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Edited Transcript of BILL.ST earnings conference call or presentation 24-Oct-19 7:00am GMT

Q3 2019 BillerudKorsnas AB (publ) Earnings Call

Solna Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of BillerudKorsnas AB (publ) earnings conference call or presentation Thursday, October 24, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ivar Vatne

BillerudKorsnäs AB (publ) - Executive VP & CFO

* Lena Schattauer

BillerudKorsnäs AB (publ) - Head of IR

* Petra Einarsson

BillerudKorsnäs AB (publ) - President & CEO

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Conference Call Participants

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* Christian Kopfer

Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator

* Linus Larsson

SEB, Research Division - Analyst

* Martin Melbye

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Robin Santavirta

Carnegie Investment Bank AB, Research Division - Financial Analyst

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Presentation

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Lena Schattauer, BillerudKorsnäs AB (publ) - Head of IR [1]

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Welcome to this conference call following the publication of BillerudKorsnäs' third quarter results. Our CEO, Petra Einarsson; and CFO, Ivar Vatne, will hold a presentation and after that there will be time for questions. Present in this room is also Christopher Casselblad, Executive Vice President, Communication. And my name is Lena Schattauer and I am Head of Investor Relations.

By that I would like to hand over to you Petra.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [2]

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Thank you, Lena. Good morning and very welcome everyone to today's webcast of our Q3 report. I will start by presenting the key highlights of the quarter and also to give a quick overview of our recently reviewed strategic direction for the coming 5 years. And after that Ivar will continue with the financial part, and we will open up for Q&As in about 30 minutes.

This quarter has been quite eventful for BillerudKorsnäs where we have started up our biggest investment, KM7, and we have also finalized our biggest divestment, Bergvik Öst. And some key highlights of the quarter.

The inauguration of KM7 on October 3 visually closed the first chapter of our KM7 journey. And the third quarter was largely impacted by the startup of the machine, both from a sales perspective, but also from an earnings perspective.

Most probably, this quarter represents the quarter where we will have the largest impact compared to previous year due to the fact that we have closed down 3 old machines and still have a minor impact from the new machine. From now on, the impact compared to last year will gradually be reduced.

Underlying sales and earnings are solid and adjusted for the negative effect from the KM7 start-up, sales growth amounted to 1% and EBITDA grew by 2% compared to last year. The sales is negatively impacted by a weaker demand in especially our industrial segments, mainly within Division Paper, affecting both sold volumes and it also put the pressure on pricing.

The profitability on EBITDA reached 16%, adjusted for the negative effect of 5 percent points from the start-up the KM7. The cost of fiber remained a headwind during the quarter and it remained on high levels. And -- but was somewhat offset by cost savings and efficiency gains where we have no major production disturbances during this quarter.

We completed the sale of Bergvik Öst, which has also resulted in a strong balance sheet and a net debt to EBITDA on 1.8, significantly better than the long term target of below 2.5.

But talking about an eventful quarter, we also had a review of our 5 years' strategy in September and I will take some few minutes to inform about that strategic direction on a very high level.

BillerudKorsnäs is a fantastic company, built on a stable foundation, has a lot of talented people and have a great future ahead. I have no doubt about that whatsoever. Our mission or purpose is still the same, to challenge conventional packaging for a sustainable future. And we have 4 prioritized areas to reach looking at the company targets for 2024.

Drive performance, profitable growth, accelerate speed in an innovation, and to expand our Solutions business. Each priority is connected to a number of initiatives. All in all, 11 initiatives that are anchored in the organization with specific KPIs and are easy to follow up. So let's take a quick look at each of the 4 priorities.

Drive performance. Drive performance has 5 initiative of the 11 in total. The other 3 priorities have 2 initiative each. To drive performance is something that we to a very large extent have in our own hands.

Safe and stable production is naturally the number one initiative. And as you already know, we see a big potential in increasing availability in production, affecting at least the EBITDA plus SEK 400 million for the next coming years.

A paradigm shift in safety is a must to succeed with a stable and safe production. Cost reduction program with a target of plus SEK 600 million by the end of 2021 was announced in September.

