U.S. Markets closed

Edited Transcript of HOLM B.ST earnings conference call or presentation 18-Oct-19 12:00pm GMT

Q3 2019 Holmen AB Earnings Call

Stockholm Oct 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Holmen AB earnings conference call or presentation Friday, October 18, 2019 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Anders Jernhall

Holmen Aktiebolag (publ.) - Executive VP & CFO

* Henrik Sjölund

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

================================================================================

Conference Call Participants

================================================================================

* Johannes Grunselius

Kepler Cheuvreux, Research Division - Head of Forestry, Paper & Packaging

* Lars F. Kjellberg

Crédit Suisse AG, Research Division - Research Analyst

* Linus Larsson

SEB, Research Division - Analyst

* Markku Järvinen

Handelsbanken Capital Markets AB, Research Division - Analyst

* Martin Melbye

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Oskar Lindstrom

Danske Bank Markets Equity Research - Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen, and welcome to the interim report presentation for the Holmen Group. My name is Henrik Sjölund. And together with me, I have Mr. Anders Jernhall, and we will take you through the presentation today. We do as we usually do. We will go through the presentation and after presentation, we are happy to take any questions you might have.

So let's start with a few highlights for the third quarter of this year. We have an operating profit of SEK 545 million, including a quite big maintenance stop at Iggesund Mill, and it -- thanks to better production and a good balance between sales and production in our paperboard division. Still good performance from our paper division. And we have forest and energy in line with our own expectations. And then we have wood products a bit weaker in the tough market situation

We also had a highlight that we have now bought back roughly 4% of the shares in our company corresponding to a bit more than 6 million shares or SEK 1.4 billion. And the Board of Directors in our company have taken a decision to change model for valuation of our own forests, which we will come back to a bit later during the presentation.

But let's start saying a few words about the forest market and not the least, the situation in Sweden. We have a situation today where we see that there is a lot of supply of wood in south of Sweden. And in our case, it's because there is some spruce bark beetle infestation that needs to be taken care of and forest owners simply need to take out the trees and that means there is a lot of supply.

If you look at price situation in Sweden, it means that especially price for sawlogs in south of Sweden, they are coming down and pulp prices are a bit more stable and especially up north, they are stable. It also means that we've had a situation where we've had a lot of imports and expensive imports, not the least, from the Baltic States, and that situation is now back to a more normal situation where prices have stabilized on a lower level.

Short term, this means that there is plenty of supply. But I think we should also remember that it wasn't long ago, and structurally over time, Sweden is a country actually where we lack fibers. If you go back a number of years, when we and other players, we closed down a lot of newsprint capacity, consumption of wood, especially pulpwood in Sweden, it came down a bit, and we had plenty of supply. After that, we have seen investments and increased consumption, especially in pulp mills in Sweden and also in Finland, which means that in this region roughly 10 million cubic meters more is consumed on an annual basis. This has not changed, and we also see some potential for increased consumption in the future. There are some projects being discussed, and we don't know exactly where that will go. But I think it's quite clear that Sweden will come back to situation where we see that it's quite tough competition for the wood.

As a forest owner, that's good because it means that it's stable demand for the pulpwood over time and also the sawlogs. As an industrialists, like we are, then it's also extremely important to make sure that we have good control of the raw material and that's the case for Holmen.

And as I said in the beginning that we had operating profit from the forest, quite much in line with expectations. Can you elaborate a little bit?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. I don't think there is so much to elaborate upon Henrik. We have a very stable result. It reflects the price level that we have in Sweden where we -- there is a great deal of stability in the northern part of Sweden where we have most of our forests. So profits are moving sideways right now. Looking for year-to-date -- the year-to-date profit has increased, thanks to the high price level, and you can -- might recall that we last year enjoyed some extra money from selling some forest properties, but also suffered a bit from forest fires last summer. So -- but in summary, it's high prices that have lifted our forest profit level to a higher level.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you. Moving onto paperboard. We have a situation in the market where we have said a number of times that actually demand for both folding boxboard also solid bleached board, that's on a healthy level. And later last couple of years, we have seen actually an increased demand, which looks quite good. That's still the case even though we can see when it comes to European demand for folding boxboard and solid bleached board that it's going down little bit. Also if you look at export opportunities for this board, you can see that the export tendency is a little bit down. And we have to remember that this is at the same time as we also have quite a lot of new capacity that recently have been converted into, I would say, consumer board. So it's a market where we see stable pricing, but there is also quite tough competition for new business.

