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Edited Transcript of SCA B.ST earnings conference call or presentation 30-Oct-19 9:00am GMT

Q3 2019 Svenska Cellulosa SCA AB Earnings Call

Stockholm Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Svenska Cellulosa SCA AB earnings conference call or presentation Wednesday, October 30, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Björn Lyngfelt

Svenska Cellulosa Aktiebolaget SCA (publ) - SVP of Communications

* Jonas Mårtensson

Svenska Cellulosa Aktiebolaget SCA (publ) - President of Forest

* Toby James Lawton

Svenska Cellulosa Aktiebolaget SCA (publ) - CFO

* Ulf Larsson

Svenska Cellulosa Aktiebolaget SCA (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

* Gustaf Schwerin

Pareto Securities, Research Division - Analyst

* Johannes Grunselius

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

* Linus Larsson

SEB, Research Division - Analyst

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Presentation

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Björn Lyngfelt, Svenska Cellulosa Aktiebolaget SCA (publ) - SVP of Communications [1]

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Sincerely welcome to this press conference where we will present SCA's report for the third quarter. The report will be presented by CEO and President, Ulf Larsson; and CFO, Toby Lawton. And after the presentation, we will invite questions on the report.

Well, Ulf, please?

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Ulf Larsson, Svenska Cellulosa Aktiebolaget SCA (publ) - President, CEO & Director [2]

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So thank you for that, Björn. I'm happy to give you some reflections and figures for the third quarter 2019.

I'm also happy to announce that we have a stable, solid, strong results for the third quarter. And still, we have a rather tough market conditions out there. So we have, if you compare this quarter with last year same time, sales growth of 5%, and that is mainly driven by the ramp-up of Östrand, of course. As I said, we have seen this quarter, when we compare that with Q3 2018, weaker market in more or less all areas, maybe except from publication papers.

EBITDA was down 12% versus '18. On the negative side, of course, are selling prices; on the positive side, volume but also currency.

Pulp volumes during this quarter was slightly higher than Q2. Still, we are limited by the economizer in the Östrand pulp mill, as we have announced earlier, but we have just performed our 7 day planned maintenance stop.

So this part is now replaced in Östrand. And we are looking very much forward to November and December now to see what we can achieve with the new economizer here. Early this quarter, we also announced a new big paper machine in Obbola. And as you might know, the machine that we already have there today is the third biggest -- is the biggest in Europe. And this one will be the biggest in the world. And we also think that we will have a game-changer when it comes to quality. The new machine will be up and running in the first quarter 2023.

We have also in conjunction with the valuation of the forest value. We have, together with external partners, looked into the total return from the Forest.

And when we have done that, we can state that if we bought 1 hectare of forest land back in 1956, and we have reinvested the cash flow from the operations year-by-year, that would have given a total return from this piece of land of 10%, now 2019, and we will come back to the calculation here, but we are not surprised, but it's rather impressing, I would say.

And we have also made a study that will indicate the market value of our forest holdings to approximately SEK 63 million to SEK 67 billion. And the value that we have today, the book value is SEK 34 billion.

So here, we have some KPIs for the third quarter. And to start with, we had a solid EBITDA level of SEK 1.36 billion, which is 2% better than Q2 '19. But as said, 12% lower than the third quarter 2018. But that gave us a solid EBITDA margin of 27% and return on capital employed in the industrial part of SCA of 16%. And we had also really strong cash flow during the fourth quarter. And by that, the leverage came down to 1.4.

And as you can see also on the right-hand slide, we are just now comparing with, maybe not all-time high, but yes, all-time high when it comes to the EBITDA margin and a very solid result back in Q3 2018.

If we then turn into each segment, starting with the Forest part, we can see also on the graph to the left-hand side, down to left-hand side, that prices have stabilized on a high level, as mentioned already in Q2. We have seen that import prices now is coming down, SEK 150 to SEK 200 per cubic meter. We have also started to reduced prices on new contracts. But as you know, we have a lagging effect here of 3 to 6 months. So we will see the effect out of this in the first and second quarter next year.