Future footprint of our assets is also included in the strategic review. To establish standardized way of working, to set a common way of working within BillerudKorsnäs is also a vital part where we have to make sure that the standards that we set are being followed. And a competitive wood supply, where the divestment of Bergvik Öst is one important milestone for the future.

The second priority is profitable growth by creating customer value. To focus our offer on maximizing customer benefits and our profitability is the first initiative and the second initiative is increased production capacity. And here we will be able to harvest on already made expansion such as Future Platform MG in Skärblacka and KM7 in Gruvön, which is expected to increase EBITDA by SEK 1.2 billion when fully ramped up after 2023.

The third priority is accelerate speed in innovation, and the 2 initiatives are increased speed to market and execute flagship pipeline. The core competence of BillerudKorsnäs in innovation is our 4 research platforms. Strength, formability, barrier and new concepts, and I regard that to be the DNA of the company.

The initiative, increased speed to market is very much to do things more focused. Fewer focus areas, but do it faster. And here we strive to have a sales of products younger than 5 years on 30% of our turnover.

The second initiative is to execute our flagship pipeline. And just to mention some of the 5 flagships. We have the paper bottle, which is a joint venture together with ALPLA, where we strive to produce a bio based, recyclable and biodegradable paper bottle for carbonated drinks. And here we have also a community where we work together with partners such as Carlsberg, L'Oreal, the Absolut Company and the Coca-Cola Company.

Flow wrap is also a very interesting flagship. It's an urgent need from brand owners where paper needs to be replaced by plastic solutions for -- in wrapping solutions, such as candy and other types of products.

And maybe the even most important flagship is, of course, the liquid packaging board, bio barrier, to focus on multilayer where the LPB customers use paper in combination with plastics and aluminum and we need to come up with a biodegradable barrier.

And the last focus area is to expand our Solutions business. And here we have a potential to become a true sustainable packaging partner. We need to expand in the value chain throughout all 3 divisions and the 2 initiatives are to grow organically or to grow through acquisitions.

We are happy to tell you more about this at a later stage. But since our Capital Markets Day it's not planned to be held until spring time next year, we wanted to take this opportunity to communicate the strategic directions on a more high level.

But also to repeat some of the potential already communicated such as the SEK 400 million in increased production availability, to SEK 600 million in our cost saving program and also to harvest on the next generation investments of SEK 1.2 billion, these 3 amounting to SEK 2 billion within the scope of the next coming 5 years.

So with that said, I would like to move back the attention to the Q3 key financial numbers, and may I handover to you now Ivar?

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Ivar Vatne, BillerudKorsnäs AB (publ) - Executive VP & CFO [3]

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Yes, thank you Petra, and good morning. So let's get into the numbers, just starting with a bit of a summary on the key financials. I mean, you probably read for yourself that that first slide all relevant figures are negative versus a year ago.

But keep in mind, and this is something I will say more than once over the next couple of minutes that numbers are definitely impacted by the KM7 impact. And as also Petra mentioned, the KM7 impact in Q3 is by far the biggest quarterly impact you will see. And then from here now on, we will expect then the impact to be smaller quarter-by-quarter.

So for net sales it's minus 4%, that's the reported figure, excluding then the KM7 impact, Europe on plus 1. In terms of profitability we have SEK 280 million of KM7 impact and if you put that back on the EBITDA you are up to 3% underlying growth. But I will show you more of that in a second when we go through the bridges.

Also noteworthy is obviously the net profit which has a massive increase and most of that obviously is down to the Bergvik transactions now setting into our numbers.

Anyway, so let's go into a bit more on to the net sales first before we dive into the EBITDA bridge and also onto the divisions. So this is the graph that you probably recognized over the last 3 years. And overall, it has been a very strong topline trend for BillerudKorsnäs. Obviously, Q3 now in '19 is a bit of a shift, but part of this can be explained.

We would been then at plus 1 if we had corrected for the KM7, plus 1 is still lower than what we have produced over the last -- over the last 4 to 6 quarters. Most of that is related to what we've seen from the Division Paper where we certainly see a weaker market for sack and kraft paper. On the line board is stronger, but again impacted by the KM7 and I will show you that when we come to the divisions.

