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Edited Transcript of HOLM B.ST earnings conference call or presentation 15-Aug-19 12:00pm GMT

Q2 2019 Holmen AB Earnings Call

Stockholm Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Holmen AB earnings conference call or presentation Thursday, August 15, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anders Jernhall

Holmen Aktiebolag (publ.) - Executive VP & CFO

* Henrik Sjölund

Holmen Aktiebolag (publ.) - President, CEO & Director

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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

* Lars F. Kjellberg

Crédit Suisse AG, Research Division - Research Analyst

* Linus Larsson

SEB, Research Division - Analyst

* Martin Melbye

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Oskar Lindstrom

Danske Bank Markets Equity Research - Senior Analyst

* Robin Santavirta

Carnegie Investment Bank AB, Research Division - Financial Analyst

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Presentation

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [1]

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Good afternoon, ladies and gentlemen, and welcome to the interim report presentation for the Holmen Group. My name is Henrik Sjölund. I'm the CEO of the company. And together with me, I have Mr. Anders Jernhall, CFO. We're going to do the presentation, and we are also happy to take any questions you might have after we have gone through the different business areas.

So let's start with some highlights from the second quarter. We have an operating profit of SEK 574 million as a result of really good earnings from our paper division, still healthy levels from our wood products even though prices are declining. We have a profit level as expected from our forest. We have seasonally lower production in our hydropower plants, but we also have dissatisfactory performance from our paperboard division, including the maintenance stop but also some downgraded board. However, we also have a positive effect from having sold a wind power permit for SEK 80 million. Last but not least, we also have taken a decision in the Board of Directors of Holmen today to make use of the mandate from the Annual General Meeting to initiate buying back Holmen shares. We will come back to that a bit later during the presentation, but let's first move on to our forestation.

If you go back sometime, we had a really difficult period last year. We had all kinds of difficult weather. It was difficult to get the wood out of the forest, and when we look at the situation this year, it's much more back to normal.

However, at the moment, we have a situation where we also had especially spruce bark beetles that has made it need -- or necessary for forest owners to take out wood from the forest in order to not have affected wood later on. We also had a couple of storms, especially one in Uppland that has had some impact on the market. So all in all, the spruce bark beetles, together with the storm effects and also a little bit lower activity from the industry. We see now that especially sawlog prices are on their way down in south of Sweden. And we have pulpwood prices leveling out roughly where they were in the last quarter and still on a fairly high level.

Last year, we also had a lot of discussions about imported wood, especially from the Baltic states. And there, we can see now that prices are coming down and also supply is going back a little bit.

If we then look at our own forest holdings where we have split our own holdings into 3 different areas: north and Holmen middle and Holmen south. We note that if we look at Holmen middle, it looks very much similar to Bergvik Öst, which was bought by AMF. It's similar both in terms of size and location.

We also note when we look at that transaction and some other bigger forest transaction in the industry, not the least the ones we have seen being made in the Baltic states, that they've been done on a level, which is quite much higher than the level we have our own forest valued at in our own books, which, Anders, has led to that we have had a discussion about reviewing the parameters in our own model.

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [2]

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Yes, Henrik, maybe you should comment that. In the graph that you -- that is shown to you right now, you see the market prices for the sale of forest properties in the individual private market in the southern part of Sweden, middle part and northern part of Sweden and also the AMF transaction of Bergvik Öst.

If we move to the next slide. I'm intending to go through a bit on the accounting of forest assets. Our forest holdings is booked at SEK 19 billion, and that's 2 accounting entries. That's the first go increase. Those that are standing here, they are booked at SEK 18.7 billion. And then we have the forest land on which the trees stand. That is, according to accounting regulations, to be booked at acquisition value, which is, in our case, SEK 0.3 billion. But it's also the forest land that enables us to sell wind farm permit, which gives a one-off profit plus a lease over a 25-year period. The transaction we have concluded now with selling one wind farm, it's worth in present value some SEK 300 million if you include the land lease revenues going into the future.

But -- and forest land also enables us to develop land for urban usage, which is especially relevant in the southern part of Sweden and it's also that, that enables us to plant the tree next year that will give revenues in the future. However, those kind of revenues we can't take into at -- in fair value. We have to state this at acquisition cost, which as I mentioned, is SEK 0.3 billion.