If we then look a bit more into detail what we have done, we have said before that we should be able to be on a running rate of roughly 550,000 tonnes per year. Lately, we have had some problems. I think that's quite clear when you look at this chart. At the end of last year, we had a couple of quarters where we were not in balance, we were lacking some orders. We felt the situation in Asia where demand was a bit weaker and after that it gave also some production disturbances and an imbalanced situation, especially at our Iggesund Mill.

Now in the third quarter, we are happy to see that, that balance is much better. It's still a tough market, but we are in a situation where we have better balance between production and sales and that has also been seen in our operating profit, hasn't it?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Although we had a maintenance stop that costed us SEK 130 million in lost production and extra costs, profit was almost SEK 100 million, up from the previous quarter, which also was burdened by a maintenance stop, and the improvement is partly due to seasonally lower cost, some SEK 30 million lower cost from a seasonal perspective in Q3, but to a very strong degree due to a very good production and good balance with the sales in this quarter. This meant that production costs -- variable costs in production came down to a good level, I would say, in this quarter.

Looking for the year-to-date profit, we are down quite a lot -- to a large extent due to heavier maintenance this year SEK 210 million versus SEK 60 million last year, but also due to high wood costs and the production problems that Henrik mentioned in the first half of this year.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you. Moving onto paper. Here, we have had a period with really good development, especially when it comes to pricing, at the same time as the underlying demand development is negative for paper as a product. When we look at the situation right now, we can see that, well, the supply-demand balance is on the weak side and there is some pressure on prices in the market, that's also the case when it comes to us, but so far it has not affected our pricing that much.

If you look at then where we concentrate our efforts mainly, then we are into uncoated magazine and book paper. And we have taken a decision -- I think it's important to note that we are one of the few ones actually investing in these segments still. We invested now or we've taken a decision to invest roughly SEK 100 million in order to continue on our journey when it comes to product development to be able to take even better care of the Swedish fresh fiber and make the most out of it, especially when it comes to brightness and offer product, which has advantages when it comes to cost for the consumer.

Still Anders talk a bit about price pressure, but the profit is actually quite good.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. The third quarter profit was almost SEK 150 million. It was a good quarter. We didn't -- we hardly had any impact from declining prices, 1% on average, so that has not taken a toll yet on our profit. This is a quarter where the costs are seasonally low, some SEK 20 million from a seasonal effect in paper. Looking year-to-date, we see higher wood prices, but that has been compensated by much higher selling prices year-over-year. So this means that the paper business have this year performed quite well from a financial perspective.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Definitely. All right. Moving onto wood products. Wood products lately has been rollercoaster, and we know this is a cyclical business. Now the market as such is especially driven by very high output from Continental Europe. And that in its case is driven by forest owners having to do something about spruce bark beetle infestation down in Continental Europe. So it means that a lot of wood is actually coming out, especially a lot of sawlogs and that has to be taken care of which means that at the same time as the market is a little bit weaker, it means that prices are falling quite rapidly.

In Sweden, we have a bit of the same, but not at all to the same degree. We also need to take care of spruce bark beetle infestation in our forest, which means that also we have a fairly high output of wood that needs to go through the sawmills. In our case, we have decided to change focus on our big sawmill down in Braviken and only concentrate our efforts now on spruce in order to take care of the spruce bark beetle wood we need to take care of at the moment.

Prices are going down quite rapidly. We also buy the sawlogs to our sawmill down south in Braviken, especially to lower price, but there is some lag in the system, which means that prices for wood products has come down, but we are right now consuming wood or sawlogs that we actually bought to the peak price in the cycle, which is hurting our margins. Isn't it, Anders?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Definitely. And you saw that in Q3 where we saw an average 10% lower selling prices, it's a combination of both lower prices and poor mix in the quarter. And as Henrik mentioned, log costs that we -- the logs that we consume right now when we produce, they were both at the beginning of the year at a much higher price than what we procure them for today. And year-to-date, you see the profit has declined quite a lot, and that's purely due to lower selling prices. The challenge, of course, going forward is to be able to get log costs down at the same pace as selling prices are being reduced.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Moving onto renewable energy. We have informed a couple of times before that we have, as a big forest owner in Sweden, a lot of good locations with potential to be developed into wind farms. We have a number of projects we are working on, and we try to drive them all the way up until we have the environmental permit and then it's the question, should we sell it like we did in the second quarter or should we invest our own money? And we have not taken a decision yet, but we have come a bit closer to take a decision and also it feels like the next one could very well be invested, then we could invest our own money, but it's still too early to be said, it's not decided.

