Welcome to this press conference and the presentation of SCA's interim report for the first quarter. The report will be presented by our President and CEO, Ulf Larsson, and our Chief Financial Officer, Toby Lawton. After the presentation, there will be an opportunity for questions. Please, Ulf, would you take the floor?
Thank you, Björn. Most welcome. Happy to give you some comments about our first quarter 2019. If I summarize, I can note that this is the best quarter ever for SCA, even if you take the time before the split into consideration, which is, of course, very nice. We saw in the end of 2019 that prices started to peak in most product areas, except from publication papers, where we have seen also price increase during the first quarter 2019. They have remained on a historically high level also in the first quarter 2019. Sales was up quarter-on-quarter by 15%. Price, currency, and mix, of course, but maybe more important is the ramp-up effect now from Östrand that gives 5% effect in sales. EBITDA was up as much as 33%. Again, price mix, currency, Östrand.
We had one transaction effect from the merger between Groupe ISB and SCA Wood France. I don't know if you remember, but we had a big fire in our French operation last year. We have also been covered for some extra costs and also loss of contribution from the insurance company. That had also an effect during Q1. Otherwise, we have seen some price increases for raw material, not the least wood, in the first quarter. I will come back to the ramp-up of Östrand, but I can already now say that it is progressing according to plan, which is positive. We had two events during the quarter. One was the merger between Groupe ISB and SCA Wood France. We will retain with 38.5% of the shares, and by that we will be the main owner in the new company.
We have also, during the quarter, finalized the acquisition of 10,000 hectares of forest land in Latvia, and that is according to our strategy to increase our ownership in forest. If we walk into some KPIs, we can see that we had SEK 1.56 billion on EBITDA level, which is 33% up quarter-on-quarter and 4% better than we had Q4 2018. That gave us a healthy EBITDA margin of 31%, and we also increased our industrial return on capital employed with 1% from 16 fourth quarter 2018 up to 17, calculated as last 12 months. During the first quarter of this year, we have paid out dividends, and after that we have a leverage of 1.6. I think I mentioned it before, but we have now been able to finance the entire Östrand project from the operating cash flow.
We walk into our segments, starting with the forest, as you can see on the left-hand side, we have seen higher prices in the market also in the first quarter 2019. I think and feel that we now have reached some kind of peak level in this perspective, also when it comes to prices for imported wood. We have in SCA increased our wood sourcing in order to meet the increasing demand from Östrand, of course.
Sales was up 27% due to that fact, also due to high prices, but not the least due to an increased volume. EBITDA was up 9%, one thing is higher prices, but on the negative side, we have the mix as we now have on a yearly basis to supply 2.5 million cu m more than we did in the past. That has, of course, an impact on the mix. Less from our own forest and somewhat more from import and what we buy from private forest owning the region. Here we have a lagging effect, so that will of course be charged to Östrand, but we have a lagging effect between the forest and the industry.
In wood, as I mentioned, we have finalized the merger between SCA Wood France and Groupe ISB, that is a clear consolidation of the French timber market. This new company will have sales of EUR 270 million per year, and the new company will have a market share of 50% in Nordic softwood against the builders merchants. It will be very exciting to see what we can achieve here. Otherwise, we've seen stable delivery volumes during the period, and our stock of orders is on a good level as it is just now.
Inventory level is equally high as it was in first quarter, it's on a good level. We saw somewhat lower prices in Q1 in comparison with Q4, I think I said that we should see between 2% and 5% price decreases in the first quarter in comparison with the fourth quarter, and we came up with 3.5%, so that was almost spot on. I foresee approximately the same movement also in the second quarter, so we will reduce prices between 2% and 4% also in the second quarter in comparison with the first quarter. Nevertheless, sales was up 12% quarter-on-quarter, increased volumes, also due to prices and a positive currency effect. EBITDA up 73%, I mentioned the transaction effect of the merger between Groupe ISB and SCA Wood France also the insurance money.
If you take that away, the EBITDA was up 22% for the quarter. Again, also here, that we see for all product segments, that we have had increased cost for wood during the period. We walk into pulp, as I said, the ramp-up is progressing according to plan. I can start by commenting the volumes for the first quarter 2019 and the deliveries. Last quarter I had a question why we didn't deliver what we produce, the answer at that time was that we need to have at least one month in stock in order to fulfill service requirements from customers. Now we are almost there, so that means that we have delivered what we produced in Q1, close to 170,000 tons.
Q1 otherwise, we had had some struggle, not at least in the beginning, as you can see the dip in January. That is due to a leakage in one tube in the old part of the recovery boiler. We had one also in September. In fact, we also had one in April, which you can't see because April has been fantastic in terms of production. That is something that we will fix. We have to wait until the plant stop in October, week 41, 42, where we will stand still for 17 days. At that stage, we will also replace this old part. That is what you can expect. In a ramp-up, we have two steps forward and one step back. What we now see in April is that we, for a longer time, have reached full capacity, almost seven days on full capacity.