What we are supposed to do according to accounting regulations is to value the standing trees that we have currently. And we do that by using a 100-year DCF valuation as a proxy for a normal harvesting cycle. We base this on a forecast of volumes from our harvesting plan, and we assume a long-term template price will apply. We assume current cost level, and then we assume that the prices will increase and cost will increase by 2% per year, and we apply a discount rate of 5.5%.

Doing that, with these assumptions currently, we arrive at the book value of the growing trees at SEK 18.7 billion. Although the land is worth something more in a market transaction, it's -- this is below what has been paid in the recent property transactions and that will -- has triggered us to review the assumption we have in our DCF calculation. And we will do that during the rest of this year and come back to you with the result of such a review in due time.

Moving over to what's happened during the first -- the second quarter in terms of finances. If we look at the first half year, we have earned SEK 600 million, which is the same as we did first half year last year. But last year, as you might recall, we sold a forest property, which gave us a gain of SEK 70 million. So underlying performance have improved by SEK 70 million the first half year, and this is due to higher prices, on average, 10% higher selling prices for the wood that we harvest from our own forests. Looking into Q2, it's -- we have the same result as we had in Q1, around SEK 300 million.

Back to you, Henrik.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [3]

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Thank you very much. Then moving over to paperboard. If you look at the market for paperboard, we can see that demand in Europe has been on a healthy level. It has moved more or less sideways. We can also see that prices are largely stable. But on the other hand, we also feel that there is fierce competition in the market. Not so much maybe in Europe in the segments where we are, especially in the premium, but we do feel it. And when we look outside Europe, especially in Asia, then there is really tough competition.

If we look at the pulp price, which is on the right side of the chart, we can see that the pulp price has been quite tough for the producers that are not totally integrated, the half integrator or unintegrated players. Just remind that when it comes to our company, we are self-sufficient in pulps, so it has hardly no effect on our result as a company.

We said in the beginning or I said that we were not happy with the result from paperboard. In the first quarter, we said that we were not happy with production. When it comes to the production in the second quarter, it is a bit better. It's actually quite good, but we're not happy with the production cost. And easily running so that when you have not totally balance between sales and production, that you have a bit of shorter runs. You run in situation where you have to switch the machine between different grades a bit faster than you actually want to do. And we have a little bit of that in the second quarter. And it's also clear that we can do it a bit better.

When it comes to the result, Anders, including the maintenance stop and downgraded board, we are not totally happy, and we land on a quite poor level actually.

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [4]

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That's correct, just shy of SEK 150 million so far this year. We do have this maintenance stop, and working on that cost us SEK 80 million in loss of production and higher costs, and we didn't have any maintenance stop the comparing period last year. But we also have some SEK 70 million in higher wood costs, and we have the production disturbances and inflated variable cost due to shorter runs that Henrik mentioned that explains the deviation.

Looking into Q2, the result was SEK 36 million. The maintenance stop took SEK 80 million away from the profit. And we had still some production disturbances with more or less one event that cost us SEK 20 million to SEK 30 million in this quarter. And then we also had to make some downgrading of the production, which cost us SEK 20 million in the second quarter.

Looking ahead, we have a large maintenance stop in Q3 in Sweden at a mill in Sweden, which we expect will cost us SEK 150 million. And just a reminder, that it's during this stop that we'll remove the bottlenecks and -- in the pulp mill. This will enable us to increase pulp production by some 40,000 to 50,000 tonnes, but that will not happen overnight. It will be a gradual production increase, and we'll see how long time that production increase will take.

Back to you, Henrik.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [5]

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Thank you. Before we leave, everybody, we just like to mention also that we have a new Managing Director. His name is Johan Nellbeck, and he is responsible for the paperboard division since a bit more than 1 week. He has lot of experience from the business and the industry, more from sales and marketing than production. And his latest position was as business area manager with BillerudKorsnäs, and we expect a lot from him, don't we?

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [6]

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Yes.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [7]

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All right. Let's move on to paper. We have a situation in paper now in the market where, first of all, we had a number of years where it was more or less impossible to increase the price. And thanks then to closures in the market where capacity was taken out, we have had the opportunity to increase prices a few times the last couple of years. And if you compare now where we are price-wise, the first half year 2019 compared to 2018, it's roughly 10% higher.

