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Edited Transcript of BILL.ST earnings conference call or presentation 20-Apr-17 8:00am GMT

Thomson Reuters StreetEvents

Q1 2017 BillerudKorsnas AB (publ) Earnings Call

Stockholm Apr 20, 2017 (Thomson StreetEvents) -- Edited Transcript of BillerudKorsnas AB (publ) earnings conference call or presentation Thursday, April 20, 2017 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Per Lindberg

BillerudKorsnas AB - President and CEO

* Susanne Lithander

BillerudKorsnas AB - CFO

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Conference Call Participants

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* Linus Larsson

SEB Enskilda Inc. - Analyst

* Olof Grenmark

ABG Sundal Collier - Analyst

* Mikael Jafs

Kepler Cheuvreux - Analyst

* Ola Sodermark

Swedbank Markets - Analyst

* Oskar Lindstrom

Danske Bank - Analyst

* Mikael Doepel

Handelsbanken Capital Markets - Analyst

* Justin Jordan

Jefferies LLC - Analyst

* Martin Melbye

ABG Sundal Collier - Analyst

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Presentation

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Per Lindberg, BillerudKorsnas AB - President and CEO [1]

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Perfect. Welcome to this presentation of 2017 quarter one, BillerudKorsnas. I am Per Lindberg, CEO of the Company. I'm accompanied by Susanne Lithander and [Adrian], our temporary IR manager.

So let's jump directly to the results of quarter one. I'm happy with our turnover in sales. We have growth of 5% vis-a-vis last year, and I think this is a sign of good demand. We do have strong demand basically across the board, and I'm not so happy with the results, EBITDA of 16%, SEK923 million. As you know, we have preannounced our results previously. We've had problems with quality, and we have also had startup problems with a small mill, Rockhammar. And this has been, unfortunately, a recurrent theme when it comes to startup issues.

So I think this is something that we are dealing with. We know what to do, and we are definitely on the right track. We've taken measures to contain quality issues. We've strengthened our quality processes. And we know exactly what the problem has been in Rockhammar, and Rockhammar is now up and running. So we view these extra costs as temporary, but nevertheless they hit us during quarter one.

You had a distribution of sales also, of course, on this slide, and the bigger business areas are packaging paper and consumer board, 38%, and 17% corrugated solutions. And if you wonder what other is, it's a combination of Scandinavian fiber logistics, wood sales and some other smaller subsidiaries of ours.

Key highlights -- well, first of all, we are growing again. That really is the good news. I think this is what we have been waiting for. We have been constrained in terms of capacity. In 2016 we did not achieve the growth that we were looking for. We are back on track again in quarter one, and the production is also back on track. We actually have all-time high production levels and also all-time high sales levels. So, again, that's good news.

Again, back to the not so good news, the one-off costs that I just mentioned of SEK80 million. I think this could be viewed as temporary costs. And, of course, when we start up the mill, it is -- we started up once after rebuild. We don't start it up twice after rebuild, just once. And now Rockhammar, as I mentioned, is back on track, and the costs associated that actually happened and that we had to take in association with what happened in Rockhammar was that the mill completely stopped because of breakdown of some key components, and the cost was that we had to supply further with external pulp because Rockhammar supplies Frovi with CTMP pulp, and that's the background for that cost.

And also when it comes to the quality, we have contained material which has not been sold, and we've taken it out of the cost. And we have blocked all the material, and that's where the costs arise, for the blockage of all this material.

And I should mention also that our investments in Gruvon and Skarblacka is well underway, and it's well on track, and I see no major issues around these projects right now.

And of course, given the issues that we've had with production problems over the last few quarters, one may question can we produce at all. Well, yes, we can and that we have an annual compounded growth of 3% over the last three years, as you can see by this slide, and we are right now at all-time high levels and see no reason that this cannot continue. And so production is actually doing well, in spite of the temporary issues that we've had from one time to the other.

The lessons learned, I will say, is that we need to be more cautious when it comes to pre-projects and in terms of preparations for startups, and I think over the last couple of years in the rebuilds that we've done we may not have taken necessary measures. After the fact, that's obvious.

So going forward we will be even more stringent when it comes to planning for and taking measures for our startups.

Financially sales volumes up to 722,000 tons, and that's record volumes, and I think this is especially good news. And, again, it indicates a strong market, and it also indicates that when we are capacity constrained we cannot sell. Now production is running well, and we can sell. And especially good news is the fact that consumer board increases with 8%, and I think that's also what we have been looking for. And, as you know, the production issues and the investments that we've made primarily is towards the consumer board and capacity. Now that's up and running and we can start selling as expected. So sales volume is really satisfactory.