If you look at the financials for renewable energy in the second quarter, it's pretty much in line with our expectations, a bit over SEK 40 million. We have saved, as we normally do, a bit of water in our magazines for the winter period when prices normally are a bit higher. And as you can see, and maybe of note, that in the second quarter, as you remember, we also had revenue from selling one permit to build wind farm on our own land for SEK 80 million. We also have a bit of help from lower property tax. And if you look at running rate for our renewable energy division at the moment, we are around SEK 250 million on the running rate.

All right. Then coming back to the forest and to the valuation of our own forest land. At the last conference, we showed this slide where we said that we have noted that there is a significant difference between the value of our own forest land in our books and to the transaction levels we see in the market. Where we are right now, we have decided -- the Board of Directors of Holmen have decided that we should change our model when it comes to valuing our own forest land to a transaction-based model. We have not decided exactly what value we will choose, but we have come as close so that we have a range between SEK 39 billion and SEK 43 billion, and that's based on transactions in Sweden in the areas where we have our own forest land.

And Anders, if I will leave to you to go a bit more into detail how we reason when it comes to the model.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. As you know, today, we report the forest divided upon 2 asset classes: The growing trees, those that we have planted today. We report them at the present value of future earnings from those trees using a discount rate of 5.5% and then we take the land and state it as acquisition cost. This means that in total we report our forest assets at SEK 19 billion. As Henrik mentioned, this doesn't reflect the true value or the fair value of the forest, so the Board has decided that we should -- the accounting should reflect the market value or the fair value of the total asset, the land and the growing trees. And we will move to deciding that value based on the transactions in the areas where we have our forests in Sweden. And as Henrik mentioned, SEK 39 billion to SEK 43 billion is the range where we have identified that we will land this value.

And if we take the next slide, the IFRS requires us to divide that in the books upon 2 asset classes, growing trees and land. And we will make that division based on DCF calculation on the revenue streams, and we will derive the discount rate based on DCF calculation on the total revenue streams from our forest holdings. Roughly 3/4 of the value will be reported on the growing trees and 1/4 on land, that's our estimate as we stand here right now. This value that we have, it's a post-tax value, it's based on post-tax transactions, but the accounting recommendations or the accounting rules requires us to anyhow report a deferred tax liability and it will be 20.6% on the total forest value. It's -- that tax entry will only be an accounting entry and no reliability.

Going forward, the change in value of the trees will be reported through P&L while changes in value of the land will be reported through other comprehensive income. That's a quick summary of the accounting treatment that we will enter into at year-end.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you very much. I think we'll have a few questions about this later. But before we get to questions, we have a couple of more slides. One, just summarizing our financial position. As we said before, we have bought back a bit more than 6 million shares and spent SEK 1.4 billion doing so. Still our net debt is a little bit more than SEK 4 billion and not more, so we are still in a very strong financial position.

And going forward, we have a few priorities. We are really happy to see that we have a better balance when it comes to our paperboard division and the balance between paper sales and production is extremely important, we need to keep that. And of course, we need to develop sales in magazine and book paper. We invest some money, and we, of course, expect that to have -- to give us new opportunities to both, take market shares and stand out a little bit from the rest. Then we have a difficult situation when it comes to wood products, especially right now as we are consuming very expensive sawlogs and price for wood products in the market is falling quite rapidly. We need to handle that. We have a very good chance to do something good when it comes to exploring opportunities of our own land when it comes to wind power in the future. We will come back to that. And of course, we have to do the last part of the homework when it comes to deciding the value of the land and finalize our forest valuation.

All right. I think we are ready to take questions after this. So if you please...

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question is from Lars Kjellberg from Crédit Suisse.

--------------------------------------------------------------------------------

Lars F. Kjellberg, Crédit Suisse AG, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

Yes. Starting a bit with the forest land. Just to clarify, did you say that 1/3 roughly will be land value and 2/3 forest? And then on a follow-up on the value -- change in value of growing trees from a P&L perspective as you mark-to-market, would that be a material change in the income versus what we've had in the current accounting scheme?

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [3]

--------------------------------------------------------------------------------

I believe I said -- I should have said, at least, 3/4 of the value should be on growing trees and 1/4 is on land, that's roughly the relationship. We'll come back to you on the exact relationship. This, from a technical perspective, will mean that change in value from the growing trees will increase somewhat from current level. We'll come back to how much that is. But it's roughly in proportion to the change in value of the growing trees.