However, when we look at the market as such, we see on the chart that we are in a business where demand is, over time, slowly declining. And when we feel the feeling from the market now, of course, that's -- that demand is going down, and we will see tougher competition for the orders or we already see a little bit tougher competition. However, we have to remember, it's quite different from segment to segment and depends where you are. And in our case, we have concentrated a lot on uncoated magazine and book paper, where the situation is more stable, where also the market supply/demand balance is more healthy.

Even though we have not run to 100% full, Anders, we have a really good result from paper division in the second quarter.

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [8]

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Indeed. Starting with the first 6 months, we have earned slightly more than SEK 250 million. It's up SEK 100 million compared to last year, and this is due to the price increase, as Henrik mentioned. Also in paper, we noticed higher wood cost, some SEK 70 million higher than we had a year ago. And deliveries are on a lower level and that's meant -- due to a bit of a soft market, which have meant that we have taken some downtime to manage the inventories, and we have taken downtime especially in Q2 to take down our inventory levels to a healthy level. Despite that, Q2 result was quite solid, slightly higher than we had in the first quarter.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [9]

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Thank you. Then moving on to something really cyclical, which is wood products. And just looking at the price graph, we see that we are now on the way down. It's clear that, that market is now affected by some effects, which are more short term maybe than long term. But also, as I said, it's really a cyclical business.

If we look at demand, it's not bad, it's actually quite good. We can see that it's slowing down a little bit. But that's not what we feel in the market. It's all the supply. And the supply comes -- especially it comes from Central Europe or continental Europe, where we talked about spruce bark beetles in Sweden before we talk about the forest. But here, it's much, much bigger. And of course, the output from the continental European sawmills is on a level where the market has a bit of a problem to digest all the volumes that comes.

Just to give you an idea what we are talking about. If you look at the market in Europe, roughly 90 million cubic meters of wood products every year, and we talk about the spruce bark beetles in the area around Germany, we are talking about a volume, which corresponds to or is even higher than 1 yearly production in Sweden, which is 18 million cubic meters roughly.

So it's a bit of a strange situation. On the other hand, it follows the normal pattern, it is a cyclical business. Still, we are on a fairly healthy level when it comes to profits, Anders.

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [10]

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Yes, we still are on healthy level. Year-to-date, actually quite a good result, SEK 83 million. It's a bit lower than last year due to prices declining and the classical thing in it. That point in the cycle is that selling prices are declining whilst log costs are still rising.

In Q2, we saw an effect of lower prices, and the price decline has accelerated. Log costs are still flattish. They are higher than a year ago, but they are not increasing and neither are they decreasing yet. And if you look at the Q2 result of SEK 29 million, if you take this over a cycle, it's -- we are right now at a pretty normal profit level, but of course, the trend is downward.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [11]

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Thank you. Moving down to renewable energy. As we said in the beginning, we've been able to sell the permit to build a wind farm on our own land for SEK 80 million. And if we look at -- we have a lot of opportunities on our own land, we have 2 other projects, which are close to be possible to conduct, and we are seriously looking into now whether we should invest ourselves in those project or not.

If you look at profit level as such, we can see now, we had of course SEK 80 million extra in the second quarter. But if you see the running rate for the first half of the year, we are at roughly -- if you take out the SEK 80 million, you're at roughly SEK 140 million. And we know we have higher revenues during the first half than in the second half. But you take a running rate on a yearly level, we are now roughly up SEK 250 million.

All right. And after that, we would also like to again come back to that our Board of Directors took a decision to use the mandate from the Annual General Meeting to initiate buying back Holmen shares.

Holmen used to be a paper and board company a bit integrated into forest and energy. Today, Holmen is much more of a forest-owning company, where we refine the raw material in our own industry using, to a large extent, energy from our own hydro and wind power. We have repositioned our paper business. We have also taken quite big reinvestments in our paperboard division, especially in boilers and later on also in pulp lines.

That, together with our strong financial position, gives an opportunity to make our capital structure a bit more effective by giving our shareholders a chance to actually own more forest per share by using the opportunity to buy back shares. I think we got a few more questions about that a bit later.

So let's move on then to some priorities. Of course, you have listened to what we have said when it comes to our performance in paperboard. It's the highest priority now to reestablish a satisfactory profitability in that division. It needs a lot of work, but I'm sure we can do better. We also are in a position where we feel that we can still develop our sales in magazine and book paper, which is very important. We are on our way to invest. We are investing and on our way soon to be able to ramp up the production at our Braviken Sawmill, having a very good cost position.