Net sales also satisfactory, 5% up. Actually, the organic growth is 3% because in these numbers, in the quarter one numbers is Scandinavian fiber logistics, which was not part of quarter one of 2016. So organically up 3%, but still that's within our target, 3% to 4% per annum. So I think we are reaching what we intended to reach when it comes to sales growth.

If you look at this slide, you'll see that quarter one of 2015 was actually higher than quarter one of 2017. But the reason was (inaudible) that we sold during quarter two of 2015.

EBITDA is actually down 9% and as you already know and we have announced the reasons why. If we compare it to quarter one of last year, it is down with the 9%. Last year we did not have a maintenance stop, and we did have part of the maintenance stop during quarter one and part of it during quarter two in Gruvon. The cost is SEK75 million. And we did have the, as we view it, temporary costs for quality and startup of Rockhammar.

If we theoretically back that out, our EBITDA margin is actually at 19%, not the 16%, and that's where I feel we should be. So I'm not happy with the one-off costs. I'm not happy with the hiccups that we have. But underlying, I think we are where we should be when it comes to EBITDA.

Cash flow during the quarter is negative, and the reason is pretty straightforward. It's due to our investments. Working capital is at 11%, where it was also during the last quarter. So no significant change.

Return on capital employed as adjusted, which -- and the adjustment means that we back out the provisions that we made during 2016. And this is a rolling 12 months measure, and the provisions made during these 12 months was SEK230 million, SEK205 million in quarter four and SEK25 million during quarter two.

You are whispering?

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Susanne Lithander, BillerudKorsnas AB - CFO [2]

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Yes, it was actually over SEK300 million (multiple speakers) EBIT, not EBITDA.

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Per Lindberg, BillerudKorsnas AB - President and CEO [3]

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Ah, EBIT, EBIT. I'm sorry. Over SEK300 million. Thank you.

So we are adjusted at our target, which is also good news and, of course, where we should be. Leverage is safely below 2.5 and not too much to say. And the reason it goes up, of course, is the negative cash flow in our investments.

So summary, I think, again, I'm not so happy with the result due to the hiccups, and we are taking measures. We are fully aware that the hiccups are not long-term acceptable. And I think that underlying that, I think we are where we should be when it comes to our financial performance.

Looking at business areas, and this is just an introductory slide for those of you that are not so familiar with our business areas. First of all, packaging paper. We have strong positions in packaging paper. We have a strategy which basically says we are going to be selective. And the reason is that parts of this business is doing really well, part of it is less good on the market, more commodity type markets. And, of course, we intend to shift from commodity and more into specialties. And structurally it also means that the investments that we make in Skarblacka and Gruvon has the intention of struggling our position in specialties and, of course, taking some capacity out in some of the more commodity-like markets.

We are also keen on expanding packaging paper outside of Europe. We are right now about 40% of sales outside of Europe, and that is progressing well. And we see actually very strong demand for our type of products in Southeast Asia and China. I think that that is something that is really exciting, and it is on the back of an increased awareness about sustainable packaging and, not the least, replacement of plastic packaging towards more sustainable paper packaging.

I think we've seen strong performance. We've actually closed Tervasaari during the fall in September, but that's not visible a lot in our numbers. We did build inventory during the latter part of 2016. So sales for packaging paper has partly been done from inventory from Tervasaari. It's up 3% vis-a-vis last year. It's up 4% vis-a-vis quarter four, so sales wise doing fine. EBITDA up 9% versus quarter one of last year. It is right now at 18% -- slightly, actually, below where we normally are. And the reason is basically that's SEK28 million out of the SEK75 million from the maintenance stop in Gruvon hits packaging paper. If we adjust for that, we are at EBITDA 20%, and that's where we should be for the business area.

The market for kraft and sack paper is currently very strong. It's actually surprisingly strong. And the reason is not easy to actually disseminate and pinpoint, but definitely a very strong market at the moment.

I should say also that seasonally this part of the year is typically strong, especially when it comes to sack papers, and construction industry typically picks up in the beginning of spring and is strong throughout April, May, June and then falls off a little bit. So seasonally we have typically a strong period right now in packaging paper. But it seems like there's additional demand on the market, so underlying the market is also very strong.

We expect that to continue throughout quarter two, and there are potentials to raise prices on the back of this strong demand. And I say potential; I'm not saying that is going to happen. But there are potentials to raise prices. So packaging paper, I think, demonstrates solid performance during quarter one.

Consumer board then, well, this is a slightly different business area and a very different market. It's a lot more stable typically and a lot higher visibility, not at all as fragmented, and where we have in packaging paper about 800 customers, the customer base is far more concentrated in consumer board with higher visibility, higher stability and also typically higher growth. This is why our strategy is directed toward volume growth. And, of course, that's the reason why we also invest in a board machine in Gruvon.