Now we are more focused on fine-tuning and trimming and so on. Again, first year with full capacity will be 2020 as we've said already in the past. Some words about the result in pulp. In terms of price, we have seen that the prices did peak also in pulp in November at $1,230 peak price per ton. In March they were down to $1,100 per ton. At the same time, Chinese prices went from $660 up to $710 in March. By that, the deviation between Chinese spot prices and, let's say, net prices in Europe was around $60 per ton in March. We see that prices will go down another $30 per ton in April. We also see that Chinese price is picking up again.
Now we are soon reaching some kind of balance point here, which is positive, I think, for the coming price development of the second part of this year. We are positively impacted by the increase in volumes, of course. By that also sales was up 93% quarter-on-quarter. EBITDA was also up 97%. In paper, you know that we have gathered both publication papers and containerboard. We have a slightly different picture in these two segments just now. In publication paper, as I said, and as you can see to the left-hand side, we've had increased prices also for the first quarter 2019, while we in kraftliner have seen reduced prices. Again, also here, we reached peak prices in November. Since November up to March, we've lost around EUR 70 per ton in unbleached kraft.
In White Top Kraftliner, we have a different slightly picture also. We've lost EUR 20 per ton during the first quarter 2019. What you see to the left-hand side is the combined situation for SCA. As you know, we produce around 85% unbleached kraft and 15% White Top Kraft. It's a mix of these two qualities. Sales was rather flat quarter-on-quarter. EBITDA was up 5% due to higher prices for publication papers, positive currency effect, and also somewhat improved product and market mix. We have also, as you know, a project going on in Munksund where we try to increase the capacity of White Top Kraftliner. The total capacity will remain on the same level. We will increase the share of white top with around 50,000 tons. That project also progressing according to plan.
We will be up and running in, let's say, between Q2 and Q3, which is according to plan. I have one slide regarding renewable energy, and you know that we have a lot of exciting growth projects in this field. Maybe wind is not the most exciting area, but we've been very successful in this area in the past. We had a long-term target to reach 5 TWh , and now we know that we will exceed that target. 2021, we will reach 6.7 TWh installed capacity on SCA land, which is equal to around SEK 100 million on EBIT level, if we have the same conditions as we have today in terms of energy prices and so on.
We also have big interest and lots of new projects in line, we have also put a new target on 11 TWh , long-term target on 11 TWh installed capacity. Before I hand over to Toby, I'd like to finish up with this slide showing SCA's contribution to a fossil-free society, we did some work last year in order to present this slide at our AGM in March. We did identify, we did quantify, and also validate the contribution we could do for a fossil-free world. If we start with the left-hand side, you can see that our well-managed forests, growing fast, has a net binding capacity of 4 million tons carbon dioxide per year. That is due to the fact that before each tree that we harvest, replant two new ones. We are really intensive in our silviculture operations.
On 15% of SCA land, we use Pinus contorta, which has 40% higher growth than the normal conventional Scots pine. We do some fertilization and so on. All in all, a net binding capacity of 4 million tons per year. If we turn to the right side of this slide, you can see that we also, with the renewable fiber, can replace more fossil-based materials. We talked about paper instead of plastics, we talked about bioenergy instead of fossil fuels, and solid wood products instead of steel, concrete, and so on. That also give a contribution of 5 million tons per year. Of course, we have some emissions from our industry that we have reduced by 50% since 2010 up till now, but still we are on the level of 0.9 million tons per year.
The net contribution is 8 million tons, and that is as much as the total truck traffic in Sweden and also the domestic flights, it's quite a lot. It has been very positively received at the AGM, but also afterwards in different occasions. By that, Toby, I hand over to you.
Thank you. Thanks, Ulf. I will start with a little bit on the income statement here. You can see, as Ulf presented, our top line net sales grew by 15% versus Q1 last year to, yeah, nearly SEK 5.1 billion in the quarter. EBITDA grew by 33%, which relates to a margin of 30.7% EBITDA margin. I go down below the operating level, we have financial items in the quarter of SEK 30 million , which also includes now some financial costs from the new leasing accounting.
IFRS 16 effects now have a small effect on the financial cost. The tax, we paid SEK 230 million tax in the quarter, where we had a accounting charge of SEK 230 million for tax, which is an effective tax rate of a little bit more than 20%, close to the Swedish tax rate. All that means that we have a net profit of SEK 908 million in Q1, which relates to an earnings per share of SEK 1.29.