We are seriously looking into the next 2 projects I mentioned about when it comes to wind power, whether we should invest ourselves. And we are going during the autumn to look carefully and to review our forest valuation.

And by that, we have concluded our presentation, and we're happy to take any questions you might have.

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Questions and Answers

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Operator [1]

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

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

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Just a few follow-ups from my side. Firstly, on the input cost, I think it was you, Henrik, you mentioned that sawlog prices are coming down and the pulpwood prices are pretty flat. Do you see sawlog prices coming down also further in the third quarter?

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [3]

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Right. I think we should look at Sweden in the following way: Long term, I actually see Sweden as a country where there will be really tight competition or tight market when it's comes to especially pulpwood, not so much sawlogs, but also sawlogs. But right now, we have short-term effects. We have the spruce bark beetles. The thing is it's very difficult to understand exactly what happens in continental Europe more than right now. It's a lot of production there. When it comes to prices in Sweden, yes, right now the tendency is that sawlog prices are going down.

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

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And you expect to feel that effect positively for wood products in the beginning of next year. Or...

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [5]

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It's reasonable. You normally have 6 to 9 months lag in pricing.

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

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Exactly, but you see the effect already in the forest division, I presume. And for the industries, you see that the...

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [7]

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The price decline is predominantly in the southern part in Sweden where we are a net buyer. We haven't really seen that large decline in the northern part of Sweden where we are a net seller.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [8]

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But also remember that it's, to a large extent, coming from the spruce bark beetles now making our -- supply of wood is plenty in south of Sweden. But also remember when it comes to the business that right now we see declining prices for wood products much more than the raw material.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [9]

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Exactly. And on the pricing side, heard from other players on wood product that prices are expected to come down further by 3% to 5% in the third quarter. Is that also relevant for you guys?

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [10]

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We don't give any forecast on price development. We can just look at the monthly charts that are updated on average selling prices and in the -- and they show quite a rapid decline right now.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [11]

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Yes.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [12]

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Right. And for paperboard, you didn't mention anything on -- so prices there are more stable, right?

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [13]

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They are largely stable. I said also that it's fierce competition for new orders. But as you could also see from the graph I showed that prices aren't moving much.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [14]

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Yes, yes. And finally for me then, I see that the depreciation charges are coming up quite a bit there. So the question is the depreciation levels that you have in the second quarter, are those also representative for the future?

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [15]

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The depreciation levels, the reason why they are increasing is the implementation of the new accounting standard, IAS 16. And if you look at the depreciation level for the first 6 months this year, they are representing the run rate. But you have to look with -- on the 2 quarters combined.

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Operator [16]

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

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Linus Larsson, SEB, Research Division - Analyst [17]

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If I may just start off with a couple of questions on forest land. You will initiate a review of your assumptions for your forest land valuation. Could you just expand a bit more on that? Which assumptions are you primarily looking at? Will the main part of the value driver in this context be a change of the WACC? Or are there other major drivers as well?

In that context also, if you could, please put any sort of number on the EBIT generated in the forest division from activities not involving the wood sale. I'm talking about wind, gravel, hunting, what have you.

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [18]

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Your first question then, it's -- you have a number of transactions, to be clear, to look at. You, of course, you have the acquisition by AMF of Bergvik Öst. But you also have the dissolution of Bergvik itself, where you had a number of transactions that also took place. So we need to look at all these transactions and look at what kind of input that gives to our own assumptions. It's quite natural that you will look at the discount rate, but you have to look at all the factors on this. And we -- it's too early days, and we don't have all the information because we're not insiders in those transactions. But we'll come back to you with more information once we have something more to say. And we do not disclose the split of nonforest -- nontree revenues in our forest division.

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Linus Larsson, SEB, Research Division - Analyst [19]

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Okay. And also in this context, maybe is there a scenario where you would actually consider structural changes to your forest land ownership? I'm not talking about the little incremental acquisition here and the little divestment there, but something more significant, a sale-leaseback setup or something like that.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [20]

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No.

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [21]

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No. We think we have a great asset, and we think it's even better when you have the forest land asset together with industry that actually have positive synergies by owning both and in our case also, in the hydropower. I think that 1 plus 1 becomes more than 2 in this case. That's our belief, and we don't see any reason to try to do anything with that structure.

