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Edited Transcript of BILL.ST earnings conference call or presentation 16-Jul-19 8:00am GMT

Q2 2019 BillerudKorsnas AB (publ) Earnings Call

Solna Jul 23, 2019 (Thomson StreetEvents) -- Edited Transcript of BillerudKorsnas AB (publ) earnings conference call or presentation Tuesday, July 16, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Casselblad

BillerudKorsnäs AB (publ) - EVP of Communication & Sustainability

* 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

* Cole Hathorn

Jefferies LLC, Research Division - Equity Associate

* Gustaf Schwerin

Pareto Securities, Research Division - Analyst

* Justin Joseph Jordan

Exane BNP Paribas, Research Division - Analyst

* Linus Larsson

SEB, Research Division - Analyst

* Markku Järvinen

Handelsbanken Capital Markets AB, 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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Good morning, and welcome to the presentation of BillerudKorsnsäs second quarter results. My name is Lena Schattauer, and I'm Head of Investor Relations. With me here in Solna, I have BillerudKorsnsäs' CEO, Petra Einarsson; our CFO, Ivar Vatne; and EVP, Communication and Sustainability, Christopher Casselblad. Petra and Ivar will hold the presentation, and after that we will open up for questions.

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 welcome, everyone, to today's webcast of our Q2 report. I must admit that it is sometimes difficult to read the expectations purely by looking at the consensus perspective. And considering the fact that the expected adjusted result this quarter varied a lot. And on top of that, we also had the effect of KM7 ramping up the cost, amounting to SEK 190 million affecting this quarter.

The SEK 190 million affecting the ramping up of KM7 is not booked as impacting comparability, thus not excluded from adjusted EBITDA. However, the most important from my perspective is that we are transparent with information regarding the company and that we utilize this telephone conference to clarify the outcome of the second quarter.

So I will start by presenting the key highlights of the quarter and then to invite Ivar to give a more granular update of the financials. And after that, we will be happy to open up for Q&As.

So these are the key highlights of this quarter. I'm pleased to present continued strong overall demand with a strong sales performance of 7% where we have experienced growth compared to previous quarter for 11 quarters now consecutive. And in total, the underlying result is solid especially taking into consideration the KM7 effect of SEK 190 million and the high cost of fiber that has affected this quarter.

The second quarter was characterized by 2 major events: the start-up of KM7 now producing liner to customers and the successful sale of Bergvik Skog Öst, the deal where we have secured a long-term competitive wood supply at the same time as it enables us to invest in future growth.

Our safety initiative as well as our program for production stability are progressing according to plan. And -- however, the production stability can be improved. During the quarter, we have had negative effects from a fire at the Gävle mill. But let's start by looking at the Bergvik Skog Öst deal.

During the second quarter we finalized both the acquisition of Bergvik Skog Öst at a negative cash effect of SEK 5.4 billion and the divestment of 89.9% of Bergvik Skog Öst to AMF for SEK 11 billion. We have a 15-year wood supply agreement with a buyback option. And the Swedish Competition Authority has approved the sale and we anticipate the transaction to be completed by end of August, with a positive cash effect of SEK 7.9 billion.

The other major event for this quarter was the start of -- ramping up KM7. The ramp-up is now ongoing and progressing according to plan. We reached the milestone stock on wire on April 17. In May, the focus was on test runs with dissolved pulp and we reached paper on pope in the beginning of June. The first commercial liner to customers was delivered end of June and we are now in the certification process of pure performance involving 3 customers.

Next vital step in the ramp-up is to open up the coating in August and to start up the certification process of cartonboard and liquid packaging board in October. The inauguration of KM7 will take place on October 3 in Gruvön.

Moving over to operational efficiency. We have improved. And looking at the production availability, it has improved very much supported by the Production Excellence program. But it was, unfortunately, somewhat offset by the fire we had in Gävle during this quarter.

However, I'm really happy with the fact that we have the PEX tracker, Production Excellence tracker tool in place now, and all mills are working in this tool. And the process we have in place is to eliminate all losses and to make sure that it is not repeated and to follow up the program continuously.

Unfortunately, this has taken longer than I expected to ramp up. And if you look at a yearly basis, I believe that we -- it will not -- we will be in a range of reaching the yearly volume that we had last year if you adjust that number from the wood shortage. But all in all, we are moving steadily towards increased availability.

If we move over to safety, a safe company is a well-run company. And also here, we see good traction but also too slow to some extent. The most exciting that has happened this quarter is that we have conveyed a safety survey. We made the decision to use the DuPont survey so that we can compare with other companies. 70% of our employees participated in the survey, which is a very high number, I believe, and we have received a feedback loud and clear.

And if you look at -- just to mention a few facts from the survey. We can see that 1 out of 3 employees at BillerudKorsnäs believe that injuries can be prevented; or to paraphrase, 2 out of 3 believe that injuries are actually part of the job and not preventable. 1 out of 4 has an experience that injuries are closely monitored and followed up. And last but not least, 9 out of 10 answered that they have not been rewarded for working safe.

