Sincerely welcome to this press conference where we will present the interim report for the third quarter of 2018. The report will be presented by our President and CEO, Ulf Larsson, and our CFO, Toby Lawton. After the presentation, there will be the opportunity for questions on the report, both from those of you participating in this press conference live and those of you that take part over the phone. Ulf Larsson, please.
Thank you for that, Björn. Good morning, everyone. Happy to give you some more details about our third quarter. Here I have this one. We have had another quarter with a stable market and increasing prices in more or less all product areas. The sales growth was rather strong, 12%, and driven by currency and also by price mix. On the other hand, we saw that volumes were down, and that is related to, first, that we have to build up stock for Östrand just now. Now we are up and running, and we have to build up the stock so we can provide good service to our customers. That is exactly what we are doing just now. If you compare with Q3 2017, at that time, we had a situation where we could sell out some volumes from stock.
That is not the case just now, because now we can only sell what we produce. The stock level in general is rather low all over the place. EBITDA was up 48% in comparison with Q3, but also in comparison with the second quarter this year. Again, prices and the currency. We can see that we have a good and stable cost control in all areas except from wood, where also we are a little bit hit by increasing wood prices. We had a very dry summer, as you remember, which was good for people, but maybe bad for harvesting operations. Due to our large forest holdings, we had the ability to move from really dry areas over to places where we had more wet climate, and by that we could also continue to harvest.
We had some extra cost, of course, related to that, but not more than maybe SEK 10 million during the quarter. The most important thing, we had a very stable and controlled wood supply during this period due to our big and large forest holding. Last but not least, Östrand. Östrand is progressing according to plan, and we will come back also to that with some more details later on during the presentation. We take a look at our KPIs for the third quarter, we had an EBITDA level well above SEK 1.5 billion, which is corresponding to 33% EBITDA margin. If you look to the right-hand side, you can see that the second quarter was rather weak, but that was due to the fact that we had our expansion stop at Östrand at that time.
Otherwise, the second quarter would have been just in between Q1 and Q3, I expect. A really strong result. Our industrial return on capital employed, counted as an average for the last 12 months, is 15%. Now we have the 90% of the investment in Östrand in the balance sheet, of course. Now we have also started, of course, to see the effect from the running operation. Our net debt in relation to EBITDA was 1.4. As we've said before, we have been able to finance the Östrand project with the running cash flow, which is, of course, very positive for us. If we walk into our different segments, starting with the forest, as mentioned, we had a stable wood supply due to our large forest holding. We have seen in the market a continued price increase.
As you can see also to the left-hand side, already mentioned that we now have to build up the inventory in order to provide our customers with good service, but that is also the case for the forest. We need to build up the inventory in order to supply the Östrand mill with wood, as we need a lot of wood, of course, in order to keep the production up and running. Sales was up 15%, increased volumes, but also higher prices. EBITDA was down 8% for the forest. One thing is that we had lower volumes from our own forest, which has a substantial impact on the EBITDA level. We had some minor costs related to the dry conditions during the summer, around 10 million SEK.
Also we can see now that the costs for externally sourced wood is getting up and forest is not 100% compensated for this wood increase. That will come with some kind of lagging between three and six months. As it is today, the industry favors a little bit from that, but that is just internal. In wood, we also have had increased prices during the quarter. We are on really low inventory levels. Sales was up 9%. Prices and currency. We have somewhat lower volumes due to our inventory levels, as mentioned before, if we compare with Q3 2017, but we are more or less sold out in our sawmills as it is today. EBITDA was up 48% due to higher prices. On the negative side, we can see that wood prices is now starting to come up.