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Linus Larsson, SEB, Research Division - Analyst [22]

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That's very clear. And also maybe finally on the upstream. You talk about potential wind power investments in your own capacity. Could you maybe put some size on that? What sort of CapEx are we talking about? What potential -- what size of wind farms revenues, potential EBIT? Any way you'd be able to quantify that, please.

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [23]

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It's too early days to make a comment. We are in the middle of the review on the profitability and the risk/reward of those kind of projects. It looks promising. That's -- that we can -- and it's -- that's why we distribute the information that we're looking at that. We might invest in it. When we look at it, we have a fairly strong cash flow as a company, and we do expect that we'll be able to finance most of such investments via cash flow from operations. Maybe not everything, but it's most of it.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [24]

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Linus, there's also a very fast, rapid development of the technology when it comes to wind turbines, which makes the cost go down almost week by week at least, year by year, it goes quite quick. And that has made it more and more interesting to look into also for ourselves.

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [25]

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And as illustration of what Henrik says, we -- you're on the verge of being able to buy turbines right now. You can't really do it right now, but soon but our -- will generate twice as much energy as the turbines that we built 5 years ago in Varsvik, just as an illustration.

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Operator [26]

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

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Martin Melbye, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [27]

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Yes, you gave a -- you segmented your forest holdings into north, middle, south. Is that a hint that you will kind of lean on this (inaudible) transaction prices when you do your new valuation or will you do more DCF?

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [28]

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No, it's not. It's just disclosing, and we do have something unique that I don't think anybody else have. We have almost 100,000 hectares in southern part of Sweden, where the value of the land itself is much higher than in other parts of Sweden. And that's something that we felt was appropriate to disclose to the market.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [29]

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And also if you look at the middle forest, all the middle, it's almost like a twin to Bergvik Öst, which has been so much discussed.

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Martin Melbye, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [30]

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Okay. And then I think you discussed back and forth on wood prices. What is actually relevant for the forest segment in the second half compared to the first half of this year when it comes to price realized?

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [31]

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We will see what happens. The price declines you have seen, as Henrik mentioned, it's primarily in the southern part of Sweden. So it remains to see what happens in the northern part of Sweden.

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Martin Melbye, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [32]

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Okay. And then the last question.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [33]

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I'm sorry. Just long term, you should remember that Sweden, as I said, when it comes to pulpwood, we are a country where we need to import, and then we have short-term effects from time to time. But after all the investments we have seen in the industry, I think -- at least our opinion is that long term there is almost a shortage of pulpwood.

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [34]

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Especially in the northern part of Sweden that's where we need to import the most.

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Martin Melbye, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [35]

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Okay. And then the buyback, is the base case that you use the 10%? Or...

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [36]

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We can't give you any guidance on that. The decision the Board made today is to initiate the buyback program. We haven't executed the buyback program of any size in 20 years' time, so we'll start buying back shares, and we will comply with the reporting rules and report weekly on the transactions that were made. So we'll see. That sort of depends on a number of factors, including the liquidity in the share.

On actions sort of as you know, we have had a very -- we have commented that we have had a very strong balance sheet. And we have increased the dividend gradually to return money back to shareholders, and this is a way of returning money back to the shareholders, at the same time, as we increase the number of hectares per share in Holmen for those shareholders that choose to stay or remain a shareholder.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [37]

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Which we see must be broadly attractive for our shareholders given the price.

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Operator [38]

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Our next question comes from the line of Oskar Lindstrom from Danske Bank.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [39]

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I have 4 sets of questions from my side. Maybe starting off with the first one, is on the paperboard division. I mean very clearly, I mean, cost per tonne increased quite significantly there. And you mentioned sort of shorter runs as one of the reasons or perhaps the main reason for this. I wonder what is the reason for a lot more shorter production runs. Is that a weaker market, a consequence of production problems, quality issues? Because it is quite significant given that overall volumes were not really -- well, they were actually up marginally sequentially.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [40]

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No. You can see it has a bit of a lagging effect from the first quarter where we had production problems, which when you have some problems, you don't run the machines as you normally do. And you have to sometimes to meet delivery times, et cetera, down from 1 quarter to another. You're not totally balanced. And we have been in a situation where we aren't totally in balance. And then quietly, you have to scrap or downgrade some board. And all of a sudden, you see that your variable cost is going up. It's something we, of course, we can do better but that's what we had in the second quarter.