But change is coming rapidly and people pop up as ambassadors as we speak and I feel very confident regarding this cultural change that we are -- that are -- that we are moving ahead with. And you can also see that the numbers are improving. It's not in the level and the range that I would like to see but still it is moving in the right direction.

If you look at the overall lost time injury frequency rate mid -- the first 6 months, we ended up at 7.7 comparing with the full year of 8.4 last year. So safety is a journey that we have entered and it will be continued from now on even if it will be strongly accelerated.

Moving from safety and production stability towards innovation. Our DNA for future growth is innovation. And we have experienced some good news during the quarter. Firstly, as previously announced, we have decided to embark on a joint venture to develop a fully biodegradable paper bottle in the joint venture with ALPLA, establishing the paper bottle company.

Secondly, during the quarter, we have announced to be the first to produce paper battery on a paper machine. There are several potential applications of the paper battery. One is, of course, Internet of packaging or digitalization of packaging. And another application is also large-scale, cost-effective energy storage in the small grids field.

And thirdly, yesterday we launched the first U-Bend paper straw 180-degree made out of paper, where we have filed a patent in cooperation with The Paper Straw Company who will produce the straw. So we look forward to share more good news in the next coming quarters to bring you along with us on our journey towards innovation.

And before I ask Ivar to come in with the financials, outlook of the third quarter. The market conditions is expected to remain good for liquid packaging board and cartonboard. And however, we see an increased uncertainty in the global container market. We have some weaker market conditions that has occurred during the second quarter and this is particularly for brown sack paper.

The continued expectation of increased price pressure remains and we also see the same picture as the last quarter on the cost of fiber that we expect to flatten out on the current high level. And we will of course continue to focus on operational efficiency and cost savings.

So with that said, I would like to invite you, Ivar, to continue with some deeper information on the financials.

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

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Thank you, Petra. I think you can just go to the next slide. I just wanted to start by showing some of the key financial figures that I think most of you already had got familiarized with this morning. So we will take them kind of in pecking order through the presentation.

Net sales is up 7%, which is a very strong number and we are happy with that. If you look then into the profitability section and starting with the EBITDA where we report SEK 579 million of EBITDA, adjusted being SEK 539 million. For the EBIT figures, we have the reported SEK 194 million and adjusted number being SEK 154 million.

You see, I guess, on both of them that there is a delta of 40. So that is the items impacting comparability. I just wanted to quickly run through that because you can say it's roughly of 3 buckets. The bigger one is some provisions for staff changes and demolition of all buildings, which is at SEK 52 million, and they're all provisions done in 2016 and 2018.

We have as well SEK 14 million of educational program around the KM7 start-up that we also have communicated earlier. And then there is a smaller item around Bergvik to round that figure off to SEK 40 million, but a pretty small difference between the 2.

I mean so you can say and see for yourself that we are down in profitability versus a year ago. But I'll go over the next couple of slide and also underlining with the very strong focus why we actually believe the underlying profitability is much stronger and in fact is growing.

But let's start with the net sales, just giving a little bit more fact. Continued sales growth. This is actually the 11th quarter in a row where we had a pretty significant net sales growth. We've had then -- yes, you can see the red line, the average CAGR for the last 3 years at 5% and we delivered above that now for Q2. And I guess also it feels pretty good from my side coming in and see how we've delivered those 7%. We are certainly not only relying on currency or some one-off items on this. It's pretty evenly spread between currency, a volume mix and pricing. So we have -- yes, the organic net sales then for Q2 '19, that's 5%. We also have a 5% underlying volume growth on that number.

So if I go into next page talking a little bit about the raw material cost. And I know this is a hot topic for a lot of you guys and also for us. We have seen the -- I mean the impact for Q2 versus -- or '19 versus last year. It's roughly SEK 300 million, which is a combination coming then from board, also from pulp and we also have an impact of chemicals.

I think the difficulty thing when you look at the outlook going forward is where does it go from now. I mean you read the same report as we do. We are kind of conservative in a way that we expect then this now to flatten out on the current level. If it turns out that these numbers or the spot prices will go down, obviously that means we will have an upside and that will flow straight through. But for our expectation and our view at the moment is that we are pretty conservative in expecting this trend to more or less continue going forward.

And I think if we go into the next slide -- and I generally believe that this is probably the most important slide that I'm presenting to you this morning because this illustrates I believe in a pretty good manner what is the underlying performance when we're looking into our results.

So we do have some positive impacts and they are colored in the green staples where we had the pricing. And that is mostly pricing that was initiated during 2018 and we now see the full year impact going into '19. The FX is, I guess, pretty straightforward. And as I did mention, we do have a positive volume which is helping our volume and mix quite a lot.

There are a couple of negative items. The SEK 300 million that I did mention, that's the vast majority in the sense of what's labeled as the variable costs. And that's -- you can sense and that's also part why we see the margin has come down. We have been doing a lot of pricing, but due to the nature of some of our contracts that are fixed longer term, et cetera, we have not been fully able to price up the 100% of the raw material impact.