Performance-wise I think we are doing reasonably well even though, of course, we are hit by the temporary costs. Typically see quarter one as seasonally strong, not necessarily that people drink more milk or juice or anything like this, but there tends to be somewhat of a year-end effect were demand is slightly lower at the end of the year and slightly stronger at the beginning of the year. We also see this in quarter one of this year, a slightly stronger than average demand. But we also see strong demand basically from all markets. So it's certainly not only seasonal. There is a strong underlying demand for consumer board products. And I also think that, especially when it comes to carton board, which was slightly sluggish during parts of 2016, we see a pickup of demand as well, which is also good news.

Net sales is up 5%. As mentioned, that's something that we had been looking for. We have been capacity constrained, and it's also up 7% vis-a-vis quarter four. So I think from a sales perspective, satisfactory. EBITDA is down, and that's due to the SEK80 million. If we theoretically, theoretically back that out, which is SEK80 million, we have an EBITDA of SEK520 million and we are up to 24% EBITDA margin, and that's exactly where we should be. So underlying performance is actually where I think we should be for this business area.

Corrugated solutions, finally -- this is the business area which is -- we operate on a huge market. The world market is 140 million tons. We are a very small player in this pond and with our 500,000 ton capacity. So we are a niche player by definition, and our products are niche products, and that's how we operate. And we -- our target is to maximize the value to extract maximum value out of our high-performance materials because our materials are high performance when we compare to the commodity products, most commodity products on the market. So that's, of course, when we address value growth as a theme for our strategy.

And on the back of that, we continue to expand managed packaging, which is part of corrugated solutions, and the managed packaging continues to demonstrate the strong sales, sales growth of 30% versus last year. Managed packaging is now 16%, 17% of the business area, a run rate of $60 million and a growth of 30% first quarter. I don't think we are going to maintain that growth for the rest of 2017 but certainly above 20%. That's my expectation.

We've had some issues around the harbor strike in Gothenburg, and we've seen some effect, especially for corrugated solutions. We've actually managed to redirect about 100,000 tons from Gothenburg to other ports, especially (inaudible). But we also see some delays in terms of deliveries for volumes for corrugated solutions. So, at the end of the quarter, we had volumes sitting in Gothenburg waiting for deliveries. And not huge, but still it does -- has had some effect in terms of the saved volumes for the business area.

EBITDA is down 12% versus last year, and it's very straightforward. It's the maintenance stop in Gruvon. Most of the cost for the maintenance stop is for corrugated solutions. It's about SEK40 million. And, again, if we do the theoretical exercise of backing that out, EBITDA is -- underlying EBITDA is at SEK230 million and the margin is at 25%, and that's typically where we should be for the business area.

We saw during 2016 some periods of sluggish demand for our products within corrugated solutions. We are now back on track when it comes to demand with strong order books. We expect that to continue into quarter two. And, again, in this business area, the demand is such that we see potentials for price increases. I wouldn't necessarily bank on it, but there are potentials for price increases for the business area. And, as I mentioned already, we expect managed packaging to continue to grow with significant numbers also into quarter four and quarter two.

Outlook -- this is, of course, a derivative of what I've already said. Demand is strong at the moment, and we expect that to continue. Some potential for price increases for packaging paper and corrugated solutions. Wood costs and wood prices we don't expect to change. We did basically mention or announce that we expect a 3% increase of wood costs for 2017. We've seen part of that materialize in quarter one. We don't think that there is a reason to change the guidance. But, again, it's not the prices, it's the wood costs. And the reason is transportation, somewhat longer distances, and that's the reason for the increase of overall wood costs.

As mentioned, we expect Rockhammar to be on track volume-wise, production-wise. But we will have some additional costs for the temporary measures that we've taken to secure production. And more specifically, what happened in the Rockhammar was that we installed two brand-new steam compressors, and when we took them into operation they both broke down due to a design error from the supplier. And this is now being redesigned. We will get the components back in June. Meanwhile, we operate a temporary steam compressor which will add some additional costs in Rockhammar, only SEK5 million to SEK10 million. But we know that's going to happen, so we mention it.

And also we do have maintenance. The maintenance stop in Gruvon is now over, and we do have the maintenance stop in Skarblacka, undergoing. So overall costs we expect to be SEK205 million for quarter two.

A few words about the investments in Skarblacka and Gruvon. As mentioned, it's on track, and the investment in Skarblacka is basically we are moving the Tervasaari machine from Tervasaari to Skarblacka. It's not going to become (inaudible) in Skarblacka. It's going to be integrated and have a completely different cost base, of course, being integrated. And we also upgrade quality with surface treatment for PM7 in Skarblacka, again to be more selective in terms of the segments that we target for business area of packaging paper, on track.