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [41]

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Compared to other segments of the forest industry, specifically consumer board is very vulnerable. It's a difficult product to produce and when the market is a bit soft, and you take those shorter runs, you have higher effect on variable costs than you have in other segments. On the other side, you normally don't see major price movements, not up or nor down. So actually you notice normally a weak market or a strong market in the cost situation, the production cost.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [42]

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And just following up on your answer here, you said that much of this effect was a lag effect from the problems in Q1. And in the report, you now commented that production was better in Q2 than it was in Q1. Does that mean that we should expect sequentially a lower impact from these things in Q3 than we saw in Q2?

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [43]

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It remains to be seen there, Oskar. We mentioned -- I mentioned that we had one major incident in Q2 that cost us some SEK 20 million to SEK 30 million. We don't know until the end of September if we have had another one of those. But we have no reason to believe that they should occur.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [44]

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That's why I said we can do better. Normally, we should.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [45]

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So it's not an issue of sort of continuous ongoing problems. It's more of one-off issues, which pop up and then kind of disturb your production. Is that how it should be seen?

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [46]

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Yes, in combination with shorter runs.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [47]

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Yes.

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [48]

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Yes.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [49]

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All right. And my second question is the wood cost. You mentioned SEK 70 million higher in both paperboard and paper. What was the year-on-year effect in wood products?

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [50]

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It's not at the same magnitude. The major effect in wood product was the decline in prices.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [51]

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All right. My third question is on the renewable energy and the wind power projects. You mentioned now that there were 2 more projects, which were kind of near termination or possibly being completed. Are they similar to the one project that you sold in Q2 in terms of size?

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [52]

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No. It's -- you can't really compare the projects. We have not disclosed the size of the project that we sold, so we can't comment that. These are normal projects that are normal for the Swedish market that we're looking at. One have already all the permits in place. The other one is awaiting final permits.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [53]

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I think we have to come back on the details.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [54]

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All right. My final question is on the capacity expansions now going on in Braviken Sawmill and the Iggesund Mill on the pulp line there. Could you talk a little bit more about the timing, size and possibly effects of these including in Braviken, for example, will you start producing more volume given the market we have? And then Iggesund, are you planning to sell sort of excess pulp on the market? Or eventually try to increase paperboard production?

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [55]

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With the sawmill, we said already from the beginning when we took the decision to invest SEK 170 million in increased capacity that the basis is our really good cost position and also the possibility to use pulp log -- sorry, sawlogs from our own forest and also bring it down from our north -- our forest holdings up north if necessary. Of course, we will have a closer look at the market, what happens when we ramp up the production. Also, we are in a situation where we closely look at our stock levels, et cetera. But we will be ready, technically, we will be ready late spring to increase the capacity. But the market will determine whether we do it or not or when it will come.

When it comes to the pulp capacity, it is 2 investments: One thing we do now where we have the maintenance stop; then we have an investment, which we have talked about before in the pulp line that comes onstream in the beginning of next year. And during next year, we should be able to increase pulp capacity running rate at the end of the year of something like 40,000 tonnes extra.

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [56]

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Over time our ambition is, of course, to drive that into board but that's more related to bringing it in the market in a wise way. Initially, it most likely will be a part, but over time, of course, our ambition is that it should become board.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [57]

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Premium board.

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Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [58]

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All right. So we should expect you to start selling pulp at a run rate of about 40,000 tonnes more in the second half of next year or something like that?

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [59]

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It's our ambition, but we'll see what -- we haven't to say concluded the investment in the asset yet.

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Operator [60]

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Our next question comes from the line of Lars Kjellberg from Crédit Suisse.

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Lars F. Kjellberg, Crédit Suisse AG, Research Division - Research Analyst [61]

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Looking to stay with paperboard. It's been quite a long time with recurring issues in that division, which of course I understand you're disappointed by. And what is the root cause there, unless you're doing good stable business? Do we have a structural problem in there? Or is this just something that has happening to you in terms of the market has changed?

I also want to just get some incremental color on when you say fierce competition in new orders. Is that relating specifically to overseas business? Or is that in Europe? And how are those orders -- new orders priced versus sort of contract prices if you like?

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [62]

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I think, first of all, when it comes to production issues, et cetera, that's all up to ourselves. It is not so much with the wood market. Yes, to some extent, if we are in a position where we feel the order book is not as long as we are used to, which we are at such situations it depends where during the year, we come to that situation sometimes. It has -- can have an effect on our efficiency in the mill, but that we have in our own hands.