You can also see that the net sales has increased, and that is, of course, related to the ramp-up of Östrand. And by that, also sales was up 28%.

EBITDA was more or less on the same level. And the reason for that is that the additional volume that we now take in is external wood, and the result is driven from the wood that we harvest [on] our own forest. So that's the explanation here.

Otherwise, good availability of wood in all assortments, I would say. And we are also impacted, of course, by the spruce disease that we now have in Central Europe, and the figure that we have just now is that more than 100 million cubic meters, are infected in Central Europe and also that we have 5 million cubic meters in the southern part of Sweden.

We haven't seen anything in our region and in our Forest, but of course, we feel the impact from the wood coming out on the market here.

If we then turn over to Wood, I would say that we have a rather strong underlying consumption in Wood as it is today. But again, this market is now impacted by good availability of sawlogs, and that is due to the spruce beetle disease. I think that I did a forecast that prices should go down 5% between Q2 to Q3, and the outcome was more like 6%. And I feel that we will have more or less the same movement in the fourth quarter. So prices will continue down, although the market is rather strong out there. But again, availability of logs is the explanation behind that.

Sales was down 10% quarter-on-quarter. And one thing is, of course, lower prices, but the other one is the deconsolidation in Wood France, and that represents minus 6% of the sales for the quarter.

If we then turn it to Pulp. Again, as I said, we have been disturbed by the economizer, and that one is now replaced after the 7 days planned stop that we've had in the beginning of October. The production anyhow was 2% higher in Q3 in comparison with Q2. We also had a problem now in the start-up after these maintenance stops.

So a conveyor belt, 1 kilometer long was destroyed and that added 3.5 days in this stop, and that really impact, of course, the fourth quarter.

Otherwise, we have lower price this quarter in comparison with Q3 2018, and you know that we had a peak price-wise in November 2018 of $12.30 per tonne. Now we are down at $8.25. At the same time, we have seen the Chinese net prices is now up on close to $5.70, and that means that we have the same price level now in China as we have in Europe.

We have rather good inventories -- inventory level on NBSK, 37 days, seasonally cleaned it's more like 34, 35, which is absolutely in the normal span. And we also feel that we have this rather strong consumption.

On the other hand, we also see that the inventory level on short fiber pulp is far too high, 60 days. And we haven't had any statistics recently. But we, of course, follow that very, very closely.

If we compare quarter-on-quarter, we have, of course, benefit from increased volumes due to the ramp-up of the expanded pulp mill. And by that, also, the sales was up 52% during the Q3 2019. I can also announce now that the planned maintenance stop that we have already announced in Q4 will cost us SEK 120 million in the fourth quarter. And then we have to add 3.5 days for the breakdown of the conveyor belt.

In Paper, when we compare quarter-on-quarter, we've seen lower prices in Q3 '19. On the other hand, just now, we see a good kraftliner order inflow, the inventory level is also very good. Sales, quarter-on-quarter was down 1%. And one thing is, of course, on the negative side, lower kraftliner prices. But we have had a strong production in -- high prices in publication paper and also strong production in kraftliner during the quarter.

Also in this field, we will have a planned maintenance stop in Obbola during Q4 and that is estimated to have a negative impact of SEK 50 million during the fourth quarter. But that is planned and also mentioned before.

In Renewable Energy, we have announced 2 new projects that will come up 2022, 83 turbines and additional 1.3 terawatt hours. And by that, we will reach 8 terawatt hour of installed capacity in 2022, and that will give an EBIT contribution of SEK 120 million.

And we have also increased the new -- the long-term target to reach 11 terawatt hours installed capacity on SCA land after 2022.

So by that, I hand over to you, Toby.

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Toby James Lawton, Svenska Cellulosa Aktiebolaget SCA (publ) - CFO [3]

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Thank you. Thank you, Ulf, and yes, good morning, everybody. I will start with the income statement. And here, you can see when it comes to net sales, our net sales grew between Q3 last year and Q3 this year by 5%.