We just talk a bit about the results per segment, focus a bit on the development versus Q4, particularly now. In forest, we see a growing top line, a growing net sales, driven by two factors, but the biggest factor is the volume growth in supply to Östrand, of course, which is growing, and we also have some higher prices coming through in the top line as well. When it comes to the bottom line, we have a seasonality in our business, so the bottom line is driven more by the amount of harvesting of our own forest, which tends to be less in the first quarter.
That seasonality is there, the profit and the bottom line is driven by the result from our harvesting our own forest. We're not growing the harvesting from our own forest at the same rate that we're growing the top line, because the increased sourcing for Östrand's needs comes mainly from third-party forest owners. When it comes to the wood segment, we see increased volumes, but prices have come down a bit versus Q4, as Ulf mentioned. When it comes to the bottom line, we have this effect from the restructuring in France, which is SEK 90 million on the bottom line.
Of that, around two-thirds is related to the transaction with ISB, the merging of the company, and around one-third is the insurance effect from this proceeds after the cost for the fire which we had last year. When it comes to pulp, we have increasing volumes, of course, from the ramp up of Östrand pulp mill. Prices are a bit lower than they were in the fourth quarter.
We also slightly worse mix because we're now selling a bit further away. The increased volumes are a bit further away, the mix is a bit worse than it was in the fourth quarter. When it comes to the bottom line, we have basically those effects from the price. We also have an increased wood cost feeding through into the Östrand result, which is offset by a better energy balance. We're improving the energy balance in Östrand.
When it comes to paper, we have slightly lower volumes than the fourth quarter. The pricing on publication paper is positive, so it's boosting top line, whereas kraftliner is the other way around, is slightly lower than the fourth quarter. When it comes to the bottom line, you have those effects, and we also had a maintenance stop in the fourth quarter. That's an effect that impacted the result in the fourth quarter, and we had no maintenance stops here in the first quarter this year. A bit on the bridge between Q1 last year and Q1 this year in terms of top line, you can see here we have price mix improvements of 5% versus Q1 last year. We have a volume growth, which is also driven primarily by Östrand's higher volumes versus Q1 last year, which is 5%.
We have a currency impact of 5% as well, which is mainly due to the positive impact from euro and U.S. dollar and the weaker Swedish krona versus the euro and U.S. dollar. When it comes to EBITDA bridge, of course, we have the higher prices and mix, which is +SEK 248 million. We have higher volumes, again, which you saw on the previous slide. That's some SEK 95 million on the EBITDA. We have an increased raw material cost, so an increased price for sourcing raw materials and primarily wood, of course. On the other hand, we're working very hard to improve the energy balance in the company, which is driven a lot by the better energy balance in Östrand, and that improves our energy cost by SEK 51 million in the first quarter.
We have then a positive currency effect, again, EUR and U.S. dollar primarily, and then a positive effect on other SEK 46 million, which is largely, again, this effect from the restructuring in France, which drives that. Overall, the EBITDA grew by 33%, and the margin then increased from 26.7% last year to now 30.7% in the first quarter. When it comes to cash flow, we had the EBITDA of SEK 1.56 billion.
If we take away the revaluation effect, we're then SEK 1.3 billion. We've increased working capital in line with the ramp-up of the top line and of Östrand, but the ratio of working capital to sales is constant. Capital expenditure was SEK 168 million in the first quarter. Here we also included some SEK 26 million, which is from the new leasing effect on current CapEx, which gives an operating cash flow of SEK 626 million.
We have strategic CapEx, which is outside operating cash flow, which is primarily Östrand, which is SEK 143 million. We're absolutely still financing Östrand from operating cash flow, which we've done for the whole project. Just to show we've had a change in net debt and just to show where this comes from so everyone understands. We had the net debt at the end of the fourth quarter was SEK 7 billion. We've had the positive operating cash flow, which you saw, of just over SEK 600 million. We've had a strategic CapEx, which was SEK 143 million. We've had the acquisition, which is the new shares in France, which is the cost for the new shares in France related to ISB, which is SEK 158 million.
Those effects plus the dividend, which we paid out in the first quarter, and then the effect from the new accounting principles for IFRS 16, both add around SEK 1.2 billion. That means we come out to the end of the first quarter with a net debt with a new accounting treatment of just over SEK 9 billion, which relates to then a net debt to EBITDA of 1.6 x.
When it comes to the balance sheet, again, the IFRS 16 has affected then the balance sheet in the end of March related to the end of December, and it affects primarily, apart from the net debt, which I've just shown you, it also affects the other capital employed, which is primarily fixed assets in this picture, which also increases by around SEK 1.2 billion. That's the main change. We also have, you can see, working capital to sales was 18% at the end of the fourth quarter, and it's 18% at the end of the first quarter. A constant ratio to sales, but of course, the growth in the company drives a growth in working capital. I'll hand back.