--------------------------------------------------------------------------------

Lars F. Kjellberg, Crédit Suisse AG, Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

Got it. And looking on the operational side, it's good to see that you resolved the issues at Iggesund. Should we -- aside from seasonality, should we now view this cost base as more sustainable? This is what it should be. You pointed out, of course, very high maintenance costs this year versus a normal year. How should we view maintenance for next year, if you can give any comments on that?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

What we did now when we had the maintenance shut at Iggesund was that we went through an inspection when it comes to the boilers. And the idea is, if we can, we would like to have maintenance shuts with not every year but more seldom, maybe every 18 months, but we don't know yet. It's too early to say. Within half year roughly, we expect to know whether we can have the shuts with a longer interval in between. When it comes to the performance as such, yes, I think this is a good performance what we achieved in the third quarter, definitely, including the maintenance shut, of course. You have to remember that the market -- yes, we see stable pricing, but we also see that the competition is rather tough, and we are maybe coming into times when it's little bit tougher, especially for new business. But we have a good product, we have a good -- if you look at sales, for example, in Europe, where we want to be better than our competition, we did really well also in the third quarter, but it's not that easy and it's very hard to say. A couple of quarters we have a bit failed, now we were doing better.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And just to add what Henrik said, this was a very good quarter when it comes to production cost. I think I usually mention that the difference between a bad and a good quarter in terms of production cost could be SEK 50 million and this was in the upper end of that being a good quarter. And just to add to what Henrik mentioned on the maintenance stop, the stop we had in Q3, that will either be 12 months from now or 18 months from now. The stop we had in Q2, that will be 24 months from now.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

The one at Workington.

--------------------------------------------------------------------------------

Lars F. Kjellberg, Crédit Suisse AG, Research Division - Research Analyst [8]

--------------------------------------------------------------------------------

Got it. Just one clarification further on the tree side, I forgot to ask the question. When you mark-to-market now, will this potentially lead to some volatility, i.e., how often will you, based on transaction values, revalue the trees? Is that going to be on a quarterly basis, yearly basis or what sort of frequency should we be looking at?

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [9]

--------------------------------------------------------------------------------

That would be -- we will -- our ambition is to mark-to-market the total value on an annual basis, that's our ambition. But we're still working on the exact how we will do, we'll come back to that. But the volatility in the P&L will not increase because the volatility and the total value will be on the landside, not on the values of the trees unless there is large changes to the discount rate that we apply or the trend price that we apply in the DCF calculation on the trees.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question is from Oskar Lindstrom from Danske Bank.

--------------------------------------------------------------------------------

Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [11]

--------------------------------------------------------------------------------

Yes, I have 3 questions. The first one is coming back to the issue of forest land revaluation. And I'd like to focus on the revaluation of the land. What kind of logic will you have for presumably increasing the value of the land? And will that logic be tied to potential wind power projects? And if you then realize wind power projects, does that mean the value is already discounted in your land valuation?

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [12]

--------------------------------------------------------------------------------

Should I start with answering that question first. No, we want to take out subjectivity from the reporting of the total forest value. And we want to talk about the total value of the forest. And that's why we say, we will look at the transaction prices for -- in the areas where we have forests. If they move up, we will revalue our forest up. If they move down, we will revalue it down. Then under IFRS, we have to separate this value into 2 parts, the growing trees and the land, and the growing -- changes in growing trees go through P&L. That's more of a technical question. Our focus going forward will be on the total value of our forest holdings. And that will be decided upon what the market says it's worth, so that we want to take out subjectivity from this question.

--------------------------------------------------------------------------------

Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [13]

--------------------------------------------------------------------------------

Okay. So moving up, maybe moving onto my second question is about the renewable energy business area and the wind power opportunity that you're discussing. What's the size of this wind power opportunity in terms of, well, size of the potential investment, EBITDA impact or you know...

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [14]

--------------------------------------------------------------------------------

What we can comment, Oskar, is that we have currently one permitted wind farm and one which we're quite close to getting permit on. Those are, of course, the ones that are close to take decisions on together. They are in the neighborhood of 1 terawatt hour. But as I mentioned, 1 is not -- has not permit yet. Then we are, of course, building a pipeline of wind farm projects, and that's something that we're building up. So we'll come back on that.

--------------------------------------------------------------------------------

Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [15]

--------------------------------------------------------------------------------

It's a long-term project, Oskar.

--------------------------------------------------------------------------------

Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [16]

--------------------------------------------------------------------------------

Yes. Okay. So this is not something that you're going to be see -- we're going to see a lot of CapEx on in 2020 from your side, that sort of substantially moves the CapEx?