In pulp, I'm happy to say that the ramp-up is progressing according to plan. We've said that we will reach 900,000 tons per year, which is corresponding to 2,500 cubic meters per day, more or less. We've reached around 60%-70% out of that now. The first quarter, we produced 150,000 cubic meters, which. Tons. Sorry. Tons, which is far better than we expected. What is also very positive to say is that the quality is really good. We have a better quality today than we had in the old mill. Of course, the somewhat high volatility, but still really strong and good quality. That must go hand by hand with increasing volumes, of course. We've said that we will reach more or less the same volume 2018 as we had 2017. We stick to that.
The first year with full production will be 2020. The ramp-up period for a mill like this is around 12-18 months, and that is also what we will reach. If we look at the market, we have now had a stable price for more or less four months in a row, $1,230 per ton as PIX price. Sales was up 15% during the quarter due to prices and also currency. Also, as already mentioned many times now, we have to build up the stock while deliveries are slightly less than the production, which is absolutely normal. EBITDA was up 73% due to higher prices, and on the negative side, we can see that we still consume a little bit more chemicals in the new mill.
We also consume somewhat more wood, which is also absolutely normal because now we have to adjust the process in a good way, and that is progressing also really well. We also are hit by somewhat higher raw material costs, but still for the first quarter in production we are close to 37% EBITDA margin, which is of course a really positive level. If we turn over to paper and start maybe with kraftliner, we can see that we've had increasing prices for kraftliner during the quarter. You can see that to the left-hand side. In publication papers, we did announce a price increase from 1st of July, and that one came through between 6%-8%. We have also just recently announced another price increase that will come through from 1st of January, as the balance is good in publication papers.
Sales was up 15% due to prices and currency, EBITDA was up 66%. Again, prices, currency, we've also seen an improved market and product mix. We have moved volumes from far overseas over to Europe, which has a good contribution, and we have also changed somewhat in the product portfolio. Also here we are hit by increasing raw material costs. By that, I'll hand over to you, Toby
Thank you, Ulf, and good morning, everybody. If I start here with income statement, you can see in the quarter we had a net sales of, yeah, just over SEK 4.7 billion and EBITDA SEK 1,549, which meant an EBITDA margin of 32.5%, which is 7.7 percentage points higher than we had for the third quarter last year, driven a lot by higher prices as Ulf has mentioned and the startup in Östrand. We had an EBIT of, yeah, SEK 1.2 billion and a net profit of SEK 991 million, which leads to an earnings per share in the quarter of SEK 1.41 per share. If we look per segment, first here you see the forest segment, you can see the net sales in the forest segment were higher this quarter, and that's really driven by supplying wood now to Östrand now that Östrand is up and running.
On the bottom line, you can see the margin has dipped in forest, which is really 3 effects. As Ulf mentioned, firstly, it's a seasonal effect that we harvest less of our own forest normally in the third quarter, which you can see. We had some slightly higher costs due to the dry summer during the third quarter. The third effect is also that we have had higher prices for wood in the third quarter, which forest paid for, and they've not been fully compensated yet by income from the industries because of this, that we use an average pricing model when we price between forest and the industries, which means there's this 3-6 months time lag that Ulf mentioned.
We have the wood division where we have a strong development, price increases again in this quarter and now an EBITDA margin 16% in the wood segment. In pulp you can see the effect from the startup of Östrand that now in the first quarter we've had an EBITDA margin close to 40% in Östrand, even with quite a lot of impact from the startup and direct costs related to the startup. You can see a big swing, and obviously in the second quarter, we had the negative effect from the expansion stop. That's made a big impact on the group as well. In paper, a continued growth in top line and in bottom line. We've had price increases in kraftliner previously, which we talked a lot about, and now impact as well from prices in publication papers, which have been positive.
We've also had an effect of, during the holiday period, we have some effect that we have a lower personnel cost during the holiday period, which has the biggest impact on the group is for paper. It's about a SEK 50 million impact on the group as a whole in the third quarter. Most, about 70% of that is in paper. If we take the variances first here on the net sales variance, you can see a 14% from price and mix. We have the negative variance due to volume, and the biggest impact here is in Östrand, where we are building up inventory. Due to the higher operating level of Östrand, we need to hold a higher level of inventory than we did before.