Newport machine in Gruvon, and that has a major impact on the entire production structure in Sweden. And so it's actually two reasons. One is basically to capture growth on the market. The other one is to streamline operations internally. And that is also on track. And we will describe more about these investments about our strategy at our Capital Markets Day in November, 15 November. So if you can, please make a note, and you are more than welcome to attend this Capital Markets Day.

And that's it for the presentation. I opened it up for questions.

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Questions and Answers

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Linus Larsson, SEB Enskilda Inc. - Analyst [1]

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Linus Larsson, SEB. You talked a bit about the strength that you are seeing in various markets, and you touched upon potential price hikes. Could you talk a bit more about that, what kind of initiatives you've launched, what kind of magnitude and timing that we could potentially foresee in the various product areas?

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Per Lindberg, BillerudKorsnas AB - President and CEO [2]

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Well, as I said, there are potentials for price increases, and we have to see whether it's at the end of the quarter whether it's actually a reality, first of all. And we, I think, were looking at relatively minor price increases right now, in the vicinity of 2%-3%, perhaps. Timing-wise, it's sometime during quarter two, if it happens.

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Linus Larsson, SEB Enskilda Inc. - Analyst [3]

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There has been extremely bullish reports about maybe the sack paper market, in particular. Could you talk a little bit about the technical kraft paper markets? Do you see the same prospects for price hikes in MG and other segments?

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Per Lindberg, BillerudKorsnas AB - President and CEO [4]

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No. I think both for sac and kraft papers we see very strong demand. That's absolutely correct and to a certain extent, to our own surprise. It's very strong. If we look back for the last three, four years, it's -- overall demand is way above what we've seen historically. But also, if we look at typical demand curve, from one time to the other, demand picks up when we have very strong order books and then it falls off again. So we are a little bit cautious in terms of what we are seeing. So we are not extrapolating any phenomenal demand over a longer period of time. Right now it's very strong, but we just have to see what happens over a few months rather than right now. But it's the same pattern for kraft papers as well as the sack papers.

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Linus Larsson, SEB Enskilda Inc. - Analyst [5]

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Okay. That's interesting. Just looking at the first-quarter performance in terms of price mix, it was sequentially positive in packaging papers. You had better realized price in Q1 on Q4.

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Per Lindberg, BillerudKorsnas AB - President and CEO [6]

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Slightly I mean, we are talking --

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Linus Larsson, SEB Enskilda Inc. - Analyst [7]

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Slightly better.

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Per Lindberg, BillerudKorsnas AB - President and CEO [8]

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-- very small numbers but slightly better, yes.

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Linus Larsson, SEB Enskilda Inc. - Analyst [9]

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But it's a positive trend. However, in the two other business areas, there was a negative price mix in Q1 on Q4. Could you in any way explain that negative price mix that we did see?

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Per Lindberg, BillerudKorsnas AB - President and CEO [10]

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Well, I think perhaps I don't have a really good explanation. Maybe you can help me out here, but I don't have a real -- it's just different mix. It's relatively small numbers, first of all. Price, if you look at the overall sales mix, it's in different markets, different products, and it's not the deterioration of market pricing. It's just what markets and what products that dominate in our portfolio, basically.

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Linus Larsson, SEB Enskilda Inc. - Analyst [11]

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Thanks.

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Olof Grenmark, ABG Sundal Collier - Analyst [12]

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Olof Grenmark, ABG Sundal Collier. Two questions regarding your outlook, if I may. First of all, you are guiding for one-off costs or maintenance costs of SEK205 million in the second quarter. Just to clarify, is there any costs associated to the move from Tervasaari to Skarblacka in that cost?

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Susanne Lithander, BillerudKorsnas AB - CFO [13]

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No. That is -- no, that is included in the CapEx, except for the transportation that we have already talked about. The cost in Skarblacka concerns -- the maintenance stop in Skarblacka is about rebuilding PM7 with a surface treatment.

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Olof Grenmark, ABG Sundal Collier - Analyst [14]

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I understand the difficulties. But maybe you could elaborate about the challenges in that move and, well, historical examples, etc.?

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Per Lindberg, BillerudKorsnas AB - President and CEO [15]

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Well, the rebuilding we are doing right now is installing a surface treatment from PM7, and again, we are fully aware that we've had issues in terms of startups after rebuilds. We are taking measures to make sure that we do not experience major startup problems this time. Can we guarantee it? No, we cannot. And so we just have to make sure that we do whatever we can.

But as I said, we start up our machines once after a rebuild, and we are going to start it up again once after this rebuild. So I think the project, as such, is very much under control. And I think the preproject is done and the engineering done. I think it's at a lot better level than it has been for the last few projects. So I expect it to run a lot smoother than it has done historically. But we cannot guarantee it, of course.

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Olof Grenmark, ABG Sundal Collier - Analyst [16]

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Thanks. And then regarding managed packaging, you mentioned a significant growth, 30% year on year. And you also mentioned a figure of 20% going forward. Could you clarify what was that? Was that annual growth, quarter in second quarter, 20%?