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [17]

--------------------------------------------------------------------------------

No. This will, to a large extent, be able to be funded through the normal cash flow of the firm, but maybe not 100%, but it's not major CapEx 2020.

--------------------------------------------------------------------------------

Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [18]

--------------------------------------------------------------------------------

All right. And then just my final question on the paper division, where you said prices were more or less stable. I think you said during the presentation now that they came down 1% sequentially I presume. Is that what we should expect as well for Q4 that prices have now come down, and they should be flat Q4 versus Q3?

--------------------------------------------------------------------------------

Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [19]

--------------------------------------------------------------------------------

I think what I said was that if you look at the supply-demand balance, it's deteriorating a little bit as demand overall is going down and there is not enough capacity being taken out. At the moment, all players take some kind of curtailments or downtime. And when new contracts are being negotiated, we will see what happens. What we do know is that some players also said that they will close capacity. What we know is that UPM Rauma will close roughly 250,000 tonnes of SC. We have the Chapelle machine that should be sold or converted, most probably 250,000 tonnes of newsprint will disappear. And we had the earlier announcement from Berg to convert 300,000 tonnes, 400,000 tonnes of LWC machine to liner. What effect that will have? We'll have to see because it's part of the balance, but there will not be -- I don't think we will be able to see any positive effects this year, it -- if the next year. And I also say that naturally when supply-demand balance, operating rates are coming down, there is a pressure in the market to reduce prices. How much? We will have to see. Not much has happened yet. That's what we see in the figures for the third quarter.

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [20]

--------------------------------------------------------------------------------

Yes. Maybe just to add to that, I'll comment on pricing. It was the impact of new prices was limited to, on average, 1% in the Q3 versus Q2. That's the impact we had in the reported results.

--------------------------------------------------------------------------------

Oskar Lindstrom, Danske Bank Markets Equity Research - Senior Analyst [21]

--------------------------------------------------------------------------------

And was that due to your specific contract structure or more generally...

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [22]

--------------------------------------------------------------------------------

That's based on our contract structure.

--------------------------------------------------------------------------------

Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [23]

--------------------------------------------------------------------------------

We have yearly, we have quarterly, half year, et cetera.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

And our next question is from Martin Melbye from ABG.

--------------------------------------------------------------------------------

Martin Melbye, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [25]

--------------------------------------------------------------------------------

I was wondering you gave this on Page 24, the volume per area, so then which transaction prices have you used per region. You have 60% in the north, 28% in the middle and 12% in the south.

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [26]

--------------------------------------------------------------------------------

What we have looked to establish a range are a number of different sources. We have looked at all the transactions, individual transactions that have been concluded for a number of years in these regions. We've, of course, looked at the different providers of statistics that there are in Sweden. There are a number of providers on those statistics as well. And we've looked at all of these sources. They point to more or less the same values and that are fit into the range that we have presented. There is some work that remains to be done to establish exactly what number do we believe most accurately reflect the market value. So we have taken a number of sources, including all the individual transactions.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

But say, guesstimate, how large is the difference in the price you put on the north and the middle, just I guess you could discuss whether your middle part is north, if you look at some of these statistics providers?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

No. We'll have to come back to the specifics on this. But if you look at the -- you have a number of providers, as you know, that provide statistics. And we don't arrive at other conclusions that those providers have in there. You need to be a bit granular. You need a good look at county level to get a accurate picture. But if you look at those statistics, they pretty much reflect the picture we see.

--------------------------------------------------------------------------------

Martin Melbye, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [29]

--------------------------------------------------------------------------------

Okay, good. Last question, just a follow-up on this impact on the P&L. This doesn't change the annual EBIT from the forest division. You'll still have a -- you have the real EBIT from the harvest and then also the -- those are growing trees, but not harvested trees, nothing will change, right?

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [30]

--------------------------------------------------------------------------------

It will change the change in value that we have every year. That number will be higher from -- purely from a mathematical perspective.

--------------------------------------------------------------------------------

Martin Melbye, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [31]

--------------------------------------------------------------------------------

So the EBIT from the forest in a normal year before and after does change?

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [32]

--------------------------------------------------------------------------------

It will increase. We will have to come back to guide you on exactly how much, but it will increase somewhat.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

And our next question is from Linus Larsson from SEB.

--------------------------------------------------------------------------------

Linus Larsson, SEB, Research Division - Analyst [34]

--------------------------------------------------------------------------------

Congratulations on strong performance in the quarter. In terms of capital allocation, could you just update us on CapEx this year and next year to start with?