The fixed cost item there as well that you see of SEK 53 million is mainly related to Gävle, where we had a fire and there has been some production disturbances, and that is pretty much what is earmarked on that bucket. But adding those altogether, I mean, you will arrive and end up at SEK 729 million, which is a higher EBITDA percentage versus the same quarter last year and very much, in our view, represents the true underlying performance and where we believe that the fundamentals of the business currently is.

Last bucket related to the startup impact of KM7, I think we have talked this quite a lot in the past. It's very similar to the estimate we have previously shared with you, where we expect that to be, and it's a combination of a volume/mix impact and a fixed cost bucket when we now go through the transition and getting this new and beautiful machine up and running, and that lands then on the SEK 539 million that you have seen in the past.

And I just wanted to emphasize also the point that Petra mentioned in the past that we have had discussion around the SEK 190 million of KM7 is that actually is an item that should be put out and reported under items impacting comparability.

Our view still is this is a number that probably belongs more in a bridge like this. It's still some operational items that can change over the quarters. Although we do have a pretty good estimate. But I can assure you that going forward we will be very clear to calculate and show this as a separate building block so we can ring-fence what are some of the impact in a transitional period.

If we then go into -- and I was just going to take Board -- division by division on some of the results and some of the highlights, and I will start with Division Board. So Board has had a phenomenal quarter. And if you think about the 7% net sales that we talked about in the beginning, all of this is driven by Board. So we have a 12% net sales where the sales volume is 10%. And obviously we had help as well from pricing and currency.

If you also look at some of the segments or where is it coming from, the good news is that it's coming broad-based. So we see several segments and several parts contributing to the growth. We have fluting and liners going up with 30%; cartonboard, 13%; and we have the liquid packaging board up 3%. So that is indeed very good news and represent a fundamental solid performance by Board.

If you look then into the EBITDA number, it's down by 75%. But very fast I will come back to the point I just mentioned on the previous slide on the onetime or the ramp-up effects of KM7, so that's a very big part of explaining the delta. We've had as well on Board the same impact that I mentioned on the total group, that the raw material impact cost has gone up which has been partly offset by pricing but not fully. And this is very much linked to some of the contract dynamic we have with some of our strongest customers within the division.

If you look at as well, this is a comment on the net operating expenses. Also just as a reminder, that also includes the raw materials, that is part of it. A big chunk of this is also just explained by the volume growth being up 10% as well as the KM7 costs that I referred to in the beginning.

For Paper, if you go into the next slide please, it's a little bit different story. It's flat on the net sales. And actually, if you look at the sales volume, it's down by minus 4%. So there is no doubt that comparing Board to Paper, we had a more challenging quarter on Paper.

Looking by the segments, you have sack paper growing by 4%. We've had kraft paper flat but also pulp is down. So again, a little bit different dynamic of what's happening within that division. On the EBITDA, you see a 50%-ish decrease in the -- well, in the profitability. Again, main reason being the raw material inflation not fully offset by pricing. We have had as well a mix effect by more of the pulp volume being sold at spot rates which has not helped us this quarter.

And last but not least we have Solutions. We are down on net sales by 4%. It's a pretty conscious choice as well because we're continuously making, you can call it, a customer mix reevaluation. We're certainly looking into some of the positions we do have with the different collaboration partners all around the world, optimizing our portfolio. So in this case, it's -- it is down but it's also something that consciously we take, in part, choice of. And we do expect going forward to have a more solid growth made in Solution. It's definitely one of our main divisional footprints we want to expand.

There's not too much to say around the profitability. It's pretty low numbers in the absolute. Compare this to versus a year ago, you can say it's mainly related to higher pricing. We had some FX impact, good cost control and also the customer mix is helping us on this side.

Right. So let's go into -- I also know a topic that I think a lot of you have followed during the second quarter where there has been a lot of action on the Bergvik side. And you see for yourself on the graph what illustrates now the net debt versus the profitability ratio when we closed the Q2. SEK 12.7 billion is the net debt that we currently have. Yes, main reason I think all of you know, at lease most should know, is linked to the acquisition of Bergvik Skog that we did during Q2. We've also had the dividend but that is not the big surprise.

We already know what will happen when we come into the Q3. So the estimate, of course there are still things that can change slightly, but we will be surprised to see not landing roughly 1.5 in terms of our new net debt ratio when we close our Q3 books in end of September. And I think that it also means we are significantly below our target of SEK 2.5 billion and we should be very well positioned, with a strong balance sheet position, to look for future growth and potential, also, M&A opportunities in the future.

Yes, just last couple of words then in terms of where do we stand versus our long-term financial targets. I did mention in the beginning, 7% net sales growth is a number we are happy with. We also demonstrated over the last 3 years that consistently we've been able to exceed that number. We know as well that the EBITDA margin of 9% is not really where we want to be. Adjusting that as I did show for the KM7 one-off, we are 12%. So that certainly improves the situation. It still means we have work to do in terms of looking into different items of price management but also looks in terms of different efficiency, et cetera, and that is a challenge going forward.