To summarize, we had a strong quarter, strongest ever, and prices coming down from peak levels, but still remaining on a historically high level. Strong sales growth, mainly related to the Östrand ramp-up, which is a positive thing, of course, and EBITDA was also quarter-over-quarter up 33%. We had two events during this quarter. One was the merger between Groupe ISB in France and SCA Wood France, and then the acquisition of this Latvian forest land. By that, I think that we open up for questions from the audience, please.
Thank you. Can you hear me? Gustaf Schwerin from Pareto Securities. I have three questions. I'll take them one by one. We've asked it before, but on the Östrand cost base, you talked about the SEK 350 fixed cost reduction after the ramp-up. Just to get some feeling for where we're heading in the near term. If I look at cost per ton sequentially, I think it's up 10%, even though the volumes are up. You mentioned the transportation costs and that part of it, but can you give some color on what's going to happen in Q2, and really what's driving up the cost per ton sequentially in Q1? Thank you.
Okay. I think the cost per ton is pretty flat Q1 versus Q4. I don't know what you're comparing the 10% with. Of course, we have higher wood costs coming through, which is a significant impact. The cost per ton benefit is also driven by the volume. We need to get the top line. Once the top line is up, we get the full benefit in terms of fixed cost per ton. We're not there yet. We don't see that benefit full out yet. Basically, the two biggest effects is the raw material cost, which you saw is increasing, and Östrand is now taking that cost. The energy balance, which is positive. That energy balance is not fully in yet either. That will come through more as we ramp up the mill as well. It's those two effects primarily.
If you wouldn't have had those production hiccups in January, would we have seen a significantly lower number per ton?
Well, I think higher volumes lead to a better fixed cost coverage, yes. Probably higher volumes also lead to a better performance in terms of energy. Yeah.
All right. I think you have something, still we are in a ramp-up period. That also goes for use of chemicals and how much wood you need to produce one ton of pulp and all that kind of things. We have just started. 2020, we will have full capacity. Trimming will be going on for many years. Don't hurry too much, please.
Okay, great. Related to pulp. You had those hiccups. If you would've produced more in the quarter, could you have sold more? Just a few words on general pulp demand, I guess primarily in Europe, but China as well.
As Toby said, you see an impact on the result for the first quarter due to the mix. We've sold much more due to Asia and also to U.S. than maybe the fourth quarter. That have had a negative impact, at least the volume for Asia. Otherwise, we feel a stronger pulp market out there. If you saw the statistics for March now, softwood inventory level went down to, I think 38 days, and also in hardwood they went down three days.
We feel a lot of strong demand now again from Asia, and we see that business has started well after the Chinese New Year, as we also predicted. Europe a little bit slower, U.S. still strong. I think it's a rather balanced situation. Yes, we could have sold more. If we can produce, then we can sell. That's the answer.
Great. Lastly, the kraftliner market is obviously weaker now than it was a year ago. When I look at your volumes year-on-year, they seem quite low. Is this only demand-driven, or are you optimizing your mix in order to get your realized pricing up?
I think it's partly production driven. Last year we were still selling some out of stock in the early part of last year, we were managing to sell ahead of production. We're not able to do that every quarter, of course. I would say it's not particularly demand driven. Yeah, probably the European market is a bit softer than it was in the first half of last year, which is reflected in the pricing, but it's not particularly a volume effect.
Okay.
Yeah.
Thank you.
Operator, do we have any questions from the line?
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. We have questions coming in. To begin with, question coming from the line of Linus Larsson. Please go ahead, ask your question.
Thank you very much, and a good day to everyone. I'd like to start with the wood cost situation. Could you talk a bit more about that, what you expect in terms of wood input, the raw material cost trends in the next quarters to come? Should we expect lower P&L costs for wood in the second versus the first quarter, for instance?
No. Actually, when it comes to the cost the industries are paying for wood, we expect that to increase slightly for pulpwood in the second quarter. As Ulf mentioned, we do have a time lag effect from the way the prices come in and the way they're sold on to the industries. As you know, we source from our own forest, but we also source from We have some import, we have third-party forest owners, and we have some central sourcing, and they all have a different time lag. We have this lag effect in the way the prices go through to the market, through to the industries. In summary, we do expect the industries to pay us for pulpwood a slightly higher cost in the second quarter again, versus the first quarter.
Mm-hmm. For sawlogs in the second quarter?
Pretty stable, yeah. Not a big effect on sawlogs.
Okay. When would you expect a decline on a sequential basis?
I think that remains to be seen. I think we expect it to be flat. We don't see further increases at the moment after the second quarter. Then, it depends on the market development, really, how that pans out after that.
What you can see an effect of is the mix, of course, because now when Östrand is ramped up, we need 2.5 million cu m more. That, of course, will give a less good mix than we had in the past, for sure.
Exactly. That's part of your guidance, when you talk about the second quarter, I assume.