--------------------------------------------------------------------------------

Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [35]

--------------------------------------------------------------------------------

We have said before that for the business we have to keep our different divisions going. We invest normally a bit less than SEK 1 billion, SEK 800 million -- SEK 900 million. And the intention is to stay on that level roughly also going forward.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

That, of course, any wind farm investments is on top of those SEK 900 million Henrik mentioned.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Right. And might be you talked about that earlier. But -- so are you -- is there a possibility that we may well have some such investment in 2020, let's say?

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [38]

--------------------------------------------------------------------------------

That is a possibility, but we'll come back to that.

--------------------------------------------------------------------------------

Linus Larsson, SEB, Research Division - Analyst [39]

--------------------------------------------------------------------------------

And when -- and this year, how -- what's the fourth quarter like? I mean what's your full year guess on CapEx for 2019?

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [40]

--------------------------------------------------------------------------------

Slightly below SEK 1 billion.

--------------------------------------------------------------------------------

Linus Larsson, SEB, Research Division - Analyst [41]

--------------------------------------------------------------------------------

Okay, great. And regarding the buybacks, could you maybe just elaborate somewhat around that. To what extent is this in order to adjust the balance sheet from the currently very strong level and to what extent is the buybacks in order to allocate excess cash flows? Could you just talk a little bit about your thinking around that?

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [42]

--------------------------------------------------------------------------------

It is a measure to adjust the balance sheet situation. That is a bit too strong compared to the investment needs in the business. That's the fundamental reason for doing buybacks.

--------------------------------------------------------------------------------

Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [43]

--------------------------------------------------------------------------------

So it's a provider to be able to do it. Without a strong balance sheet, we would not have been able to do it.

--------------------------------------------------------------------------------

Linus Larsson, SEB, Research Division - Analyst [44]

--------------------------------------------------------------------------------

And so the follow-up question, obviously, is how -- what's the balance sheet strength that you are aiming for?

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [45]

--------------------------------------------------------------------------------

We have not set any targets. We -- as you know, our ambition is always to have a strong balance sheet, and you can debate on how strong it should be. We'll come back to that topic.

--------------------------------------------------------------------------------

Linus Larsson, SEB, Research Division - Analyst [46]

--------------------------------------------------------------------------------

Okay. That's great. And then on paperboard. You have initiated some cost savings at Iggesund. There was some article about the possible cost savings initiative at Workington. Could you please comment on that and say something maybe around timing? Should we see some progress in the fourth quarter or is it gradual and -- a little bit on the timing and even magnitude on that, please?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I think you should see what we do when it comes to the cost side of the business. It's something -- we look at our cost situation always. And sometimes, we run a bit like a project, but you should not see it as a priority. You should see it as something we do all the time. And sometimes, it also needs to be negotiations with unions, et cetera. And sometimes, it's something you do bit by bit without having to agree with unions. In this case, we are looking carefully at our cost situation at both mills, but also at other part of the organization and also in other divisions. So we don't comment on specific how much money or when. It's an ongoing process that we tend not to stop.

--------------------------------------------------------------------------------

Linus Larsson, SEB, Research Division - Analyst [48]

--------------------------------------------------------------------------------

Okay. That's fair enough. And then just finally, if I may just briefly come back to the wood costs that we already discussed. Did you have any tailwind in the third compared to the second quarter in terms of input costs? And if so, how much?

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [49]

--------------------------------------------------------------------------------

No tailwind from input costs. We see a pretty flat cost development in our industrial divisions on looking at wood or other input materials.

--------------------------------------------------------------------------------

Linus Larsson, SEB, Research Division - Analyst [50]

--------------------------------------------------------------------------------

And the fourth quarter, any difference fourth compared to third?

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [51]

--------------------------------------------------------------------------------

We normally -- no, it's pretty flat cost environment right now.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question is from Johannes Grunselius from Kepler Cheuvreux.

--------------------------------------------------------------------------------

Johannes Grunselius, Kepler Cheuvreux, Research Division - Head of Forestry, Paper & Packaging [53]

--------------------------------------------------------------------------------

Can you hear me?

--------------------------------------------------------------------------------

Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [54]

--------------------------------------------------------------------------------

We can.