We decided for this time to show a net sales bridge as well to illustrate exactly what both Petra and myself spend a bit of time on in introduction. So reported net sales of 4%, you can see for yourself the biggest building block comes in the end and that's the KM7 start-up. So it's SEK 300 million on net sales. And you need to think about this, this is the volume mix impact that we are suffering from a temporary loss of capacity where we are turning down or turning off 3 machines and gradually getting new capacity with our new KM7 machine. And as this impact will then start to be lower and lower once we progress now towards full ramp up. But obviously, both in Q4 and in 2020 we still expect to see impact also here.

But if you then look at the other impacts that we have in the left-hand side, we have an FX help off 2% and that is pretty consistent what we've seen throughout the first quarter of '19.

On pricing it has been such a dramatic shift, so we split it out in 2 buckets. So you probably also read the same report as we do that the pulp pricing has taken quite a hit in Q3, very much linked to what is being traded on a very commoditized market. Pricing level down more than 10% versus year ago, and we see then the pulp pricing now back to the level we've seen in 2017, early 2018.

Now the pricing other that really means it's a accumulated pricing position for everything else than pulp and you still see that is positive and that is a carryover pricing impact and of everything that we started in the back half of '18 and the beginning of '19 as of pricing interventions.

On the volume mix, so this is a bit of a smaller piece, but there's certainly offsetting items in between those. The underlying situation on Board is actually positive and taking that number up quite a bit, but -- and pretty much all of this is offset with decline in the Division Paper. But again, I will show you those details when we get into the divisional slides in a second.

Right. So with that I continue on to the profitability bridge. And it's very much the same logic applies that we presented in the previous slide from the KM7. So the KM7 EBITDA impact is then SEK 280 million and you might wonder I just talked about SEK 300 million in the previous page, now I am talking SEK 280 million.

So the SEK 300 million, that is the net sales impact of volume and mix. And here I am talking about the profitability piece, which has the main component being volume and mix, but we also have some, called it babysitting cost or some extra fixed cost items, that has hit us in Q3.

And the SEK 280 million is obviously SEK 20 million lower than we had guided for in the -- well, mid-September. Main reason for that it's coming -- the volume in September coming in better than expected.

And coming back then kind of to the left-hand side of the chart is very much the same logic as we just went through on the net sales bridge. In pricing the impact for us is SEK 80 million, most of this is coming from the pulp pricing, while we've been partly been able to offset this through, I guess, what we said pricing in other. So net is SEK 80 million negative.

The currency, its helped, obviously, as the Swedish krona has continues its journey, so SEK 90 million is the net, including all of the hedging impact. Yes, volume and mix I do not think I need to say much more, more than what I just said on the previous slide on the line board and also solution, contributing to a positive result, while most of this is offset by negative impact on Paper.

On the fixed cost piece, minus SEK 10 million versus year ago. This is obviously again a net number of several different impacts. But the one that I just wanted to highlight that we have a help on cost program that we will talk a bit more in a second. It's a smaller benefit of SEK 10 million, but that's great to see that we already have some impact of kind of earlier signs of that program.

We have been helped by maintenance phasing of around SEK 14 million. There is also an IFRS 16 impact of SEK 28 million and then the negative vibe here is an inventory reevaluation that brings this back into a slightly negative number. But in the big scheme of things, I would not say that this quarter has been very eventful in fixed cost. There is more smaller items offsetting each other.

Right. So I just wanted to talk a little bit more about something that we introduced about -- well, 5 weeks ago, and that is the cost program. I just mentioned this that we have very early signs already coming into Q3. Have in mind, and that this is already communicated, the big impact of this should starts to see in 2020 and, obviously, the major impact when we come to 2021.

So I guess, now what we will be doing in Q4 is really getting ready to deliver on all of this project stream when we enter into Q1. And as a reminder to all of you in terms of what this program really is all about. If you really boil it down, you can say that this program has 3 legs and it's around procurement, purchasing, savings. It is around FTE reductions and we also have a stream around end-to-end savings across supply chain and logistics. And for a very brief or a -- I guess a rough guidance, you should assume 1/3 of these 3 streams as the saving impacts.

And we already communicated those numbers, but we have said SEK 250 million in 2020 and the exit rate when we going into Q4 2021 is SEK 600 million.