I think the return on capital employed has already been covered in some previous sections. We do now have an increased asset base with the KM7 coming into our books, and it will take some years before we see the EBITDA generation of KM7 really coming in where it belongs. So that is still a long-term, I guess, target we'd like to have, but it will take some time for that to be coming up where it belongs.

Net debt versus the EBITDA, I did mention this, it's very temporary being above and we should see a very different number there as we close the Q3 in September. And I think the dividend policy is something which has been consistently good and also the numbers for last period has been certainly above the target.

So with that, I'm handing it back to Petra.

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

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Yes. So I just would like to summarize the -- where we are from a more broad perspective.

And I think first things first, and that has been for us to ensure a successful ramp-up of KM7 and that is something that I'm very content with during this quarter and also to make sure that we have the competitive wood supply going forward. And here I definitely think that the deal that we made with Bergvik Skog Öst is a step in the right direction.

We need to steadily improve and here we have definitely potential to unlock when it comes to stabilizing the production, and that is a continuous improvement journey. And then to speed up and accelerate innovation and new solutions for the company to reposition ourselves moving forward. And here I also believe that the second quarter was a step in the right direction.

So with that said as a broad summary, then on where we are moving, then I would like to hand back to you, Lena.

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

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Thank you. We will now open up for questions. (Operator Instructions) So by that, we're ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Martin Melbye from ABG.

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Martin Melbye, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [2]

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First question on the Gruvön ramp-up costs, the SEK 190 million, is that entirely on the Board segment? Or is there something there on the Paper segment as well? And linked to that, the depreciation, how will that change in Q3 versus Q2 regarding the Gruvön new machine?

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

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Okay. I think maybe you can take that, Ivar, I think.

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Ivar Vatne, BillerudKorsnäs AB (publ) - Executive VP & CFO [4]

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I think the first comment around -- yes, that was SEK 190 million and the split. We operate with a 70/30 split between Board and Paper, so 70% Board and 30% Paper. It's a rough estimate but it should be a pretty good estimate that we use as allocation key between the divisions. And the second question was around the...

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

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Scheduled depreciation in the second quarter versus the third quarter.

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Ivar Vatne, BillerudKorsnäs AB (publ) - Executive VP & CFO [6]

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Yes. So we have a, yes, rough estimate of SEK 30 million depreciation per month, and that means we have 3 months of depreciation for Q3 scheduled and we have had 0 for Q2.

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Martin Melbye, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [7]

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Okay. So there's another SEK 90 million of depreciations for Q3 versus Q2.

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Ivar Vatne, BillerudKorsnäs AB (publ) - Executive VP & CFO [8]

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Correct.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [9]

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Yes, that's correct.

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Martin Melbye, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [10]

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Okay. Good. And then one question on the Bergvik Skog Öst transaction. Have you stated the gain you'll have in Q3? I reckon it could be like SEK 4.7 billion. But have you given that number?

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

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It's not a bad estimate, Martin. I can still say that we are working with the auditors just to get all of the moving pieces tied up. There's also some moving pieces in the Bergvik during the Q3 in particular with some of the dividends. So I don't want to give you a more updated number than what you said now. But I can say it's not a bad estimate and we will confirm this as part of the Q3 close.

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Martin Melbye, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [12]

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Good. Good. And last one from me, the change -- the prices changes on sack kraft paper, I see that some newsletters are talking about 4% to 5% lower prices. Is that relevant already from Q3 or is that coming in phases for you?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [13]

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I think that, that differs. But I think if you look at sack and especially brown sack, here we can see the pressure in -- from the price perspective and that weaker market definitely. So I think that is something to be expected from -- already from Q3.

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Martin Melbye, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [14]

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And the wood costs, how is that changing quarter-over-quarter?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [15]

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What we estimate with -- it's that it'll flatten out on a high level. That is as detailed as we can be. And then as Ivar of course stated that if something more positive happens, then of course we will be happy to see that development. But as a guidance, we don't see anything else right now but the flattening out of the fiber costs for next quarter.

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Operator [16]

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Next question is from Gustaf Schwerin from Pareto Securities.

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Gustaf Schwerin, Pareto Securities, Research Division - Analyst [17]

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Gustaf Schwerin, Pareto. Three questions from my side. Firstly, on the Board Division, can you say something about the negative mix effect? How big that was related to the KM7 ramp-up.

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Christopher Casselblad, BillerudKorsnäs AB (publ) - EVP of Communication & Sustainability [18]

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Yes. I think...

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

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Did you understand the question? The negative mix effect on Board on the ramp-up...

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Christopher Casselblad, BillerudKorsnäs AB (publ) - EVP of Communication & Sustainability [20]

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That is 2/3 of the SEK 190 million, Gustaf.

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Ivar Vatne, BillerudKorsnäs AB (publ) - Executive VP & CFO [21]

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It's SEK 133 million.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [22]

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Yes. I think that was the same question as Martin had.

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Christopher Casselblad, BillerudKorsnäs AB (publ) - EVP of Communication & Sustainability [23]

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As Martin -- exactly. Is that what you're looking for, Gustaf?