Also when we had the expansion stop, we were selling out of inventory, so we came into this quarter at a low level. That's the biggest effect, although it does have an impact also partly in publication papers and in wood. We've had a 7% positive impact from currency. Looking at the same bridge for EBITDA. You can see we have a good impact from price mix, some SEK 652 million from higher prices and better mix. We have a negative effect from volume, which I mentioned on the previous slide. We do see an impact of higher wood costs, which impact us with SEK 241 million, most of which is wood cost.
Within there, we do also have an impact from higher direct costs in Östrand during the startup, which is mentioned later, which is some SEK 50 million impact on direct cost in Östrand. Otherwise, we have an increasing wood cost, but limited on other items. It's nearly all driven by wood cost. Energy, we have fairly flat. We do have higher electricity prices now in the Q3, but that's been offset in the Q3 by also some increased income from selling electricity certificates, green certificates. Currency, we have a positive impact, again, due to the weaker SEK. In other, we have a positive variance. We sold a wind power project, which had an EBIT impact of around SEK 50 million, which was shared between the Q2 and the Q3, which is the biggest impact.
Some impacts also from timing of maintenance stops versus the Q3 last year. That led to a 48% increase in EBITDA to SEK 1,549 million this year. Take the cash flow. We have an operating cash flow year to date of just over SEK 2 billion. That means we're financing the investment in Östrand from our own operating cash flow, because the investment in Östrand, you can see on the bottom line, the strategic capital expenditure is SEK 1.7 billion this year to date. We are also financing an increase in working capital. We have a SEK 626 million increase in working capital, which is driven by higher prices and by the growth in Östrand. Relative to sales, working capital is stable or actually slightly down, but obviously the higher prices impact on working capital and the growth in Östrand.
That results in operating cash flow of SEK 2 billion for the year to date and SEK 742 million for the quarter. This slide you've seen before, but just to reiterate a bit, production began in Östrand in June according to plan. We expect the ramp-up period, as Ulf mentioned, 12-18 months. We expect production volumes this year to be in line with last year, and 2020 to be the first year at full capacity. We had production in the Q3, as Ulf presented, of 147,000 tons as well. We expect to double the NBSK capacity in the mill up to 900,000 tons, and the biggest impact is on fixed cost reduction. In there we expect a SEK 350 per ton reduction in fixed cost per ton after the project, and that's the biggest impact. We also expect a better energy balance.
From previously being a net consumer of electricity of 0.1 terawatt hours, we expect to be a net producer of 0.5 terawatt hours when we're up and stable at full capacity. Finally, we do expect a potentially higher wood cost due to wood being sourced further away. If we look at the project costs, the one-off costs. Here is a slight update. The project-related costs are slightly updated from what you've seen before, but very small. We have about SEK 75 million this year, of which SEK 20 is depreciation, SEK 55 million impact on EBITDA due to purely project-related costs. We have the big cost due to the expansion stop, which was in the Q2.
We've had now in the fourth quarter, a small stop, which we also according to plan, which you can see the guidance is around SEK 20 million for the impact from that small stop in the fourth quarter. The ramp-up effects are the direct costs that are related to the startup, which are really related to energy, chemicals and also wood usage during the ramp-up, a significant part. Now we've got through one quarter of the ramp-up. We have much narrower guidance on where we expect these direct costs to end up, and we have a guidance of SEK 150 million-SEK 175 million for the whole year. As you can see, we've had so far this year to date, we have SEK 125 million. This effect is now coming to an end, and from next year we'll have normal direct costs.
It's a much narrower range than we were showing previously. Working capital, we expect, and as I showed on the cash flow, we expect working capital to increase due to the growth in production volumes. That's what we're also seeing. When it comes to the balance sheets, we now have a total capital employed of SEK 45 billion. We have a net debt of just under SEK 7 billion. A very low leverage considering especially our forest asset, and 1.4 times EBITDA, and equity SEK 38 billion, which means a net debt to equity of some 18%.