We have booked now a SEK 30 million provision in our Q3 results this year. It's on items impacting comparability and it's mainly related to the second stream that I mentioned about the FTE reduction part. And I just wanted to finish this slide that we do not foresee any other sizeable costs or any other sizeable one-off impacts in our ability to deliver this program.

Good. So let's get into more details on the divisions. And you probably remember the drill by now that we have the sub segments in net sales and then we have the profitability piece. So overall, our net sales for Board, we came in flat, excluding then the KM7. So that's the fair share of Board of the SEK 300 million net sales I introduced some slides ago, we would be up 5%. And the reason for this is the underlying growth in fluting and liner is close to 10%, while you see reporting being minus 7% in this case. And that is very much linked to then to this temporary loss of capacity that I introduced some minutes ago.

Cartonboard as well is continuing to grow very well and is on the same trend that we've seen throughout 2019. It's, obviously, a focus area for us going forward. Liquid packaging board, little bit more nuance to explain this. Year-to-date we're still in growth, 3%. The impact then you can of minus 2%, that's nothing to do with KM7 impact. You should read this is more off a phasing impact to relate to delivery challenge in the wake of our availability issues in Q2. That was coming mainly from Gävle in the last section of quarter 2. But we still expect to land the full year in growth for liquid packaging board.

On the EBITDA figure, looks pretty nasty with minus 37% down. Lot of this is attributed to the KM7, so roughly 2/3 of the SEK 280 million sits in Board. Excluding this, we have around 37% left to -- well, to reconcile to give some perspective on, mainly explained by high fiber cost that's still is a kind of full year impact from a pretty high rate. We also seen a lower price impact on pulp.

Just a last comment there on the net operating expenses. It's up SEK 235 million versus year of the 9%, SEK 100 million that is related to the KM7, so that's mean this SEK 135 million that you can say is underlying. And this is related to 2% higher sales volume. We have also some maintenance phasing and there is inventory revaluation impact on that number.

And I thought it might be just proper to talk a little more and I think some of you are already very update on this. But KM7 has started. It's certainly one of the biggest company's milestones in our company's history. The SEK 280 million I have already talked about, slightly lower than estimate, mainly due to then volume coming in better than expecting in September.

Volume and mix are the main drivers, but we certainly also have some extra cost, and particularly in Q3 around what we call babysitting cost or extra fixed cost items. I think it's also noteworthy to comment that the volume trend in the back half of Q3 has been positive. And just for giving a one illustration of that. We've seen also going into beginning of October that we've been able to run the machine up to 1,400 tonne on a 24 hour shift. That means that if you annualize this, you're starting to actually see that we're coming close to the capacity number that we have said from the start.

I do not want to create any false expectation here that is now the run rate we see every single day. It's certainly a learning curve still and we have certain more steps to going through, including the coding and menu certifications. So it's not before we come to 2023 that we have the full machine up and ready in the capacity in the segments that that we want.

We keep the SEK 650 million KM7 impact for SEK 20 million. Meaning, we go slightly off our Q4 impact that was currently -- well, historic -- previously at SEK 160 million and that up to SEK 180 million, while we keep the guidance for 2020, meaning SEK 200 million, stays.

Right. So let's go into the Division Paper. We do have as well a KM7 impact, but it's less -- much less than on Board. So if you exclude the KM7 impact, we would have minus 12% on this one. The -- I guess, the truth on Paper is that things have shifted quite a lot during this quarter and also versus last quarter. It's partly because we have a high base loss in Q2 2018, but probably important that the market trend have certainly become more negative than what we saw only 1 or 2 quarters ago.

For sack in particular, we see a significant decline in the brown sack and this is something we are not alone. But certainly as well we see all players struggling in at the moment. Volumes and pricing is down double digit versus year ago. And pricing on brown sack is now back to levels that we saw in the end of 2017.

On white sack, we see a decline as well, but it's certainly not dramatic as the situation for brown sack. So that is certainly the number you see on the screen is mainly impacted by the brown sack.

For kraft paper prices are holding up much better. And the negative effect you see is mainly driven by volume or demand decline, particularly coming from the industry and the non-food sector.