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Gustaf Schwerin, Pareto Securities, Research Division - Analyst [24]

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Yes. Perfect. Great. Then secondly, on container board. I mean when you talked about a pretty stable situation both for fluting and kraftliner now for Q3, I mean, naturally I assume pricing should be a bit lower quarter on quarter. But looking at your volumes now Q2 versus Q1, they seem to be holding up quite well. So I mean, there's uncertainty we're seeing in the market. Do you actually feel that affecting volumes now going forward? Or are inventory levels at a level where activity is still quite good?

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

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I don't see -- we don't expect any big swings when it comes to volumes especially talking about fluting and liner. It's definitely so that we have seen a weaker market situation also for fluting and liner, and the prices has come down somewhat. But it -- the biggest effect is what we see in brown sack. And I would also like to say -- add to that, that in white sack, the market conditions are much more stable. But we -- if the question is particularly regarding Board, I would say that I don't see any major effects on the volumes as being -- considering the market outlook that we give.

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Gustaf Schwerin, Pareto Securities, Research Division - Analyst [26]

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Great. Very clear. And lastly from my side. If I remember this correctly, you still have some liquid contracts that are expiring this year which have not yet been renewed. So if this is correct, I mean has the negotiation for this started already? And do you have any feeling now for the possibility to further increase your average pricing in board?

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

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It's correct that we have not yet renegotiated all contracts that we have in liquid packaging board. And -- but we are not -- I don't want to comment any further on that as we speak. So what we have communicated regarding the new contracts are still valid of course, but we have not yet renegotiated all contracts that we have.

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Operator [28]

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And next question is from Christian Kopfer from Nordea.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [29]

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Just a couple of questions from my side. First the -- can you just update us on the import of wood? How much you import from the Baltics on pulpwood?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [30]

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Can you take that first, the import of wood from Baltic is...

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Christopher Casselblad, BillerudKorsnäs AB (publ) - EVP of Communication & Sustainability [31]

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20% out of the total comes from the Baltics and it's mainly hardwood birch.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [32]

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So it's -- okay, so that's about the same as you used to have?

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Christopher Casselblad, BillerudKorsnäs AB (publ) - EVP of Communication & Sustainability [33]

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Yes.

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

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Absolutely. It's exactly the same.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [35]

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Okay. But we have seen prices coming down in the Baltics. So I'm a little bit puzzled to note here you're commenting at all on it. I mean you don't see any prices lower on your imported wood or...

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

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I think that we don't guide on the specific level. So I think the overall guidance that we can give is also included mix. It's different mix that we have considering hardwood and softwood. But on that sort of high-level outlook, I would say that we are not confident to say anything else but a flattening out of the wood prices.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [37]

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But if mix is unchanged going into Q3 versus Q2 and if everything else is unchanged, but the only thing that has moved is the price level. I mean I cannot see how you cannot see any lower prices overall.

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Christopher Casselblad, BillerudKorsnäs AB (publ) - EVP of Communication & Sustainability [38]

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I think, Christian, you have to see it like this, it's a mix effect. So this quarter we have used more hardwood than previous quarters. And hardwood is more expensive than softwood, so that is the reason why we see a flattening -- sorry, a flat cost for fiber in Q2 versus Q1. That's the main reason.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [39]

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And how do you see the mix going forward then between hardwood and softwood?

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Christopher Casselblad, BillerudKorsnäs AB (publ) - EVP of Communication & Sustainability [40]

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That is too detailed. That is operational questions that we don't disclose.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [41]

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Okay. Then on the -- I mean you've previously talked about the production targets, but it's impossible to follow those on continuous basis because you're not reporting this. So can you say anything about delivery targets for 2019?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [42]

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I think it is our ambition to start to report in a more granular way our -- how we proceed with the Production Excellence program and also invite you to see more what is actually happening in the Production Excellence tracker now that we have it in place. But we actually plan to do it for this quarter but we have decided to wait to make sure that we have top quality of the numbers before we disclose it.

So what I can say is that I'm really happy with the engagement and the ambition levels in the company where we still stick to the fact that we have the ambition to improve availability with 4% units by 2020. But -- and I think we stated that already from the start that this is not a linear journey. It will actually be exponential so that we will have a bigger effect of this when we have all the tools in place. But what we can say now is that we most probably will and on the same level -- around about the same level as we had for 2018, and then you need to adjust for the wood shortage.

So it's unlikely to see the full effect of the 2% units already this year since it has taken a bit longer to put everything in place than we anticipated. And on top of that, we had the fire in Gävle this quarter. But our ambition is to make sure that you can follow this in a more granular level per division.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [43]

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You mean on production levels, Petra, or...

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [44]

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Yes.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [45]

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Okay. But are you also going to talk a little bit also about deliveries, because at the end of the day that is what also impacts earnings, I guess.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [46]

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Deliveries. You mean seller by volumes and...

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [47]

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Shipments. I mean -- yes, exactly.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [48]

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Yes, the shipments and -- no, I don't think that, that is -- I think that is not something that we will guide in detail going forward.

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Operator [49]

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Next question is from Justin Jordan from Exane.