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Per Lindberg, BillerudKorsnas AB - President and CEO [17]

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No, 20% is annual growth. I said above 20% annual growth.

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Olof Grenmark, ABG Sundal Collier - Analyst [18]

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For how long?

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Per Lindberg, BillerudKorsnas AB - President and CEO [19]

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Well, for the foreseeable future. So we expect it to grow with above 20% for some years to come. Thanks. That's how we basically -- how we allocate resources and how we plan the business right now, and we see no reason that it couldn't continue.

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Olof Grenmark, ABG Sundal Collier - Analyst [20]

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Great. Thank you.

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Mikael Jafs, Kepler Cheuvreux - Analyst [21]

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Mikael Jafs, Kepler Cheuvreux. You talked a little bit about implementing these measures. Is it possible for you to give us some more color and flavor on that? Do you have special project groups, etc.?

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Per Lindberg, BillerudKorsnas AB - President and CEO [22]

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Yes, I think, yes. This is particularly if we look at the quality issues now, what happened was that on a few occasions we did release material that should not have been released to customer. And it was discovered at the customer site that it contained particles, which it shouldn't have, and we could detect it back to partially our own processes. And we know exactly what happened. We know exactly where in the processes that this has happened, and it's actually plastic particles.

So what we do now is we have installed manual inspection routines, and we are investing in web inspection systems. And we also -- we strengthened the inspection. We strengthened our communication with our customers, and we are basically more proactive when it comes to quality.

This is a process over time. It's nothing that we installed right like this, but it's a process over time. But we have had intense communication with our customers, and they are quite happy with what they see and the measures that we've taken. So that's what we've done. But the quality issue is something that we take very seriously, no doubt. So this is something that we will maintain, of course, for the foreseeable future.

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Mikael Jafs, Kepler Cheuvreux - Analyst [23]

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Thank you. And then the last question from me -- you speak of a further improved order situation for the carton boards. What's happening on the carton board market? Is it just general demand, or are there some other drivers as well?

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Per Lindberg, BillerudKorsnas AB - President and CEO [24]

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Well, first of all, it seems like the general demand is picking up somewhat. When we see the growth of consumer board, our growth is primarily in liquid packaging board, only a slight growth on carton board. But still, it's a positive sign that the market is picking up from, as I said, slightly sluggish 2016. So we see underlying demand improving somewhat. But also now the thread is up and running and where it should be. We do have capacity to address the market in a way that we haven't had for the last year and a half or so. So we can actually grow ourselves and continue to be a little more aggressive on the market when it comes to sales.

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Mikael Jafs, Kepler Cheuvreux - Analyst [25]

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Thank you.

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Ola Sodermark, Swedbank Markets - Analyst [26]

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Ola Sodermark, Swedbank. As the follow-up question on corrugated solutions and managed to -- especially managed and packaging and the impressive growth you are showing there. But on bottom-line, it's limited impact, as far as I understand it, right, so far?

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Per Lindberg, BillerudKorsnas AB - President and CEO [27]

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Oh, yes. Yes.

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Ola Sodermark, Swedbank Markets - Analyst [28]

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So far.

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Per Lindberg, BillerudKorsnas AB - President and CEO [29]

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So far.

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Ola Sodermark, Swedbank Markets - Analyst [30]

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But it's not a burden?

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Per Lindberg, BillerudKorsnas AB - President and CEO [31]

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It is a slight burden, yes, but it's fully intentional because we're building capacity. So we are building capacity for -- to generate this growth. And the capacity is not machine capacity, nor is it CapEx. It is investment in people. And so we are investing to generate and maintain this growth, and we do that ahead of delivering the business. So right now it's a very marginal burden on the result. But that's intentional. And we could, if we wanted to, of course, just maintain the business where it is right now, volume wise, and we would definitely improve margins. So we are investing in the business to generate profit.

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Ola Sodermark, Swedbank Markets - Analyst [32]

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And the big question is obviously when it's going to contribute to profits.

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Per Lindberg, BillerudKorsnas AB - President and CEO [33]

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It will definitely contribute to profits when we have loaded this capacity. So I expect that to happen in 2018 and 2019. But for 2017 and partial 2018, it will continue to be investing for growth rather than reaping the profitability benefits.

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Ola Sodermark, Swedbank Markets - Analyst [34]

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And to ask the question on the pulp market, the pulp market has been maybe stronger than one could have expected. Can you share your view? You used to have some views.

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Per Lindberg, BillerudKorsnas AB - President and CEO [35]

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Yes, I know. At this time, we did not expect the price development that we've seen. For those of you that don't follow pulp pricing, I think most analysts and ourselves, we thought that prices would actually drop for 2016. They haven't; they have actually increased. Right now we are out at [$]830, [$]835. Our expectation was that we would be below [$]800.