On the EBITDA, we are also down on -- versus year ago, SEK 90 million. This is related to the KM7 start-up or the allocated amount of the KM7 start-up. Keep in mind also if the EBITDA percentage is reported 14%, you take out that allocated amount, it will come up to 19%, which is solid. But we still have a, excluding KM7, decline. This is mostly related to higher wood cost as I mentioned on the Board. It's also down to higher pulp sales and over lower pulp pricing. And certainly also prices and volume drop on both in sack and kraft as I was just mentioning to you.

Small comment then on the net operating expenses. We are down on Paper operating expenses mainly due to volume decline is 9% and also on Paper we had a bit of help on the maintenance phasing versus a year ago.

So if you go then into Solutions. Net sales grew by 4% and that's obviously something we are happy with. We certainly also have an ambition to continue grow this more aggressively, very much in line with the strategy part that Petra talked about for this quarter.

Just want to highlight a product that we are proud of, it's called FibreForm. I think some of you already know it. It's certain niche that we have as one of our biggest investment. Its great profitability and we certainly want to accelerate this and having this leading the growth in solution is something we are very happy with.

In terms of profitability, keep in mind that this is pretty much non asset free division. We are up to 6%. We were in red figures last year, so we certainly improved this SEK 24 million since last year. Most of this is just related to our contribution margin or the EBITDA margin being significantly up due to product mix and also customer mix.

Right. If I just then move on to this part and I think this is also something we have been quite vocal about over the last quarters. We do have now a very strong balance sheet in the wake of completing the Bergvik transactions. Net debt of SEK 5.5 million (sic) [SEK 5.5 billion] when we closed the books for Q3. Meaning, our net debt ratio is 1.8 which is certainly better than our target. And it's certainly has made us well equipped for both a potential winter period which is coming/anything we might want to consider of looking into M&A.

So with that closure, I just wanted to hand back to Petra for a bit of summary and some comments on the Q4 outlook.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [4]

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Thank you, Ivar. So if you look at the summary and the outlook, we have a strong financial position and the market for Division Board is expected to stay -- to remain stable. We have a weaker market condition for Division Paper, and particularly on brown sack -- brown sack paper and kraft paper for industrial use, and we also see an increased pricing pressure.

We have a slightly lower total cost of fiber due to lower pulpwood prices and we have also the KM7 start-up effect of approximately SEK 180 million. And we continue to focus on operational efficiency and cost savings, of course, also for the fourth quarter. So with that then I hand over to you, Lena and open up for Q&As.

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Lena Schattauer, BillerudKorsnäs AB (publ) - Head of IR [5]

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Yes, we will now have a Q&A session. And we would appreciate if you limit yourself to 3 questions each and then get back in line. So by that, we are ready to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Christian Kopfer of Nordea.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [2]

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Just 3 short questions from my side. Firstly, you highlighted that you see some tailwinds from the decline in pulpwood prices. What kind of magnitude are we talking about in cost per cubic meter around 30-40 or on average?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [3]

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I think it's -- the average price, I don't -- I think that estimate is not something that we can guide for the fourth quarter. But it's definitely declining.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [4]

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But can you give me some color on how that's coming down, because it's a quite big impact for you. I mean if it is a lot?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [5]

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Do you -- you're really -- if you -- do you want to specify the questions just so that I understand correctly. Is the pulp business that we have had before or is it connected to the fiber cost as well or is it explicitly for the pulp business that we have had during the quarter, just so that I understand correctly.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [6]

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I'm sorry, if I was unclear. So that the question is with regarding to the raw material impact cost -- the wood that you are buying -- so how much that is coming down in Q4 versus Q3?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [7]

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Okay. So I think that is something that first of all I think if you look at the overall market, we have a lot of wood available in the market right now, and it's also so that we see a time lag that is quite long when we look into the books for the next coming 3 to 6 months. It is sometimes a time lag of up as much as 6 months. So as of this stage, we actually see increased cost of fiber compared to last quarter. We have not yet seen a decline. But that is, of course, some what we expect to see now for the next coming 6 months.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [8]

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And then on the KM7 impact, I think it was Ivar that mentioned that you -- it seems that the wrap up is actually going a little bit ahead of the most recent plan that you have. But still it seems that you increased the cost impact for Q4. How is that adding up?