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Justin Joseph Jordan, Exane BNP Paribas, Research Division - Analyst [50]

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Ivar, I just wanted to first of all just -- can I just walk through just the cash impacts of the Bergvik Skog Öst transaction? Clearly you purchased -- just want to be absolutely clear in terms of the resulting net cash benefit to delivered group as it were. So clearly, you purchased the assets for SEK 5.4 billion in -- back in the end of May and then you're announcing disposing it for a net SEK 7.9 billion at the end of August. So am I right in inferring that we should be essentially -- the net cash impact is a positive SEK 2.5 billion? And then I'm just curious, is there any tax implications of the capital gain tax or anything on that?

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Ivar Vatne, BillerudKorsnäs AB (publ) - Executive VP & CFO [51]

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Yes. Let me just refer in my previous slide. I think the best way to look at this is that it actually -- we acquired this for SEK 6.4 billion that we sold at the same time 5% of Bergvik Väst for SEK 1.2 billion. So some of the net impact for that is, yes, SEK 5.4 billion. The -- I guess the easier way to think about this is to say that our net debt now is SEK 12.7 billion. And the enterprise values or the full 100% we did sell was SEK 12.2 billion, and that included a SEK 3.5 billion of debt, meaning equity value comes to SEK 8.8 billion and we get 90% of that. So the net proceeds is SEK 7.9 billion. So you would expect then from a net debt figure of SEK 12.7 billion that this will come down by SEK 7.9 billion, rounding to SEK 5 billion of net debt in Q3 and that explains the ratio. On this type of industry in Sweden, there should be no tax impact.

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Justin Joseph Jordan, Exane BNP Paribas, Research Division - Analyst [52]

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Great. Okay. And just specifically on Q2, switching entirely, can you just give us the impact in terms of both lost volumes and cash cost of the Gävle fire, please?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [53]

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The lost volumes on the fire in Gävle?

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Justin Joseph Jordan, Exane BNP Paribas, Research Division - Analyst [54]

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Yes, please.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [55]

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We have -- we had an effect of losing roughly in the range of 13,000 tonnes and affecting the EBIT for the second quarter of SEK 29 million.

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Justin Joseph Jordan, Exane BNP Paribas, Research Division - Analyst [56]

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Great. And just -- I just wanted to be absolutely clear of what you're saying in terms of production for 2019. Because you've previously talked about in a production in 2018 of 2 8 3 5, including 50 million of lost volumes from wood shortage. And you've previously guided to 2 9 -- 2,900 tonnes for 2019. What exactly are you saying now? Are you saying flat year-on-year on the 2 8 3 5? Or should we be thinking flat year-on-year on a 2 7 8 5? Just wanted to clarify what exactly are you saying, please.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [57]

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Ivar?

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Christopher Casselblad, BillerudKorsnäs AB (publ) - EVP of Communication & Sustainability [58]

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Justin, we are expecting the guidance to be lower to around the same level as last year adjusted for wood shortage to...

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [59]

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2 8 3 5.

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Christopher Casselblad, BillerudKorsnäs AB (publ) - EVP of Communication & Sustainability [60]

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Exactly. So 2 8 3 5.

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Justin Joseph Jordan, Exane BNP Paribas, Research Division - Analyst [61]

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Okay. And that's incorporating the Gävle lost 13,000 tonnes in Q2.

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Christopher Casselblad, BillerudKorsnäs AB (publ) - EVP of Communication & Sustainability [62]

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Absolutely. That is one of the main effects why we do this right now.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [63]

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Yes. And also the fact that we have a slower start than we originally anticipated of the Production Excellence program to be quite open. And we still -- we don't back off of the original target of 4% in -- by the end of 2020. But we see that 2.9 million tonnes will be hard to reach.

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Justin Joseph Jordan, Exane BNP Paribas, Research Division - Analyst [64]

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Sure. Appreciate that. Okay. And just one final thing from me. Just on your sack kraft contracts, are they mainly at spot? Or are there some mix of quarterly or annual contracts? I am just trying to understand the pricing impact that you're citing in Q3 and thereafter.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [65]

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I think it depends. If you talk of -- if you call the brown sack or white sack. If you look at the market from our perspective of brown sack, we have a quite low market share and a quite competitive situation with a large influence of spot pricing. On the other hand if you look at the white sack, we are one of the market leaders which -- with an entirely different set of pricing.

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Operator [66]

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The next question is from Robin Santavirta from Carnegie.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [67]

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Now -- and first of all, I think that what you are saying and guiding is roughly flat fiber cost Q-on-Q for Q3 and I guess a bit further out, while at the same time you're also talking a bit about a bit lower sales prices in sack paper and potentially in fluting and linerboards as well. So if you combine that -- the underlyings of earnings outlook, it's possibly weakening a bit towards the end of this year. I was just wondering if there's any sort of offsetting impacts that you have planned or are already doing in terms of cost-cutting or production improvement or something else.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [68]