So the question is, where are we going to go from here? Well, I think our expectation is that we will probably not see all that much of an improvement from where we are right now in pricing. But I know that there are companies announcing even [$]890 per ton. And to me that's slightly surprising. I don't think that's going to materialize, but I could be wrong. The market is not easy to understand right now. So we -- this is not a big deal for us right now. But, still, it does have some bottom-line effect. But we have misjudged the market in terms of pricing, and right now again we think it's going to be at [$]830 and maybe slightly taper off at the end of the year. This is what we think right now.

Any further questions here or anything on the telephone?

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Operator [36]

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(Operator Instructions) Oskar Lindstrom, Danske Bank.

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Oskar Lindstrom, Danske Bank - Analyst [37]

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Three questions here. First one is on the sack paper market, where I think -- I believe it was last year China imposed tariffs on imports, and that caused some turbulence in the sack paper market. Is that turbulence past? Is this going to be an issue going forward?

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Per Lindberg, BillerudKorsnas AB - President and CEO [38]

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That has pasted. That's not an issue at all, at the moment. As mentioned, sack paper demand is very strong, and our sales into China is very limited, and that's a consequence of the import tariffs. And supply patterns and streams globally seems to have settled, and it's not an issue right now.

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Oskar Lindstrom, Danske Bank - Analyst [39]

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Okay. My second question is on the increased production volumes and also sales volumes in the consumer board business area where you say that Frovi is now really performing closer to where it should be performing over where you had expected it to perform. Is this increased volume going mainly towards folding box board, or are you also delivering more on liquid packaging board? And basically what I'm trying to get at is, are there any price/mix implications from the increased volumes?

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Per Lindberg, BillerudKorsnas AB - President and CEO [40]

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For quarter one, most of the volume increases for liquid packaging board.

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Oskar Lindstrom, Danske Bank - Analyst [41]

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All right. So how much -- what percentage of your sales volumes in this business area are folding box board, and how much is liquid packaging board?

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Per Lindberg, BillerudKorsnas AB - President and CEO [42]

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More than 80% is liquid packaging board.

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Oskar Lindstrom, Danske Bank - Analyst [43]

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Oh, okay. And then my final question, which I think I ask every quarter, is on M&A opportunities. I realize your main focus is the investment in Gruvon and also in Skarblacka. But you have stated that you have some room for potential acquisition, I guess mainly bolt-on acquisitions. What are you seeing out there? Are there attractive assets, potentially, for sale, and especially are you seeing any opportunities to add to your corrugated services business or managed packaging, to be specific?

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Per Lindberg, BillerudKorsnas AB - President and CEO [44]

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Well, we continue to look, and you are absolutely right. We are looking for bolt-on acquisitions. We just have to see whether there's any attractive targets and attractive pricing around that. When it comes to corrugated assets, there has been and still is a lot of speculation around what's going to happen with SCA and so forth, and I'm not going to add to that speculation at all. And when it comes to managed packaging, we are actually looking for acquisition possibilities, yes.

But there's really not very many actors that do what we do. So if we acquire something, it would probably be very small or relatively small, at least, and that's kind of where we are right now.

When it comes to major M&A, right now we're focusing on our investments and making sure that that works.

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Oskar Lindstrom, Danske Bank - Analyst [45]

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If I may just sort of -- again, on the bolt-on acquisition, do you have any sort of holes that you feel that you need to fill like, yes, we would like to have some more pulp capacity or a specific type of machine, or are bolt-on acquisitions more interesting opportunities which might come up?

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Per Lindberg, BillerudKorsnas AB - President and CEO [46]

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Well, I guess we are a little opportunistic in that sense. We are not looking for anything beyond our existing segments or business areas. So if anything, it will be within packaging paper, consumer board or corrugated solutions and materials. So deviating from that, it's not going to happen. And within that, yes, we're going to be relatively opportunistic in terms of is it a fit and is it a good price and do we generate synergies. If it's a bite-sized opportunity, we are probably going to go ahead, if all of these criteria are okay.

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Oskar Lindstrom, Danske Bank - Analyst [47]

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All right. Thank you very much.

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Operator [48]

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Mikael Doepel, Handelsbanken.

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Mikael Doepel, Handelsbanken Capital Markets - Analyst [49]

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Just coming back to the very strong volumes in the consumer board business, and just as a follow up there, was there anything in particular in Q1 2016, particularly weak ones, that partly explains this 8% year-over-year volumes growth?