To summarize, we've had a stable quarter, stable prices, and good underlying demand in all areas, more or less. Strong sales growth, and EBITDA was up 48% in comparison with Q3 last year, but also in comparison with Q2 this year. As you remember, Q2 was heavily impacted by the startup in Östrand. Now we are up and running. We've had a stable wood supply to our industries, very much due to the fact that we have large forest holdings that we can rely on, and the Östrand startup is progressing according to plan, both volume-wise but also quality-wise, which is equally important. By that, I think we open up for questions from the audience.
Introduce yourself.
Yes, please.
Thank you. Gustaf Sjödin from Pareto Securities. I have two questions. First of all, if you could comment a little bit on what you're seeing in terms of cost inflation going forward. Secondly, how should we think about pulp deliveries in Q4? Are you going to continue building inventory, or should we expect those to come up? Also, can you please remind me of what you said in Q2? If I remember correctly, I think you said that the production levels from Östrand in Q2 were very limited. Thank you.
Yeah. On cost inflation, we see the impact of wood, and you saw the SEK 240 million variance we had there versus the third quarter last year in wood cost, and that's actually nearly all wood. On other items, we see pretty limited impact if you talk about chemicals and so on. It's really wood-driven, but we do see an increase in wood cost. Then maybe on pulp deliveries, we expect to still build inventory in the fourth quarter. Probably the effect will be a bit smaller than the third quarter, but still we'll be ramping up production faster than we're ramping up deliveries because we're having to build inventory as well.
We're not giving any figure on it, but we do expect that effect also in the fourth quarter, and then it will level out once we get up to a higher stable production level.
We have no limitation in the market-
Yeah
so to say, in the pulp market. The underlying demand is really strong. Linus? Mm-hmm.
Thank you very much. It's Linus Larsson with SEB. Maybe if you could expand a bit on what you see in the round wood market on both saw logs and pulpwood if you look into the fourth quarter and the beginning of next year.
Yeah. We have seen during this year a price increase as an average, I would say, between SEK 60 and SEK 80 per cubic meter, somewhat like that. I think that it will be more flat now. I think we have, at least for the time being, reached the peak, so to say. I think we will remain on this level now. We have a good supply. It was somewhat stressed in the summer for many players due to the dry summer, and also before that, as you remember, we had a harsh winter with lots of snow and also some problems with the harvesting operations during the wintertime. Now I think that inventory levels are stabilized now, and so rather flat development from now on, I think.
When it comes to your sourcing for your new capacity at Östrand, how have you been able to find those new volumes? Have you had to rely on increased imports to any degree, or how has your mix shifted in terms of sourcing?
I think it is more or less to what we've said before. We have increased the purchase from private forest owners in the region. That has went well, of course. We have also done some long-term contracts, as earlier announced, with Sveaskog and some of the forest owners associations, and they are also delivering to plan. We don't import too much. We have some operations in the Baltics, and we continue with them, but we are more or less on the same level. Rather stable wood supply, I would say.
When it comes to the wood business area, you've had a very strong market for quite some quarters, both in terms of demand and pricing. Now some competitors of yours, they are talking about stabilizing prices or even declining prices. If you talk about Europe to start with, how do you see the price outlook for sawnwood products in the next several months?
We don't do too much with an outlook, but we have had increasing prices, I think, for 14 quarter in a row. Still we feel that the underlying demand is strong. Our inventory level is low, as mentioned. Just now, as you normally have, you have a seasonal effect in Q3 and Q4. Normally they are a little bit weak in terms of demand in comparison with Q2 and Q3. This year we feel that. Last year we didn't feel it at all, which is more an exception. We feel that the market is stable.
Thank you.