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Yes, definitely. And I think that I've been quite open with that several times in the past now that I see that BillerudKorsnäs have a lot of potential to unlock. And I'm really happy now that we have Ivar Vatne, the performance management expert, onboard. So I think that we -- I see in front of me that we do have the power we need to offset the slightly weaker estimate by pure cost saving, also working with operational efficiency both when it comes to value-based pricing and with the lean manufacturing. And it has taken a little bit longer than I anticipated. But I do believe that we have the tools in place that we need now and we also have the management team that we need in order to deliver on this potential going forward. So thank you for asking that question.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [69]

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All right. That is clear. Then in terms of this divestment of the forest asset you had for a while. I know you talk about M&A and growth investments combined with that, and obviously your balance sheet is fairly strong now. What kind of M&A and growth investments are you looking at? Is it more of a bolt-on type of things or something major?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [70]

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No. I think it's -- what we can say at this stage is of course that the deal that we made with Bergvik Öst enables us to look into this in a much more sort of thorough manner. And this is something that we are working quite extensively with right now, and we are setting for a Board meeting here to discuss the strategic direction for the company in September. So right now I cannot comment on our ambition level, but it is definitely something that occupy a lot of our times right now.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [71]

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All right. And finally in terms of the new KM7. Now did you deliver any volumes, second-grade volumes now in Q2? And could you provide some info on where you are -- in what markets you are placing those additional linerboard volumes in the second half of this year? And finally combined to that, I guess you're talking about a bit of a weaker containerboard market but also guiding for foreign exchange white kraftliner prices. So what is the dynamics in that market?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [72]

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Okay. Let me start first then on what has been delivered during the second quarter. And in the second quarter, we have been fully focusing on ramping up the machine and make them -- making sure that the machine works. So we do have -- we have delivered second-grade liner material to customers and we have also delivered some materials for certification when it comes to liner. But in the second quarter, it's a very small amount. So it's not even worthwhile for you to sort of calculate it and put it in your models, and that has never been the purpose for us either.

And if we move forward in the outlook, I would say that what I worry most about, as I have said, is the brown sack development. And the brown sack for us is more or less one like 20%, 25% of the Paper Division and it's also a place where we have a very small market share. So moving forward with KM7 and the plans that we have to certify materials for liner and then to also move into liquid packaging board, I'm not worried about the market situation in combination with ramping up KM7. It's not at all on that magnitude.

And then you also asked where we plan to deliver the material that we produce, in what areas, and this is something that I think is too granular and I think it's also something that we need to have an option to act. So everything is not yet finalized.

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Operator [73]

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Next question is from Markku Järvinen from Handelsbanken Capital Markets.

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Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [74]

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Yes. I just had a few sort of last questions about some more detail on these issues that have been extensively discussed already. But on the liner and fluting prices, I guess we've seen the sort of NSSC and white liner pricing sort of gradually decreasing during the first half. Did you see lower prices impacting your earnings or your P&L already in Q2? Or are you expecting a more significant impact from that in Q3 compared to Q2? Or how does it work for you?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [75]

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We have seen -- we do -- we have seen the market price on the fluting and liner that it has -- it have come down somewhat. But it's not on a major level. But it's -- we have not been able to keep the price levels from last year. We have been forced to take some steps back. But it's not on a level that I think it should be disclosed in the sort of second quarter affecting the result too heavily.

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Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [76]

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And you don't expect a sort of more significant impact in Q3 compared to Q2 then? Or is that too early to say?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [77]

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It's -- I think it's moving back to the guidance that we have, we see -- we guide for an impact more considering the brown sack than when it comes to liner and fluting.

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Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [78]

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Okay. Good. And then just on the fixed cost, Q3 I guess is seasonally lower fixed cost. Could you remind us how much lower is the Q3 fixed cost compared to Q2?

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Christopher Casselblad, BillerudKorsnäs AB (publ) - EVP of Communication & Sustainability [79]

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What's that?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [80]

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The fixed costs compared to the -- Q3 compared to Q2. It's the maintenance schedule, isn't it? The...

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Lena Schattauer, BillerudKorsnäs AB (publ) - Head of IR [81]

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Yes.

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Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [82]

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No. I mean the sort of seasonal holiday pay-related issues, I believe. But...

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Christopher Casselblad, BillerudKorsnäs AB (publ) - EVP of Communication & Sustainability [83]

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Historically, it has been around SEK 100 million.

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Operator [84]

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Next question is from Linus Larsson from SEB.

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Linus Larsson, SEB, Research Division - Analyst [85]

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A follow-up on the market situation. You talked about a challenging market situation in sack and kraft paper, and I think you also mentioned you'll need to adapt production. I'm just curious if you could expand it a bit on that. Have you been taking market-related downtime? Are you intending to increasingly take downtime for market reasons in your Paper Division as we move into the third and fourth quarters?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [86]

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I think we are not planning to do any major actions when it comes to downtime, but we are looking into mix-related actions and also cost savings. And also to -- but not to -- we have not made any decisions to take down capacity.