Yeah, absolutely.
Yeah.
Yeah. On your wood business area, just on pricing, you said that you had a 3.5% price decline in the first quarter. Was that on an average-to-average basis? Or how should I understand that 3.5%? If I look on a realized Swedish krona basis, the decline was obviously a lot less.
That is the average, and for both species and included currency effects and so on. That is the average.
Yeah.
I guess in local currencies, I guess in pounds and euro and so forth.
No, including currency effects. That's SEK-based.
Oh, really? Okay. It looked like a lot less in your P&L, I thought, on a realized basis. Maybe there is something else disturbing that picture.
We have a mix between timber supply, where we have more wholesale kind of business than we have our sawmill side. Basically, the actual clean price difference is 3.5%.
Okay.
Yeah.
You also said, what you said about the second quarter, you said 2%-4%, let's call it 3%. That's also on an average-to-average realized basis in Swedish krona terms then?
Calculated on the same way, I think that we will see around 3% down also in the second quarter in comparison with the first quarter. We've done 90% of the business for the second quarter now, we have also set prices, we have a good stock of orders, we don't have too much to sell. Not too much of spot volumes for the rest of this quarter. It's a balanced situation, prices will go down approximately as much in Q2 as it did in Q1.
Just one final question from my side. What's the latest on the Obbola kraftliner project?
We have more or less finalized now the pre-project, and we are fine-tuning a little bit and mainly related to permissions and things like that. I think the pre-project will be finalized during the summer.
A board decision?
That you have to ask the board about, but the pre-project will be finalized during the summer.
Excellent. Thank you very much.
Thank you. Your next question comes from the line of Mikael Doepel. Please go ahead, ask your question.
Thank you. Coming back to the sawn timber market, we talked about the pricing there a lot. How do you see the demand situation going forward? I think your deliveries were quite good in the first quarter. How do you see demand developing and volumes developing in Q2?
As I said, we have a good or strong stock of orders. I think we've sold out 90% of what we produce in the second quarter, which is normal, I would say. If we take a look at the inventory level, we are more or less on the same level where we are now as we were one year ago. That is a stable sign. We feel a good demand in the market. We have now also started up the sales to the builders merchant sector and also a reasonable good start. It's a normal situation.
If demand is good, what is pressuring prices down?
It's always a question about balance. I don't know if we have a different situation compared to our colleagues, for us it's a balanced situation. What has pressed down the prices is maybe the Chinese situation. If we've seen that you have normal activities now in China for pulp, maybe it's still a little bit slower in solid wood products, I would say. Also Japan may be a little bit slower.
Okay. Switching to kraftliners. You talked about some price pressure in that business. What are your expectations going forward? Do you see prices bottoming out now, or do you expect to see some further price slippage there?
Again, we don't forecast prices. If you look into these indexes that you can publicly find, you see that prices still is continuing down. Not dramatically, you have EUR 2, EUR 3 per ton down. That is what we see, that is what you also can see from public figures.
Okay. A final question on the pulp markets. You talked about demand there in China improving and Europe still being pretty slow. You talked about European prices coming off in April, but I didn't really catch what you said about China prices. Were you expecting China prices to move up now?
What we see now in the Chinese market is that they have moved up from $660 in November up to $710, and we see a trend slightly upwards in China. I think you will reach some kind of balance point in the summer. When we have the balance point, you can judge yourself really what's going to happen for the second half of this year. That is good. We feel a much stable market now in pulp than we maybe did a couple of months ago.
Mm-hmm. What is your take on the inventory situation in pulp? If you look at the port inventories, for example, in Europe and also in China, they are undoubtedly very high still. What's your take on that and how that will impact the market?
They are high, the trend is downwards. You saw that for the March figures now, both for softwood and hardwood, the inventory went down with three days each. The level is what it is. We see the same figure there.
Mm-hmm. Yeah, sure. Just a final question, maybe a bit of a technical one, but in terms of the SEK 90 million booking that you did in the first quarter, you said that two-thirds of that related to the merger. Where are these numbers coming from? Why are you booking the one-off for the merger?
What we've done is we've sold our operation in France to the new company. That's basically what drives the effect from the merger of the company. We have basically two-thirds of the SEK 90 million is from that effect, and the insurance is a separate matter, and that's basically in the result is the other third. The cash flow effect is SEK 90 million as well. That's a cash flow effect, and that's driven from the insurance impact. It's a bit technical. I hope that was clear. It's those two effects, which are all related to France and basically the whole of our French business has now been restructured into the new merged company.
Okay, good. Thank you very much.
Thank you. Your next question comes from the line of Markku Järvinen. Please ask your questions.
Yes, good morning. I still had a few questions. Regarding pricing, Q1 we saw higher prices for publication papers. Are those price increases now fully in your Q1 numbers, do we still see increases in Q2? What kind of a contract structure do you have in place?