--------------------------------------------------------------------------------

Johannes Grunselius, Kepler Cheuvreux, Research Division - Head of Forestry, Paper & Packaging [55]

--------------------------------------------------------------------------------

Perfect. Perfect. Yes. I also have a couple of questions on the share buybacks and it also relates to your new valuation method on the forest land. You're talking about you want to have a strong balance sheet going forward, but you don't want to say exactly how strong and so forth. Is the new valuation method impacting your view on your balance sheet strength at the moment or is this just an accounting exercise?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

No. It doesn't impact our view on the balance sheet strength. It's an accounting exercise to reflect market values. So it doesn't change our view on how much debt we should have.

--------------------------------------------------------------------------------

Johannes Grunselius, Kepler Cheuvreux, Research Division - Head of Forestry, Paper & Packaging [57]

--------------------------------------------------------------------------------

Right, right. Yes, that's very clear. And on the buybacks, I mean, you were very active after Q2. And you haven't said sort of how one should look at how active you should be or the strategy behind it and so forth rather than it's a method of adjusting the balance sheet to a more adequate level. But do you have any level? I mean, theoretically, if the share price goes sky-high, are you still a buyer or how should one think about that?

--------------------------------------------------------------------------------

Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [58]

--------------------------------------------------------------------------------

We said the following. We have used a mandate that the Board of Directors got from the Annual General Meeting that was to buy up until 10% of outstanding shares. Beyond that, we don't have any further comments more than what is official statistics now that we have bought a bit more than 6 million shares.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Just to clarify, the mandate is, we have -- the Board has decided to use the mandate. It doesn't mean that the Board has said that we should buy back.

--------------------------------------------------------------------------------

Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [60]

--------------------------------------------------------------------------------

No. It's our process to (inaudible).

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [61]

--------------------------------------------------------------------------------

We have bought back what we have bought back. And if we will buy back or not, we'll report as we take action, but we haven't said any target at all on how much or at what price.

--------------------------------------------------------------------------------

Johannes Grunselius, Kepler Cheuvreux, Research Division - Head of Forestry, Paper & Packaging [62]

--------------------------------------------------------------------------------

Okay, okay, okay. Good. Then when it comes to the wood product situation, it's tough pricing. But could you help us in giving some color, what's your projection there? When will the market become more normalized? I suppose this will be a very tough market situation for quite many quarters, right?

--------------------------------------------------------------------------------

Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [63]

--------------------------------------------------------------------------------

That's really difficult to say right now because you have the situation in Continental Europe where normally the wood that's now coming out, especially sawlogs, they would have stayed in the forest, but they need to take them out. That can't go on forever. But right now, supply of sawlogs is so high and that needs to go through the sawmills, which means that the market for wood products is a bit oversupplied at the same time as things start to calm down a bit, which means that right now the market is oversupplied and prices are going down. You can see from the rollercoaster ride from historic -- from the history that after it goes down, it comes up, but exactly when it comes up is very difficult to predict, and now it's a special situation.

For us, the most important is to see also that especially where we have the spruce bark beetle, there we need to get also down the raw material price in order to be able to compete with Continental Europeans.

--------------------------------------------------------------------------------

Johannes Grunselius, Kepler Cheuvreux, Research Division - Head of Forestry, Paper & Packaging [64]

--------------------------------------------------------------------------------

Yes, yes. And my final question is, how one should think about the small decline in pulpwood price, sawlogs prices? Is it fair to say that this will affect your profits from the forest operation next year? In other words, your profits will be slightly down year-over-year or is this -- I mean it depends to see how prices move forward going forward. But let's assume that prices are exactly where they are now for the next months to come, will your profits be down somewhat in the forest operations or is this a very small decline as you see it? I mean you're referring to the index or market prices and your realized prices is something different basically.

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [65]

--------------------------------------------------------------------------------

There has been some price adjustments now as we turn into the fourth quarter in the middle, south part of Sweden, and we have some forest there. We will get less revenues from sale from those forests, but that's a relatively small portion of our harvesting revenues. In the larger areas where we have forest land, prices are unchanged right now. What will happen next year? We don't know. But if they go down next year, of course, our profits will go down, but we don't know what will happen.

--------------------------------------------------------------------------------

Johannes Grunselius, Kepler Cheuvreux, Research Division - Head of Forestry, Paper & Packaging [66]

--------------------------------------------------------------------------------

Okay. Okay, got you. So what you see now is very stable prices for most of your forest business anyway.