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Per Lindberg, BillerudKorsnas AB - President and CEO [50]

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We did have some major issues in Frovi at the end of 2015 and also into 2016. So we were limited in capacity in the beginning of 2016. So that is part of the explanation --

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Mikael Doepel, Handelsbanken Capital Markets - Analyst [51]

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Okay. And then --

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Per Lindberg, BillerudKorsnas AB - President and CEO [52]

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if we take that as a reference point. But, of course, we -- the sales is up also versus quarter four. So one should also, of course, recognize that.

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Mikael Doepel, Handelsbanken Capital Markets - Analyst [53]

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Sure, sure. And then coming back to the question on the potential price hikes, you talked about the sack and kraft papers. You see potential in both grades there. But you are also saying or guiding for both liner and floating that you see some potential to hike prices there. Can you talk a little bit about that as well?

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Per Lindberg, BillerudKorsnas AB - President and CEO [54]

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Well, it's nothing extraordinary. The demand is good, and typically if we want to manage our own order books and not end up in a situation where the order books are unmanageable, we have to adjust pricing in order to also adjust order books to a manageable level. And that's really what we're looking at. And so that's the reason why we are saying that could be potentials for price increases, just to make sure that the commitments we make for our customer we can fulfill and produce at a reasonable time. That's where we are. It's something spectacular on the market.

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Mikael Doepel, Handelsbanken Capital Markets - Analyst [55]

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But would you say that the potential is the same here on liner and floating as in the sack and kraft papers of hikes of 2% to 3%, or is the likelihood lower to hike prices in this segment?

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Per Lindberg, BillerudKorsnas AB - President and CEO [56]

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It's probably we are looking at more or less the same magnitude. But, again, I'm saying potentially.

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Mikael Doepel, Handelsbanken Capital Markets - Analyst [57]

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I got it. Then just one on the Rockhammar issue, the quality cost. You talked about Rockhammar and what happened, that you had to stop the mill and so on and so forth. But could you talk a bit about the quality cost? You said what kind of measures you are undertaking to improve the quality performance. I'm wondering what are the actual costs that you are incurring now in terms of quality and will discontinue in Q2 or not?

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Per Lindberg, BillerudKorsnas AB - President and CEO [58]

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Well, I don't think we necessarily induce any additional costs, operating costs, as a consequence of our quality measures. It's just that we need to do things slightly differently in terms of how we are operate our machines and our mills, more manual inspections in critical areas of the process, making sure that there is no contamination and also final inspection different. Also, as I mentioned, different and more intense communication with customers, nothing that adds significant operating costs.

However, we will invest in web inspection systems for at least one machine, which is more corresponding to the systems that our customers have in place. That's going to happen sometime during the fall of 2017, and the investment is not huge. We are talking somewhere in between SEK15 million to SEK20 million.

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Mikael Doepel, Handelsbanken Capital Markets - Analyst [59]

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So does that mean that the SEK80 million that you took in Q1, that that's 100% Rockhammar, then, if I understood you correctly?

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Per Lindberg, BillerudKorsnas AB - President and CEO [60]

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No, no, no, no, not at all. It's about half of that is the costs from Rockhammar and the consequences that we had to buy external pulp to supply Frovi rather than supply it from Rockhammar. That's the cost. And Rockhammar is now up and running, and half of the cost of the SEK80 million is the quality cost, i.e., the containment of material that we did as a consequence of the contamination of the material. And so it's basically materials not delivered and written down to zero in value. That's the cost.

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Mikael Doepel, Handelsbanken Capital Markets - Analyst [61]

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Okay. That's clear. And did you say about going forward, how do you see this developing, the quality cost issue?

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Per Lindberg, BillerudKorsnas AB - President and CEO [62]

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Well, there's no guarantees in anything, certainly not in our business. We have complex processes, and we are taking measures to make sure that things do not happen again. I cannot guarantee it. But we know what went wrong, and we are addressing that. And I view these costs as temporary, i.e., my feeling is that this shouldn't happen again.

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Mikael Doepel, Handelsbanken Capital Markets - Analyst [63]

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Okay. And just a final -- more of a housekeeping question. I didn't see -- I guess you are not -- you still have the same CapEx guidance for this year, [4.3]?

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Susanne Lithander, BillerudKorsnas AB - CFO [64]

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Yes, more or less, except for the SEK45 million that we talked about in our press release that has been moved from CapEx to cost.

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Mikael Doepel, Handelsbanken Capital Markets - Analyst [65]

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Good. Great. Thanks a lot.

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Operator [66]

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Justin Jordan, Jeffries.

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Justin Jordan, Jefferies LLC - Analyst [67]

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Two quick questions, and I appreciate I am slightly covering ground that's already been covered. But I'm just trying to get a bit more color on the 7.5% to 8% volume growth in consumer board. As I look back in prior quarters in 2016, I appreciate that we are going to see some mill issues. I know you've talked about it exhaustively, but in all seriousness you had a pretty flat volume growth throughout most of 2016, and now you've got 8% organic volume growth in Q1 2017. That is substantially ahead of the underlying consumer board market. Are there any particular new customer wins or new product innovations or something we should be aware of? And if that is the case, shouldn't they be reflecting in probably the next subsequent three quarters also because presumably a new contract win would be in there for the next year?