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Ivar Vatne, BillerudKorsnäs AB (publ) - Executive VP & CFO [9]

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Yes. So -- no, I can understand why you are asking this. And I think the way you should probably look at this is that there is still uncertainty in terms of how the learning curve is going forward. We probably also look at keeping a flat guidance now on SEK 650 million -- it's probably the right thing to do. The SEK 20 million I wouldn't be too worried about in terms of sending a signal that something new has come up. But let's put it this way. We've had SEK 280 million in Q3, we are now coming down. We'd SEK 100 million in Q4 which for us is a significant step into the right direction.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [10]

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And then on the price pressure that you see on especially brown sack paper. And when you say increased price pressure, does that mean that you see even more price decline quarter-over-quarter in Q4 than in comparison to Q3 versus Q2?

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Ivar Vatne, BillerudKorsnäs AB (publ) - Executive VP & CFO [11]

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Yes, so I think it's certainly something that we see in certain of our segment. I think it's a bit different what product we are talking about. I think for -- if you start on Paper, we certainly see that on brown sack we expect continued pricing pressure even further, and that's also I think what we've seen in the beginning of Q4 now in October. We probably also see part of that impact coming into white sack much less than obviously we see on the brown sack. In terms, of the -- yes, the kraft paper, little bit less certain. But certainly also we expect the pricing pressure to come a bit in that segment, definitely in the wake of industry and nonfood still being a bit of deaccelerated. On the Board, we probably see a much more stable situation, and we don't expect a major pricing impact in any of the Board segments.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [12]

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And maybe if I can add, I think it's also, when you talk about brown sack. I think it's not only the price. I think it's very much a volume issue that is really hurting us and that will definitely continue for the next quarter.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [13]

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But then finally, I'm just wondering about the wordings here, because you say it's an increased price pressure. So -- which to me that's just that the price pressure is accelerating rather than the opposite?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [14]

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Yes, I think that is the case for brown sack. Absolutely.

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Operator [15]

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Our next question comes from the line of Martin Melbye of ABG Sundal Collier.

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Martin Melbye, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [16]

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I was wondering on this price declines on sack kraft paper. How much have actually have been realized in Q3, and how much more is yet to come in Q4 on a segment basis, the Paper segment?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [17]

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For -- if you divide it, I think it's very much down to what you commented on Christian's question, Ivar. And I think it's -- compared to Q4 and Q3 it's definitely weakening I think all 4 segments within Paper -- both sack white and brown and also MG and MF. But I think it's very much specific. And if you look at the different segments within Paper, you could see that we are taking a much more severe hit when it comes to the industrial segments. And if you compare to the segments that we have within white sack, for instance, that are directed towards food, then we don't see at all as a severe impact. So it is very much an impact from the industry segments that we serve such as building and the steel industry and those types of -- chemical -- those types of markets.

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Ivar Vatne, BillerudKorsnäs AB (publ) - Executive VP & CFO [18]

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And maybe if I can just add, Martin, that -- I mean, from what we've seen from last year, we certainly have seen pricing has dropped significantly in pulp, as I mentioned, also brown sack has come down a lot, while we've seen a less impact on white sack. Besides that, I think also kraft paper has come down, but it's much less extent than we've seen versus the -- yes, brown and white sack.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [19]

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But I think to understand the magnitude, I think, if you picture that where the levels really where on 2017, I think it's more that it has sort of bounced back to that level. So it's not that we are sort of totally -- sort of falling off the cliff. It's more about it's back to the levels of '17.

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Martin Melbye, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [20]

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And it is where it gets difficult, because the reason they are talking about the 5% price decline on sack kraft paper and of course that's important for Paper. Then you have all these smaller niches. So if you were to translate both for the Paper segment how large will the price decline will be quarter-to-quarter for Q4?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [21]

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I think it's -- as you said, I think, we have lot of niches in Paper and I think it's a little bit to detailed to guide on that level and I think it differs a lot in -- but what we can say is that it will definitely continue for the fourth quarter.

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Ivar Vatne, BillerudKorsnäs AB (publ) - Executive VP & CFO [22]

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And especially in brown sack.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [23]

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Yes.

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Martin Melbye, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [24]

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And last question, this -- the SEK 200 million of Gruvön ramp-up cost for next year, given that you have now increased the number to the last 2 quarters, is there any -- have you looked at that number in detail in line to what you had well replied to ?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [25]

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It's a fair question.