Thank you. Mikael Öst, couple of questions. The first one around another stable market nowadays, the pulp market. Could you elaborate a little bit on that? We all know that there's very little new capacity coming on stream, how should we think around that market? Just a couple of words on that.
Yeah, I don't know really how you should think, we feel that the market is strong. You also know the history. We have had increasing prices for many quarters in a row in this field. Now it has been stable for, I think, four months in a row, which is also an exception, more or less. The demand is strong, as you say, no new capacity is on stream. We feel that the market is still stable.
Could you please remind us about your dividend policy?
No, it's a stable and increasing dividend, so that's the policy.
Okay. Thank you.
Should we take them?
Well, if we don't have any further questions from the audience, maybe we have some from participants through the phone. Please, operator.
We do have questions from the phone lines. The first question comes from the line of Robin Santavirta. Your line is now open. Please ask your question.
All right. Thank you. Can I ask about the pulp volumes, and I've asked this before, but perhaps a bit more specified now when you're producing more in Östrand. What market are you planning to sell the additional volumes? Is that now clear, and have you already sold to some new markets, or is it mostly Europe still?
Well, I think we've said that before also. As it is just now, we have to sell everything that we can produce in Europe. We have had some customers that they have been suffering during this period when we have been working with the new mill. Now we are up and running, and now we can supply them with pulp, and they are happy for that, and we are happy for that. Long term, I think that some volumes, of course, will go to U.S., and also some minor volumes will go to Asia. Our main and head market will continue to be Europe. As it is just now, we can sell whatever we produce in Europe. Long term, we will open up for overseas sales.
All right, thanks. Would you mind just to specify a bit to say the target is to produce as much as last year. You're producing a bit into inventory. What kind of delivery volumes are you expecting for the full year 2018? Could you provide a little bit of guidance on that?
I think our guidance we've provided before is that we expect volumes in 2018 to be in line with 2017. What we talk about there is production volume. We do expect delivery volumes to be slightly down if you take it on 2018 versus 2017, but a small difference. The effect will continue a little bit in the fourth quarter, but it won't be as big. Obviously, it depends on the ramp up, so we won't speculate on the volume in the fourth quarter. You've seen the curve, and we expect the ramp up to continue upwards.
Right. Thanks.
You state that the quality you produce is good, does that mean that now in Q3 already, everything that you sold is, so to say, A quality?
Everything is A quality. We had some minor volumes at the really early stage, which we sold as B quality.
One or two
one, 2,000 tons, not more than that. The quality has been really stable already from the very start, which is really positive.
Okay. Just a final one on pulp. Now, the EBITDA margin, as you said, was high at 36% already at this stage. The cost per delivered ton is, to me, quite low at this stage. How should we look at that cost per delivered ton now going forward into Q4? Is it fair to assume that it could remain at this level or even then decline when you get a little bit more deliveries out?
As I think we don't give outlooks, but what you can see, we've had the extra direct costs and project-related costs due to the startup, which we've given guidance on. That's one effect, and then we have to leave it to you to predict what you think will happen with prices and wood costs, of course. Those effects you can see in our guidance.
All right. Thanks. The final question from me, just on pulp market, do I understand you correctly that the current outlook is what you're seeing now is basically stable and for flat pricing?
We know that we've done prices now for November on $1,230 again. That is flat. We've had flat prices now for four months in a row. That is what we know.
All right. Thank you very much.
Thank you very much. The next question comes from the line of Oskar Lindström. Your line is now open. Please ask your question.
Yes. I have four questions from my side. The first one is regarding the wood products division and why volumes were down almost 9% year-over-year.
Can we take them one by one? Start with that.
Yes.
Yes. As I said during the presentation, the reason for that is that during last year, we had some volumes in stock. That is not the case this year. That is only related to the fact that we now can just sell what we produce. Last year was slightly different. This year we can just sell what we produce. We have due to low stock level.
Is that a situation that should also be true of the fourth quarter this year? That you last year had deliveries beyond production?