As Ulf mentioned, Q3 last year was pretty much the high point in terms of pricing in a lot of our segments. So this growth is both a lower pricing environment but offset -- more than offset by the growth in the Pulp sales through the expansion of Östrand. So those 2 are the 2 big effects driving sales, [but] we have an underlying growth driven by the expansion in Pulp.

EBITDA is then down 12% versus last year, and this is really driven by the pricing environment, as we say, between the peak in Q3 and the current pricing level we have.

When you look at EBITDA margin, it's 5 percentage points down from 32.5% Q3 last year to 27.4% this year, which I think, given the circumstances, is a pretty resilient EBITDA margin development.

The EBIT then is down 6.6 percentage points in margin, slightly bigger drop because we're carrying more depreciation this year due to Östrand.

Then we have some SEK 26 million in financial cost this quarter, SEK 172 million in tax charges, which is pretty much the Swedish tax rate applied to our profit before tax, which all in all, gives us a net profit for the period of SEK 757 million, which is on earnings per share of SEK 1.08. If we just talk through a bit by the different segments. Starting on the left-hand side here in Forest, you can see the top line in Forest has been growing steadily for a number of quarters. And this is primarily driven by the increasing volumes used to supply Östrand in -- and the growth in Pulp. Those are primarily sourced externally so they affect the top line on net sales, but they do not affect the absolute EBITDA, which then has a knock-on impact on margin, of course. But when you look at the absolute level of EBITDA, you can see we're on a higher level versus where we were a year ago, and that's primarily, the Wood prices have increased a bit since last year. We're a bit down on quarter 2, which is normally -- which is a seasonal effect.

We have a lower level of harvesting in our own forest, typically in quarter 3, so that tends to drive the seasonal pattern in the bottom line as well.

Then when it comes to the 3 industrial parts, the wood, the top line has come down a bit and it's driven by the pricing environment that Ulf mentioned, where the prices have come down since the Q3 last year.

And then we have, in terms of bottom line, the margin is also then affected by this price development, and we're down at 12% EBITDA margin, which even so is a pretty -- I think, a pretty resilient EBITDA margin given the pricing trends. Pulp, of course, we have the expansion in Östrand driving the growth. And particularly since last year, but then in the last 2 quarters the pricing trend on the other side is reducing net sales. And that's really also what's driving the bottom line. You can see the margin has come down a bit quarter-on-quarter due to the lower pulp prices that we see today.

When it comes to Paper, a very stable top line. Underneath that, of course, we have -- we actually have -- the kraftliner pricing has come down as well since Q3 last year, but the publication paper has offset that. So we have those 2 going in different directions that result in a -- basically, it looks almost exactly flat top line, but those trends are going in different directions. And that's really what's -- if you're like, what's driven the trend versus a year ago is the kraftliner pricing is lower now. But that's been offset in recent quarters by a better pricing on publication paper. So a pretty stable bottom line throughout -- EBITDA margin throughout this year.

If I just walk you through the bridge in terms of top line, in terms of net sales. We had, first of all, the first bar, you can see is the impact on the pricing, the minus 15%. So it is a significant impact from the negative price trend on, yes, particularly pulp, but also kraftliner and Wood all significantly down since Q3 last year, which, again, was pretty much the high point versus Q3, Q4 last year for all those.

Publication paper is not as big as those 3 together, of course, but has a small positive variation versus last year. We then have the big impact from the expansion of the pulp mill, which added 20% in terms of top line. We have a 2% impact from the weaker SEK and then a 2% negative impact, mainly from this deconsolidation where we deconsolidate the Wood France business this year, which we did not last year.

If we walk through the same bridge when it comes to EBITDA, you can see the impact on prices, the same impact we have on the sales, of course, which drops through to EBITDA, and that's the biggest impact. Then this is offset by the higher volumes from Pulp, which contribute to a significant positive.