They are in our resulting Q1, basically.
We don't expect further price increases in publication papers in Q2.
Do you expect to maintain this price level throughout the year, or how does it look for H2? Do you have annual contracts? Is it biannual or how does it work?
Yeah, in some areas you have annual contracts, at the same time, we know that you can't really answer that. We see now that capacity will be closed down, not least in LWC, Burgo, and some other places also, that will improve the balance quite a bit. On the other hand, structurally, the consumption is going down in publication papers. We know that, capacity need to be closed down in order to keep the balance, that's for sure.
Okay. On the kraftliner side, I guess we see prices moving down. How do you see that market developing? What's driving the prices down, and how long do you expect that to continue?
Yeah, I think one thing is the general situation, not least in Germany and Central Europe, where you see less activities and if you don't have the same growth that you had in the past, that will have an impact on the use of packaging materials, that's for sure. The other thing is maybe also the price development that you see in recycled fiber that put the pressure on the testliner prices and that will also have an impact on the kraftliner pricing.
Okay. In terms of Obbola, I guess you're finalizing the pre-project now. Technically what follows the pre-project? Is it then the feasibility, and how long would that last?
Just now, as I said, we are fine-tuning some details here, mainly related to permissions. We have to wait and see a little bit, I think we have cleared that out in the middle of the summer. After that, the pre-project is finalized, then it's up to the board.
Pre-project is followed by an investment decision, if it's followed by an investment decision. Is that the way to look at it?
Yeah. There's no other stage in between. The pre-project includes the feasibility.
Okay. Construction can start after the decision by board?
Absolutely.
Yes.
Okay, good. Just on that topic, how do you view now Stora has announced expansion in kraftliner pending board decision there as well, and Klabin has also discussed a fairly sizable expansion. How do you see the market sort of absorbing all of this new capacity?
If you look in the past, you see a rather solid growth in packaging materials, so 2%-3% per year, and I think new capacity is needed in the market, definitely.
Okay. Still on Östrand, you talk about Chinese pulp market a bit more. Do you expect to move much of the sort of added capacity that's coming on stream when you ramp up to China, or how should we think about that?
Our core market, our home market, that is Europe, of course, and will be going forward. I think that the best development that we've had now has been in U.S., where we see a rather big demand for the quality that we can produce. We have developed quite a good position in U.S., and we will build on that. Of course, as a complement, we will also sell some volumes to Asia. I think our first target after Europe will be U.S.
Okay. Very good. Those were my questions. Thank you.
Thank you. Another question comes from the line of Jesper Starn. Please ask your question.
Sorry. I see you already got this question a couple of times this morning, just a brief update on the spruce beetle situation in your forest would be much appreciated.
Yeah. Spruce beetle is not a problem for SCA. We have been a little bit worried, and we have done a lot of investigations, and in our area, as it seems just now, it is a very stable situation. In fact, better than last year at the same time. We know it is a big problem in the southern part of Sweden and also in central part of Europe, of course. For us, it's a better situation than we expected, really. That means no risk at all, I would say, this year, as it feels just now.
Okay. Less risk or no infestation at all?
No. Nothing at all really to mention. Every year you have something, but that is really small things.
Okay. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Cole Hathorn. Please ask your question.
Good morning. When you think about the kraftliner expansion at Obbola, how do you frame that when you speak to the board on the actual timing? There are a lot of capacity additions coming through, and you don't want to be allocating capital in a glut in the market. How do you ensure that that new capacity is going to come on stream to meet the demand, but not too soon?
An investment like Obbola, if that come through, it is a 30-40-year perspective on that kind of investment. When we took the decision around Östrand, we didn't know that we should reach the market with a fantastic timing. You cannot really plan it that way. You have other perspectives that you have to take into consideration when you take a decision like this. Soon we have finalized the pre-project. It is a strong project.
We know that fundamentally you have a strong growth in packaging materials. We have solid wood supply and a lot of advantages in the area around Obbola. That is maybe much more important than to reach the market exactly at the same, in a certain point, you cannot really predict the timing. If we take a decision now this year, we will start up in 2022, late 2022. That is the perspective we have.
That takes me to, it's a long time between decision and startup.
It's a long time, yeah.
You can't try and time it.
Sure.
Yeah.
I'm just wondering on your commitment to when you pull the trigger on ordering effectively equipment and your cash flows going out, is there a timeline if things are a bit soggy in the interim, can you delay that and say start up in 2023? What's your lead time that you can delay the startup of that project before you're committed?
I think once you take a decision and start the project, it's just to carry it through. You can't really change the timing on the key parts of the project once you've started.
Also you have a huge organization related to project like that. It's a big thing.
Thank you.