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Linus Larsson, SEB, Research Division - Analyst [87]

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Okay. And relating to this obviously as we look at the realized pricing in the Paper Division in the second quarter compared to the first quarter, it was a decline of 3.5%. And I think you did mention now on the call that part of it is mix and part of it is pulp spot pricing increasingly. Does that decide how much price declines have we seen in the second quarter and how much more will roll in, in the third quarter would you say?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [88]

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I think that is -- it's difficult to answer that. But I believe it's -- to guide on that particular level, it's quite tough for us to do right now considering the plans that we take and also to see and to monitor how severe the situation is. Because it's a lot of different things we can do to maneuver the situation looking into the mix of the portfolio and also to add the pulp mix to this. And then it's the difference if you do it on contract or if you do it on spot price. So unfortunately, I think it's a too-detailed question actually for us to answer. And also not that I don't want to answer, it's more that we are in the -- continuously planning regarding this and to see what to do specifically with the brown sack pricing and volume and mix as we speak.

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Linus Larsson, SEB, Research Division - Analyst [89]

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All right. All right. Okay. But just as a -- just using the second quarter 3.5% price decline as a reference, would you say -- I mean would you, compared to that figure, in any way guide on the third quarter whether we should see something similar of a realized price decline including mix or clearly less, or even more than that?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [90]

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I'm reluctant to guide on that, but I would say that considering the guidance that I have given so far, it's definitely on that level.

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Linus Larsson, SEB, Research Division - Analyst [91]

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Okay. Great. And then just finally, if you could update us on the KM7 impact. I might have missed it on the call. But what -- so it was SEK 190 million in the second quarter, and what's your guidance for the third quarter?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [92]

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The guidance for the second half of this year is we still stick to the SEK 500 million. So we have additionally, SEK 310 million then to add on. And if you look at the quarters coming, I think you could put in -- sort of you can divide it evenly between the 2 quarters coming. That is the same as we said last quarter, and we still stick to that.

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Operator [93]

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Next question is from Cole Hathorn from Jefferies.

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Cole Hathorn, Jefferies LLC, Research Division - Equity Associate [94]

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Just a clarification question. On your Board Division outlook, you note that customer inventory levels have normalized. Is this referring to your niche fluting and white liner market or the wider recycled and virgin containerboard inventory levels?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [95]

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It's -- I think it's -- as I interpret the question, it's a more wider -- that's a market question or it's the -- the comment is more from a market perspective than exactly...

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Cole Hathorn, Jefferies LLC, Research Division - Equity Associate [96]

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Yes. So I'm just trying to find out if it's inventory levels for customers for the wider market or just for your specific fluting and white liner segments.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [97]

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It's for the wider market.

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Cole Hathorn, Jefferies LLC, Research Division - Equity Associate [98]

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For the wider market. Great. And then on sack and sack kraft paper, you talk about brown grades being bit softer. But can you give a little bit more color of where you're seeing that weakness and also if you're seeing any weakness between the various types of grades between the low- and high-quality brown sack grades?

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Christopher Casselblad, BillerudKorsnäs AB (publ) - EVP of Communication & Sustainability [99]

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We see it like this. The brown sack is down and the reason for that is basically the Asian markets. And so the white is quite okay, the brown has come down...

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [100]

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And the brown is also in the industrial segment.

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Christopher Casselblad, BillerudKorsnäs AB (publ) - EVP of Communication & Sustainability [101]

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Yes, it's in industrial. So it's the construction industry that has come down, especially in the Asian market.

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [102]

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Asian market, yes.

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Christopher Casselblad, BillerudKorsnäs AB (publ) - EVP of Communication & Sustainability [103]

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So what we have seen this quarter is not that much of a price pressure. It's more of a volume pressure. It's important to clarify it.

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Cole Hathorn, Jefferies LLC, Research Division - Equity Associate [104]

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Sure. And then just finally on your kind of operational efficiency, you called out at the beginning of the year that you start hitting targets for the various management segments. Have those been put in place and people are aware of their targets, and those are being set for the full year in 2020? Or are those still to come into play?

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [105]

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Absolutely. Everyone is aware of it. And we have a performance management system in place every month to follow, we follow each target. We have promised a 4% increase of availability and we have targets in place to take out the losses for all machines -- all mills, all the machines and we also follow the targets on specific losses and where they are in the process to actually take out the loss. So I feel very confident that we have everything up and running now. But now it's the execution part that -- and here we will have an excellent help from Mr. Vatne to...

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Christopher Casselblad, BillerudKorsnäs AB (publ) - EVP of Communication & Sustainability [106]

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He's [smiling].

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Petra Einarsson, BillerudKorsnäs AB (publ) - President & CEO [107]

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Yes. So it's -- I don't think that -- yes, I think you can pick anyone and ask if they are aware of the targets that they have on their -- on them in the divisions, in the management teams and also in the management team for BillerudKorsnäs, everyone is aware of the specific targets. So I have full confidence in that. And I do believe that we have potential to take it -- to make it also to the bottom line.

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Operator [108]

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And that was our final question for today. So I'll hand the call back to the speakers for any closing comments. Please go ahead.

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Lena Schattauer, BillerudKorsnäs AB (publ) - Head of IR [109]

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Okay. So that concludes this conference call. Thank you all for participating and welcome back when we report our Q3 results, the 24th of October.