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Per Lindberg, BillerudKorsnas AB - President and CEO [68]

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Well, I think that's a very good question. I think the underlying growth of consumer board is not at the 8%. As I mentioned already, we have been capacity constrained, and what happens when we have capacity constraint and also have delivery commitments is that we decrease our inventories. And we have -- the possibility for us is now to deliver what have been difficult for us to deliver historically.

We also see somewhat of a little bump during the beginning of the year in terms of demand, so that is part of the explanation, more of a supply chain issue. And I think also perhaps that what we see in terms of demand is an indication of perhaps other capacity on the market not performing as well as expected.

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Justin Jordan, Jefferies LLC - Analyst [69]

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Okay. All right. Thank you. And just a quick follow-up, then, just moving to divisions, talking about packaging paper. Obviously, according to (inaudible), you were talking about kraft paper price increases, potentially. I appreciate, obviously, you've achieved sack price increases at around 3% or so for calendar 2017 already. But just so I'm clear in my brain, as it were, are we talking about potential price increases for both sack and kraft, or is it just kraft that we are talking about potentially for possible price increases in Q2?

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Per Lindberg, BillerudKorsnas AB - President and CEO [70]

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For both.

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Justin Jordan, Jefferies LLC - Analyst [71]

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For both. And it's really a function of, what, end market conditions being strong in both areas?

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Per Lindberg, BillerudKorsnas AB - President and CEO [72]

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Yes.

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Justin Jordan, Jefferies LLC - Analyst [73]

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That does it. Thank you.

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Operator [74]

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Martin Melbye, ABG.

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Martin Melbye, ABG Sundal Collier - Analyst [75]

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Yes, a question on the cycles. So the macro cycle is much better. Could you simplify things and say how much is packaging demand growing by now compared to normal across your grades because this is hard to measure by months or quarters?

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Per Lindberg, BillerudKorsnas AB - President and CEO [76]

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To be honest with you, I don't have the answer. I think after the fact we are going to find the answers, but right now, as I said already, the demand for sack and kraft is surprisingly strong, and it's to such an extent we just have to see whether this continues. I seriously don't believe it's going to continue at this level because if it continues at this level it's going to be a dramatic shift in what's happening on the markets. I don't think we are looking at that. I think we are looking at more of a temporary refill of inventories, etc. But it's also -- I'm also quite convinced that we are beginning to see somewhat of a change also when it comes to underlying demand for more sustainable packaging, and it is driven by a desire for many to substitute plastics for paper. And to what extent I don't have the answer right now.

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Martin Melbye, ABG Sundal Collier - Analyst [77]

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And if you try to link that answer with the thing we were afraid about last year, all the new capacity growth, is that now eaten up, or is it still yet coming, mainly in 2018?

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Per Lindberg, BillerudKorsnas AB - President and CEO [78]

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Well, the capacity is still there, and I think our assumptions around the underlying growth of the market is still there, which means that we will see that capacity as a possible threat, I guess, in certain areas and which are these areas, primarily within liner. So that hasn't disappeared, but right now it's not visible.

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Martin Melbye, ABG Sundal Collier - Analyst [79]

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Okay, last question: this SEK45 million that's been reclassified from CapEx to cost, how much of that will be there in Q2 alongside with these SEK10 million from extra costs at Rockhammar?

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Susanne Lithander, BillerudKorsnas AB - CFO [80]

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You can spread it out evenly over the year.

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Martin Melbye, ABG Sundal Collier - Analyst [81]

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Okay. Good. Thank you.

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Operator [82]

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(inaudible), Carnegie.

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Unidentified Participant [83]

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A lot have questions have been answered, but still one from me. Demand appears to be quite good and the outlook as well. I was wondering about input costs and what is the outlook there. In terms of Q1, it seems good costs were around flat, but what's the outlook now for the rest of the year?

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Per Lindberg, BillerudKorsnas AB - President and CEO [84]

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I think we will see very moderate price movements, if any. The key input for us is wood. We already mentioned that we think it's going to be relatively stable going forward. Other key inputs are chemicals. We see a slight increase of pricing for some chemicals, but overall it doesn't have much of a material effect, at least not yet. So overall relatively small movements.

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Martin Melbye, ABG Sundal Collier - Analyst [85]

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Right. Good. Thank you.

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Operator [86]

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(Operator Instructions) There are no further questions at this time. Please go ahead, speakers.

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Per Lindberg, BillerudKorsnas AB - President and CEO [87]

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Okay. Well, I thank you very much and appreciate your attention, and we will see you again in three months.