Thank you. Next question comes from the line of Justin Jordan. Please ask your question.
Thank you, good morning, everyone. I just wanted to perhaps explore a little bit more on the paper division. Well done clearly on the successful Östrand ramp up and continuing, but just focusing on paper for a second, and specifically on the kraftliner market where your deliveries were 7% down in Q1. How would you describe that? Is that just softness in end market demand? When we think about that going forward, clearly as Europe's largest independent producer of kraftliner, would you consider taking commercial downtime if soft market demand conditions continue with soft pricing conditions, particularly with what's going on in the U.S. kraftliner market?
First, I think it's right to say that last year, this time, it was a fantastic kraftliner market. We have maybe never seen something similar. At that time, we really sold out everything that we had in stock, and were on the super low, record low level in terms of inventories. Now we are on a more normal level, that is one reason why the sales went down. The other one is, of course, that we have a weaker market today than we had one year ago.
Yeah. Given that weak market, is that something that you would consider potential commercial downtime to help balance that market demand?
Of course, if that's needed, then we will do it. Already today, we have the biggest machine in Europe, in Obbola, and the third biggest in Europe, in Munksund. They are really cost-efficient. If we feel that we need to take downtime, then we will do it. Already today, we have a low cost level.
Okay. Thank you. Just one final, sorry, follow-up question for Toby, really. Can you just remind us, sorry, the thinking on CapEx for calendar 2019 overall, please?
Basically, if you take a whole year basis, if we include the effect of the leasing, which also increases the CapEx, because that now comes into the leasing amount. You could say on average over time, around SEK 1.2 billion as a current CapEx level.
Great. Thanks, Toby.
Yeah.
Thank you. Our next question comes from the line of Alexander Berglund. Please ask your question.
Thank you very much. Most of my questions have been answered. I would just like to clarify two points. First of all, you mentioned on the negative mix effect that you had in pulp because you had to sell to destinations further away. Then you also commented about increasing your sales initially to U.S. and then maybe more to China. My question is really, is this something we should expect as a consequence of you having more capacity and the European demand being more lackluster, that we're continually going to see this negative mix effect?
Then my second question, once again, relates to kraftliner. You mentioned that given publications out there, we're seeing a couple of euros per ton at lower prices. If I look at the RISI prices for Europe in April, most countries are, at least on the unbleached side, seeing about EUR 20 million per ton decline, April versus March. I just wonder if you could confirm if that is what you are seeing as well for April deliveries. Thanks.
If we start with the pulp. Yes, Europe is our core market, and we like to put as much volume as we can in Europe. For a while, we have had as good profitability for deliveries to U.S. as we've had for Europe. We have our own logistical company. We have set up an efficient solution for supplying the East Coast of U.S. with pulp, and I think we are positively surprised about that. That we will continue, and we will develop that further, of course. Exactly as the situation is for wood, now we start up, Östrand is starting to give some big volumes, and we have to sell pulp in a slightly different way than we did in the past, and we have to buy wood in a slightly different way than we did in the past.
Step by step, we also need to fine-tune that part. We have to fine-tune the process, and also we have to fine-tune our systems when it comes to wood supply and also to the selling of pulp, of course. Do not know if that's an answer, but it is sometimes tough to grow, but so far it's went very well. Again, it's according to plan, but it takes some time, definitely so.
On the kraftliner prices, is EUR 20 per ton in April lower than March? That is something that you are seeing as well for your April deliveries?
I see exactly what you see in the official statistics, and then we try to do our best in the market. No more comments about that. You can see it yourself.
Okay. If you are thinking about the sequential, given the visibility you have now into Q2, basically all prices are down Q2 versus Q1, where we are now with the exception of the publication paper, is that correct?
I think that's fair to say.
Thanks. Thank you very much.
Thank you. We have two more questions. The next question comes from the line of Christian Kopfer. Please ask your question.
Thanks, operator. Just two follow-ups for me. Firstly, on the raw material effect on this trend, you previously said that the cost will come down some SEK 350 per ton. Can you just help us understanding how much is the underlying cost inflation for Östrand? What I'm getting at, obviously, is how much of this SEK 350 will be left after the cost inflation?
The SEK 350 per ton is a fixed cost benefit. The cost inflation, what we see is wood cost is primarily where the cost of wood has gone up. That's not fixed cost, of course, that's variable cost. That's a cost we see with pulpwood prices are higher. We also flagged for that was unexpected, that we're going to have to source wood from further away. We will see an increased wood cost, which we see is offset to a large extent by the energy balance, which is positive. That's where we see the big inflation, is wood cost.
Okay. Can you just quantify it? How much has the variable cost gone up per ton, approximately, for Östrand?