The market as such, I mean, it's no secret that there is a lot of new capacity. But as you can see from the price level, et cetera, we have been able to keep prices, and we are not in a hurry to expand our premium business. We do it step-by-step where we find possibility to sell to right customers. So not structural in that sense, but competition is tough, yes. And of course, we have to be even more careful when we look at the customers we do business with, especially in Asia, and we don't do the spot business in any cases.

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Lars F. Kjellberg, Crédit Suisse AG, Research Division - Research Analyst [63]

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I was going to say, a couple of years ago, you started to talk about length and maintenance cycle within Iggesund. And then, actually last year, you had to do an interim sort of stoppage, but I would back on the lengthened cycles. We should not expect any maintenance next year?

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [64]

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We -- it remains to be seen after this maintenance stop that we have during Q3. To your comment, Lars, you alluded to that we have had some disappointing profitability in paperboard over the last year, and that's true. It started Q1 last year. But that problems were not related to Braviken or sales. Those were due to rising input costs on chemicals and wood, which could not be passed on to the customers. What we have had recently is self-inflicted problems on the production side combined with a weak market, especially stemming from a slowdown in Asia.

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Lars F. Kjellberg, Crédit Suisse AG, Research Division - Research Analyst [65]

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So a couple of follow-ups also on the share buybacks and one on the forest. You're talking about a more efficient capital structure, which I can understand. You have a strong balance sheet, et cetera. But you also have had relatively elevated CapEx in the industrial activities. Should we expect the CapEx numbers to come down a bit subject to, of course, you approving new projects. But on the recurring asset base, should we expect that to come down a bit to strengthen your cash flow?

And then finally on the forests, of course, there's been some meaningful transactions at much higher value than you have in your books. How do you weigh in the return on whatever asset value we will put in. And let's assume you get something similar to the AMF transaction, just speculative. If those returns would be very, very low for you as a company, would you still be inclined to hold onto those assets if that is indeed the value we should be looking at?

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [66]

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If we take your first question, I don't really -- admittedly, we spent a lot of CapEx when we did the boiler investments, et cetera that we started up 2012 and 2013. But after the last 5 years, we have been at the CapEx level roughly around SEK 800 million to SEK 900 million a year with -- and our annual depreciation is SEK 1 billion. We've been careful in where to spend it, and we've chosen to spend it to develop. But I don't recognize a picture that we've had elevated CapEx level.

We don't expect elevated CapEx levels, and we don't expect a lower CapEx level going forward. We're still committed to investing in developing our assets, which means probably investing in line what we have done in recent years.

And your question if we will take into consideration, if I understand it correctly, if we inflate the value of the forest assets, of course, the reported return on capital will go down. Will that be a factor that we consider? No. It's accounting we're talking about and you have to remember that, and that's why I talked to you through about -- you have to divide the accounting on growing forest and land. And part of the AMF aid of course is related to what we call land. And our obligation as management is to ensure that the -- we comply with the accounting regulations, and we will review the value that we feel is appropriate to book for the growing forest.

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Operator [67]

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(Operator Instructions) Our next question comes with the line of Robin Santavirta from Carnegie.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [68]

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So just on the buyback, I was wondering what is triggering the decision right now, looking at your share price in 2015 and '16, I guess the average is currently some 40% higher than then, and the balance sheet was roughly as strong as 2015 and '16. So what was different then compared to now? And also looking at the earnings you have generated, you have been very stable over the past 2 to 3, even 4 years in earnings. You can say at a good level but limited growth. Does this now imply that basically there's very few growth opportunities other than the Braviken that you have already announced and probably completed?

And also, does this imply that you do not see potential interesting M&A opportunities despite of lower valuations right now, compared to a few years ago? So can you just comment a little bit on capital allocation also related to potential growth of the company in the future.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [69]

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(inaudible)

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [70]

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You can comment that, firstly, we are focused on adding value to our assets. Growth is not in our focus. What we are focused on is actually doing -- taking actions that add value to the existing assets that we have. We focus on organic growth, and we believe that's a strategy that will, over time, generate the best return to our shareholders. And we have quite -- for quite a long time communicated that we have a balance sheet that is very strong. It's stronger maybe than the business risk warrants. And now, we have -- after have made a number of reviews, including reviewing a major expansion in paperboard, come to the conclusion that it starts to become the right time to distribute excess capital back to the shareholders. I don't know if there was any more.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [71]

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No, no. Really, I think it's -- as was said before that the company is a bit -- has changed a bit, of course, and the risk has come down. And as Anders said, we don't see any major investments, right, in the nearest future. So this is a good way to do something good for our shareholders. They will own more forest per share, and we believe that forest will be brought to a very attractive price.