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Ivar Vatne, BillerudKorsnäs AB (publ) - Executive VP & CFO [26]

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Yes. No, I think we probably would not go at this -- yet out this on quarterly basis. I think you should assume that in the first half we should be a little bit more, let's call it, front heavy that of SEK 200 million, but also the impact then start to be much less by quarter. So I think at least the guidance we can give for now is not unreasonable split through quarter, but definitely a little bit more front heavy would be a good starting point.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [27]

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And also, yes, we have scrutinized it and we stick to SEK 200 million.

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Operator [28]

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Our next question comes from the line of Linus Larsson of SEB.

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Linus Larsson, SEB, Research Division - Analyst [29]

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And if I may just continue a bit on the price discussion that we just had. Quarter-on-quarter the group realized price was done some 5% and in Paper it was down more than 8%. But I would presume that part of this is a mix impact, it's not purely a price decline that we are seeing. Could you please talk a bit about that? And maybe especially on the pulp side, what's happening with your pulp exposure in the very short term in the third quarter and also please in the fourth quarter?

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Ivar Vatne, BillerudKorsnäs AB (publ) - Executive VP & CFO [30]

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Yes. No, I think it is a fair point, Linus. You are certainly right that -- I mean, there is lot of things happening at the same time in Q3 and definitely within Division Paper, the core segment are down -- well, most of them at least in volume versus a year ago. We are doing, obviously, what we can to keep the machines going and that literally means we are using pulp as a bit of residual or last resort -- at least short term. So definitely, our pulp exposure has increased quite a lot even.

I think you can probably use the analyzed guidance that we had in the past of roughly SEK 110,000 we said as a net exposure. We are looking now more as an annualized of SEK 140,000 and that is probably the level that we currently see for a -- let's call it short to midterm basis. But I would definitely expect also in Q4 that if you compare Q4 versus last year that we have a significant growth on the pulp in lines of what we see now in Q3.

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Linus Larsson, SEB, Research Division - Analyst [31]

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And so if you compared Q4 with Q3, do you -- given the weakness that you see in terms of pricing and also demand in some of your Paper segments, would you expect even more pulp or have you limited your drying capacity already at this stage. Should we actually expect a diluted mix component from increasing pulp in the mix again in the fourth compared to the third quarter do you think?

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Ivar Vatne, BillerudKorsnäs AB (publ) - Executive VP & CFO [32]

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I would probably say that you can expect a marginally bigger contribution -- our mix impact in Q4 versus Q3. But I would not go and say that that should be dramatic in any way. We certainly already in Q3 have a pretty big increase on pulp and we do expect that to be a bit bigger in Q4.

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Linus Larsson, SEB, Research Division - Analyst [33]

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And then more generally on your -- as you say, you have a very strong financial position at your headline of your report and for obvious reasons and you have talked about M&A, especially in Solutions, which isn't a hugely capital intensive part of your business that's kind of the point. So my question is, now that we expect the ramp up to progress, cost savings to come through how do you look at capital allocation? Is there room for increased dividends say an extra dividend, share buybacks, any of that sort, could you just please say something around -- your thinking around that will be interesting.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [34]

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Okay. First of all, I think it's -- if you look at -- that is from a CapEx point of view we still stick to the guidance that we have had on base CapEx of SEK 1.3 billion. And when it comes to acquisitions and within Solutions, we do not have anything to report as of yet. And also I think I must also -- the decision to increase dividends and what to do with the balance sheet and the strong financial situation that we have is also something that needs to be discussed with the Board and that is something that we will have to come back with.

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Linus Larsson, SEB, Research Division - Analyst [35]

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And are you ready to provide full CapEx guidance for 2020 or maybe already did and I missed it.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [36]

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Yes. That is we still stick to the SEK 1.3 billion that we have communicated earlier.

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Linus Larsson, SEB, Research Division - Analyst [37]

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But I mean, would that include all types of CapEx -- potential expansion CapEx, et cetera?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [38]

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Yes. But if you -- do you have something to add?