Just now we balanced the deliveries with the production. That will be the case also in the fourth quarter. Again, in the fourth quarter, you have Christmas, you have New Year, and some other disturbances in the deliveries. That you have to take into account, otherwise, just now we can sell what we produce.
Okay. My second question is the paper division. Did you mention what the size of the January price increase is going to be, and what has been the sort of acceptance? What share of your portfolio is impacted?
The announcement is between 6% and 8%, exactly the same level as we announced in 1st of July. That one came through. That goes for the whole portfolio, both for uncoated and coated papers.
Just publication paper, of course.
Just publication papers.
It's not-
Yeah.
This has been a division or a market segment which has been difficult for many years. Do you feel that this new sort of market balance, and hence the prices resulting from that is a stable situation? Or do you sort of see signs that there's new or old capacity coming back or being ramped up? How sustainable is this new market and pricing environment in publication papers?
Nothing new has happened. Structurally, publication paper is going down more or less at the same speed as it's done in the past. What we see now is a healthy balance between supply and demand. How long will that remain? Well, don't know. A couple of quarters, depending on how much capacity that will be closed during next year and so on. You have some closures announced, and we will see if they come through. I believe so. Structurally, we are in the same position, I would say, as we've been now for many years.
All right. Also in the paper division, anything, any news on the Obbola project, or potential Obbola project?
It's a pre-project. As we've said before, we will deliver on the pre-project the first quarter next year. By then we are also ready to take a decision.
Okay. My final question is on the pulp division. We saw, I think it was SEK 30 million in depreciation increase quarter-on-quarter. How much more should we expect for the fourth quarter?
We started the full depreciation from September. That's one month of increase. It'll be around three times that. We expect an annual effect of around SEK 300 million on depreciation. That's about SEK 75 per quarter.
All right. Super. Thank you.
Thank you.
Thank you very much. The next question comes from the line of Martin Melbye. Your line is now open. Please ask your question.
Yes, hello. Just to understand this guidance for pulp production, is it linked to pulp deliveries so far this year or pulp production so far this year? Does that mean then, say 173,000 tons or 200,000 tons produced in Q4? 215, I think.
What I said was we expect volumes in 2018 to be in line with 2017. When we talk about that, we expect production volumes in 2018 to be in line with volumes in 2017 where there wasn't much variance between productions and deliveries. That's the guidance we give. Then deliveries will be a little bit behind production volume during 2018 due to the fact that we're building up this inventory.
Okay. It's, let's say 173,000 tons then produced in Q4. This inventory build in Q3, if you hadn't had any inventory build, what would have been your EBITDA? Would that been the same as shown or different?
No, if we didn't have any-
The way you reported
inventory build, we would've sold more. I won't say what the EBITDA would be, but you can see the production volume we had was 147,000 and the delivery volume, you can see in the report if you just give me-
Just over 100.
Yeah. That's the difference. You would've had the effect of those additional sales. Yeah, the delivery volume was 106.
105.
For next year, you have this graph where you show full production either mid-year or end of the year. Do you have a good guidance for production next year?
No, not yet. That will be somewhere in between. We expect 2020 to be, like we say, the first year with full volumes and next year will be somewhere in between. We don't have any guidance on that yet.
The way you report this, you include the CTMP volumes. Once it's up and running, it should be 1 million tons or should it be 900,000 tons, the way you show the numbers on pulp?
No, the capacity is 1 million tons, so it's 100,000 CTMP and 900,000 NBSK.
Yep. That's good.
When everything's fully up and running and that's capacity.
Thank you very much. There are currently no further questions on the phone lines. As a reminder, ladies and gentlemen, if you wish to ask a question, please press star one.
Okay. That will conclude the press conference on the report for the third quarter. Thank you very much. We look forward to seeing or at least hearing you all on the 30th of January when we will be presenting the report for the full year of 2018. Thank you.
Thank you.