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [72]

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And to be clear, we are not in a hurry to execute share buyback. The AGM will take up this question next year, et cetera, et cetera. Just as we have been quite patient in maintaining a strong balance sheet, we are in no hurry to buy back shares.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [73]

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I understand. And then one final on the paperboard, looking at your volume development, the deliveries have actually been down now for 4 quarters in a row. And looking at the segment where you sell, it's actually quite stable demand there. So we see retail sales growing in the areas where you sell the material. So you must have some kind of discussion with your customers. Is this sort of weak demand they are seeing, is it their inventory destocking? Or is it basically tighter competition? Maybe you're losing a little bit of market share. So how would you describe this sort of delivery declines you have experienced?

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [74]

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Deliveries to the premium market for consumer packaging, there, we have not decreased our market share. On the contrary, we have increased a little bit, but we sell to different segments. And partly, we also sell to Asia, as you know. And the picture is a bit scattered, and it looks a bit different from segment to segment. Yes, you're right, deliveries are down a bit but it's nothing that must be like that forever. Yes.

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [75]

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It's predominantly an effect during the autumn of 2018 where we reported a softening of the Asian situation. If you look at the other quarters, you don't really see that pattern. And if you compare it to the market statistics, we are on par with the market statistics.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [76]

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But if you look at the Asian market, consumer goods is still growing, a lot of the segments where you sell the stuff. I mean the end demand of that material is still growing. So -- and you say weak demand. So what is your sort of sense? Is it the demand, and demand is growing in Asia in the segments you operate? Or is it an inventory destocking that your clients are doing?

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [77]

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It's a split picture in Asia for us as well. We do some business, which is really premium, where we really want to be. And there, we have been successful. And of course, also we have some business, call it fillers or business we do not really want to have long term. And there, of course, we have a tendency -- if competition is tougher there, we might don't do it.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [78]

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I see. And then, yes, finally just on pulp, where you have really nice set up with an integrated model that I agree with. But you're looking at the market for pulp within -- in Sweden and maybe Scandinavia overall, I guess, you mentioned stabilized on a high level. Why are you sort of expecting going into 2020? Because we're seeing pressure in prices of basically all the materials you use that pulpwood for. So do you see prices declining in 2020? I guess it's early, but you must have a quite educated guess about that. Or do you see sort of demand remaining high and prices on the current levels?

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [79]

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The correlation between the end-product prices and the pulpwood prices is quite weak actually. So you have to -- if you go back a few years, there was excess availability of pulpwood in the Nordics due to the closures of graphic packaging machines. That put pressure on the pulpwood prices and created high margins for the -- most of the pulpwood consuming industries. Now pulpwood prices have come up but still everybody needs pulpwood and it's, as Henrik mentioned, it's a shortage of pulpwood structurally. So the long-term price trend is, if you are a forest owner, is quite positive. And what happens short term, it's as always, very difficult to assess, and we can't give any forecast on that.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [80]

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Okay. And then just finally, if you look at 10, 15, even 20 years back, the 2% higher price you use in your DCS model on pulpwood and logs, is that sort of what the price development, the average price development has been for you in over 15, 20 years?

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [81]

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You have to -- in line with inflation in society, if you -- well, you have to add that, you can take -- calculate it over 20 years or 50 years. Wood prices have followed more or less CPI. CPI, of course, during periods have been high or low, but that's in line with historical pattern, and that's why you use -- we assume that CPI will be 2% in the future, and we use that in our forest valuation as pulp increase -- pulp would increase.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [82]

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Is that also something that you're reviewing now? I guess the WACC is probably a little bit high in the current circumstances. But then the CPI outlook is also maybe not 2%. So is that something under review as well?

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Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [83]

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It's included in the review, and it's a package that you have to look upon, of course.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [84]

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All parameters will be reviewed.

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Operator [85]

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Thank you. And as there are no further questions registered at the moment, I will hand the word back to the speakers for any closing comments. Please go ahead.

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Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [86]

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Thank you very much for your attention and have a nice day. Thank you.