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Ivar Vatne, BillerudKorsnäs AB (publ) - Executive VP & CFO [39]

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No, I can just say that I think the SEK 1.3 billion, you should considered that's the guidance we already on the base CapEx for. Now anything on top of this is obviously something we are, as Petra said, in close discussion with the Board. There is nothing for the time being on the table that we are in any position to communicate.

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Operator [40]

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Our next question comes from the line of Robin Santavirta of Carnegie.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [41]

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Can I start with the strong volumes in cartonboard in the quarter. Now we have couple of other companies also reporting strong volumes in that quarter. What is that about, is it inventory restocking now or is it simply stronger demand? What are you seeing in cartonboard?

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Ivar Vatne, BillerudKorsnäs AB (publ) - Executive VP & CFO [42]

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No, I think in general there is nothing that I would allocate this to any inventory or any other one-offs. So we put a lot of focus in that segment over the last couple of years. It's a very attractive segment for us to be in. And I guess, you can say that we are still kind of reaping the fruits of putting just more sales and commitment in that segment. And demand in pulp is still strong within the high luxury and high end segments we operate in and that is pretty much the answer here.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [43]

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Then just in terms of volume, as I understand, you claim that the volumes are up, excluding this KM7 start-up. But when I look at Q3 '17 your deliveries of around 700,000 tonnes and now they are down 40,000, so on an annual basis that is some SEK 160 million less delivered in Q3 this year compared to what you did basically on a run rate 2017. And as I understand, you also have this productivity improvement program very much in play now, I guess, for 1 year which should actually increase the underlying volumes. Is it something that I am missing or is actually on an annual basis almost 200,000 tonnes of negative impact in the quarter just from the start-up of KM7 or is it -- because I also think you -- I picked up some comments about weaker volumes and weaker demand in kraft papers.

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Ivar Vatne, BillerudKorsnäs AB (publ) - Executive VP & CFO [44]

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Yes, it is a long and good question. But I think let us just separate 2 things. You are talking about these underlying programs, so that's a PEX program. That's just -- I mean, we can take that straight away that on the PEX, yes, we have still items happening in 2019 are working. We also had some, as previously communicated in the first half, offsetting items of that, so we have not really seen any impact June 19 from that program as a net. So that kind of is bit of starting point.

But I think in general, how you should probably think about when we talk about an underlying growth of this that, we have had 3 machines that we have turned off during then Q2 or in -- let's say, at end of first half and we're gradually starting up on the KM7. And obviously, that temporary loss of capacity has been then allocated between Board and Paper. And our estimate is obviously that most of that would have come into a liner and a fluting segment. So it's obviously an estimated number, but it's pretty good estimate based on the machines we have turned down and again the temporary loss of capacity we see.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [45]

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Yes, because we talk about…

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [46]

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Okay. Good.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [47]

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Yes, okay.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [48]

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That is clear. Just I unfortunately missed this part of the call with some technical issues here. But I just -- can you -- and sorry if that's sort of a repeat. But what are you producing with the machine at the moment? What are you selling? And then maybe, I guess, you went through that, but more focusing on disqualification of liquid packaging. That is normally and extremely sort of difficult process where you need to run up and run down the machine several times, and it's sort of a lengthy process that might take, I guess, more than 1 year. Could you comment a little bit how you see sort of that? When is that happening? And can you -- what kind of volumes can you produce during that time? And when do you expect the sort of any material sales of liquid packaging board from KM7?

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Ivar Vatne, BillerudKorsnäs AB (publ) - Executive VP & CFO [49]

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Let me take the first part of what we have produced and then maybe Petra takes a bit of the way forward and the stage that we're going through. But in a nutshell, we are producing at the moment mainly white top liner and we have some cup stock as well that is coming through. So that's pretty much what we've seen so far and we expect that to be the main ingredient for the Q4 as well.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [50]

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So I think we focus now on the availability of the machine to make sure that we speed it up. And when we are satisfied with that, we will move the attention over to the coating process and that will most probably happen in the early part of next year. And when that is up and running, of course, we will also initiate the certification process in very close cooperation with our liquid packaging board customers and then that process will continue up until 2023.

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Operator [51]

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(Operator Instructions) And there are no further questions. Please go ahead speakers.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [52]

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Okay. So then that concludes this conference call. Thank you all for participating and welcome back when we report our year end results and that will be the 29th of January. Thank you and goodbye.