--------------------------------------------------------------------------------

Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [67]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [68]

--------------------------------------------------------------------------------

Yes. Slightly down from the Q3 level, given that there has been some price decreases in the southern part and the southern part of the middle part of our Swedish Holdings.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I think you should remember that if you look at Sweden in -- as I said before, in a broader perspective in a bit more long term, we do not have enough pulpwood in Sweden. We are an import country. But short term, of course, the market could be changing a little bit. But if you look at what has been built, especially in the new pulp mills, et cetera, I think it will be extremely important to have control of raw material, first of all, but also, there should be plenty of competition for wood in the future.

--------------------------------------------------------------------------------

Operator [70]

--------------------------------------------------------------------------------

And our next question is from Markku Järvinen from Handelsbanken.

--------------------------------------------------------------------------------

Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [71]

--------------------------------------------------------------------------------

I had a few more questions about the forest valuation. First of all, the reporting in Q4, are you going to report this in -- the increase in the biological asset, will that be in EBIT? And will it be sort of, let's say, an item affecting comparability or how should we look at that?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

The change that relates to the value of the growing trees will be reported in the P&L in EBIT, but it will be an item affecting comparability.

--------------------------------------------------------------------------------

Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [73]

--------------------------------------------------------------------------------

Okay. Very good. Then, I guess, as you said, 3/4 will go to the biological asset, which kind of implies that, that value will go up from 18.8% to somewhere around SEK 30 billion, so maybe 50% to 70%. Should we think that change in value of forest that you report quarterly and annually will change in the sort of similar proportion?

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [74]

--------------------------------------------------------------------------------

Yes. It's quite reasonable to assume. We haven't done the mathematics on it, but it's a pretty realistic assumption on that.

--------------------------------------------------------------------------------

Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [75]

--------------------------------------------------------------------------------

Okay. And then the deferred tax, that increase, is that related to the biological asset only or is it also on the land, or it's just the biological asset?

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [76]

--------------------------------------------------------------------------------

It's both. It's the accounting recommendation. That means that we have to take it on both, land and biological assets.

--------------------------------------------------------------------------------

Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [77]

--------------------------------------------------------------------------------

And does that mean that if you were to sell the forest that you would have to pay that tax?

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [78]

--------------------------------------------------------------------------------

It depends on how -- it's a theoretical question; but in practice, no. We will never sell the forest. But if we were to sell part of it, we normally don't pay tax. What we sold previously, what we call, BillerudKorsnäs, that was -- forest was sold up on account -- as a company and we didn't pay any tax.

--------------------------------------------------------------------------------

Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [79]

--------------------------------------------------------------------------------

So you're saying that your forest is set up in companies that you can sell and then you don't have to pay the tax?

--------------------------------------------------------------------------------

Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [80]

--------------------------------------------------------------------------------

In days we would.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. It's -- once again, it's a theoretical question. But it would normally not entail paying tax.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So and then just further on that, if you harvest, do you then need to pay that tax or is it related to that for the harvested part?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

For harvest, we have to pay the tax on.

--------------------------------------------------------------------------------

Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [84]

--------------------------------------------------------------------------------

Okay. And then taking all of this into consideration, what would you now say that this is the sort of fair book value of your forest assets? Is it 40 -- sorry, SEK 39 billion to SEK 43 billion or is it that minus the deferred tax or how should we think about that?

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [85]

--------------------------------------------------------------------------------

It is SEK 39 billion to SEK 43 billion. And you can make -- if you want to sort of make a reference, you can look if BillerudKorsnäs paid tax on the forest they sold to AMF or if that they did not pay tax.

--------------------------------------------------------------------------------

Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [86]

--------------------------------------------------------------------------------

But while you say that you're not going to sell and you will pay the tax when you harvest, is that sort of comparable?

--------------------------------------------------------------------------------

Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [87]

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [88]

--------------------------------------------------------------------------------

No. The balance sheet entry reflects the value of the forest land and that value is based on the market transactions where we have our forests. And that value reflects the value we would achieve if we were to sell it in the local places we have it, and we can sell it without tax being paid.

--------------------------------------------------------------------------------

Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [89]

--------------------------------------------------------------------------------

But tax on profit -- tax on harvest, that's normal tax on profit?

--------------------------------------------------------------------------------

Anders Jernhall, Holmen Aktiebolag (publ.) - Executive VP & CFO [90]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [91]

--------------------------------------------------------------------------------

(Operator Instructions) And as there are no further questions, I will hand the word back to the speakers for any final comments.

--------------------------------------------------------------------------------

Henrik Sjölund, Holmen Aktiebolag (publ.) - President, CEO & Director [92]

--------------------------------------------------------------------------------

Thank you very much for your attention, and have a good afternoon or evening even soon. Thank you very much. Bye-bye.