We don't give out kind of splits between variable and fixed. You can see in, I think, the slide Ulf presented, you can see the pulpwood cost. You can see the graph there, which shows the increase year-over-year and quarter-over-quarter. Basically, that's pretty much the impact that Östrand is taking in terms of wood cost.
Okay. When do you expect the fixed cost reduction to be met? Not 2020. Is it 2021, or?
I think this year we're ramping up. You don't get the benefit at all until we're at the full volume. We will be at full volume, as Ulf presented, 2020, first of 2020. I think there'll be still some optimization to be done, probably on the cost side during that time. Yeah. We don't have a specific year that we say, but I think your assumption is pretty fair.
Okay. On deliveries, just to understand a little bit what normal deliveries are for you on kraftliner and publication. On kraftliner, you have seen decreasing deliveries for fourth quarter in a row. Are current deliveries around 190,000, 200,000 tons? Are those representative for the next couple of quarters?
That's the normal levels. It varies a little bit depending on sales versus stock and also production. We have to take into account the maintenance stops as well. If you look basically in the second quarter, we expect a maintenance stop in paper.
On the publication side, what are you aiming for there? Stable deliveries from here, or?
Yeah.
If you adjust for the maintenance stop, obviously.
Yeah. We basically sell everything we produce, so yeah. Our production capacity is stable. We don't expect any big changes. Yeah.
Thank you very much. Yeah. Thanks, Toby. Thanks.
Thank you. Our last question comes from the line of Oskar Lindström. Please go ahead.
All right. Three questions from my side, or three sets of questions. First off, on the pulp side, you mentioned a leaky boiler impacting your production in January. Is that something that then stopped having an impact in February, March, and April? What was the impact of that?
The impact is when you have a leakage in the recovery boiler, you have to stop, because otherwise you get a big problem. The stop is, don't remember exactly how many days in January, but I think we were close to five, six days. That is something you have to do. We had one also, as I said, in September, and we had one in January, and we had also one in the beginning of April. April was not too bad. I think we stopped three to four days. Due to that, we have rescheduled. We were thinking about fixing this permanently in 2020, now we have replans, we will do it during week 41 or 42. We have 17 days of a planned maintenance stop, now we will do this work at that time.
It's a substantial impact, of course, when you have to stop down everything for a couple of days. The positive thing in April is that after that stop, as I said, we have been able to produce more or less at full capacity for more or less one week in a row, which is very positive because you can really start work on fine-tuning and find out how you can long-term achieve a higher availability and so on. That has been a very positive start of the second quarter now.
Okay, good. My second question is on the capital allocation side. You answered a little bit about Obbola and so on. I'm just wondering about the status of your biodiesel and biorefinery projects, do you see them as an alternative to or competing against Obbola for capital?
Every project are competing with each other in terms of capital allocation. On the other hand, just now we have a really strong cash flow. We have the feeling that our owners would like us to continue to develop profitable projects. As always, you need to balance cash flow and what kind of investments you do. I think, long-term, they will not compete to each other. They are complementary, I would say.
You could say all the projects that we've talked about, and you see in, basically, our project stairway slide. We believe we can fund all those from our own balance sheet and our own cash flow. It's all provided we satisfied that they're good projects and they have a good return for shareholders, we think it's all doable.
Right.
Yeah.
The biodiesel and biorefinery projects, they're farther away.
Yeah, they're further down the track.
in the pipeline.
Yes.
They're, for that reason, not competing against or alternatives to the Obbola project.
We have started the process in getting permission. That's a long process in Sweden. Commercially, we don't know exactly what to do in Östrand. We've said will be in 2025 maybe or something like that's a long way.
Decision in 2025?
We don't know. We don't have the final solution, I say it's a long way. Just now we're talking about Obbola kraftliner, technically we are ready for decision after summer. The biorefinery, a couple of years ago, ahead.
All right. My third and final question is on the wood division or wood products. The Tunadal Mill, you started it up after some major investments end or second half of last year, if I remember correctly. Is that having any sort of significant impact on performance and earnings?
Definitely. Tunadal startup has went well, and it's contributing also well. As you can see, I think when you compare our wood business with other companies, we are doing very well. Of course, Tunadal is an important part of it.
Should we see it that Tunadal was not fully in the results Q2, Q3 last year, but that it is now in Q1?
No.
We had volumes from Tunadal also last year. The growth is improving and that improves the cost position as well. Yeah, it has an impact. I wouldn't overstate the impact because we have five sawmills and Tunadal is one of them, but it's one of the most efficient. Tunadal and Bollsta are two of the most efficient mills in Sweden, and they've got growth potential.
All right. Super. Thank you. Those were my questions.
Thank you.
Thank you. There are no further questions at this time. Please continue.
Well done. Thank you for joining us in this press conference, in this presentation of Q1 2019. We look forward to seeing you again when we present the second quarter on the 26th of July. Thank you.