When it comes to raw material, we do have a higher cost for Wood this year versus last year for the wood we source externally, which, of course, is what impacts here, but this is offset by some higher income for some byproducts that we sell.

And then on energy, we have -- basically, the energy prices are not down versus last year, but we have some improved energy costs due to the improved energy balance, particularly in Östrand where we're now a net seller of energy. And we also have some impact from wind power as well.

Then currency again is positive from the weaker Swedish krona and then small other effects. So, basically, those effects altogether our margin versus last year, 32.5% is now 27.4%, and total EBITDA is impacted by 12% versus last year.

If I now walk on to cash flow. You can see, basically, if we -- on the right-hand side, January to September, we have an operating cash flow so far this year of some SEK 2.3 billion. In the quarter, Q3, we had a strong cash flow. We delivered nearly SEK 1.1 billion in -- just in Q3, significantly helped by working capital is one factor, the underlying earnings, but also the change in working capital, which is with the price environment coming down that of -- that helps in terms of working capital and delivers a strong cash flow. We have strategic capital expenditures pretty low in this quarter, some SEK 63 million. We expect that to be larger in the fourth quarter, we will have some impact from both finishing the final payments on Östrand but also some down payments from the start-up of the Obbola project, which Ulf mentioned, where we will start to see strategic CapEx coming in [for] Obbola project as well. So that will be higher in Q4.

And the impact of this cash flow on net debt. I think we have a good reduction in net debt this quarter. We started the quarter at the end of June with SEK 9.7 billion in net debt. We then had the operating cash flow of SEK 1.1 billion. We've had some strategic CapEx on the other side, but we've also sold the terminal in Rotterdam this quarter, which has resulted in a SEK 660 million impact on net debt, so a significant reduction. Then we've paid some tax. And all in all, that then reduces our net debt from SEK 9.7 billion, down to SEK 8.2 million. So a SEK 1.5 billion impact, which then when we look at our ratio, particularly net debt-to-EBITDA, we were 1.6x at the end of Q2 and now we're 1.4x. So a good debt reduction in the quarter.

And you can see that -- effect of that here on the balance sheet. But here, we compare to the end of 2018. And if I just go through line-by-line quickly, you can see the Forest assets, and this is -- we're still accounting here the same way we have previously with the Forest assets, we'll come on to the proposal, which Ulf mentioned for going forward, but we have an increase in the Forest assets of just over EUR 1 billion. So here, we have the normal revaluation, but we also have some impact from the acquisitions in the Baltics on the Forest assets. We have -- working capital is actually slightly up versus December 31 last year, and you see an impact there, working capital on sales in the same way. And other capital employed has increased by around SEK 1 billion, which is partly Östrand, but it is also we have the leasing assets which we did not have at the same time end of last year, so that has an impact. And overall, then our net debt-to-EBITDA is 1.4x, net debt around SEK 8 billion and equity around SEK 40 billion.

Okay. Then I will hand back to Ulf.

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Ulf Larsson, Svenska Cellulosa Aktiebolaget SCA (publ) - President, CEO & Director [4]

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So then we'd like to say a few words about the Forest revaluation. And I'll start with this slide. You've seen it before. But value creation, financial value creation in the Forest can be seen in 3 components. And the first thing is the harvesting, the thing that we do every year to drive cash flow. The other component is the net growth because every year, we harvest less than the growth.

And then the increasing standing volume will, of course, be the future cash flow. And the third component is the land value. Step-by-step value of the land is increasing. And then of course, in this, we have the positive climate effect due to the net growth in the forest. And you know that it is the growing forest that binds carbon dioxide but also the possibility that we have to replace fossil-based, both materials and fuels with renewable materials from the forest.

If we quantified this, and this is on national level, Sweden. You can see on the left-hand side that we have increased the standing volume in Sweden since 1956, according to official statistics, up to 2019, with 55% from 89 cubic meter per hectare up to 139 cubic meter per hector.

At the same time, we have more than doubled the harvesting volume, here measured as 2 cubic meter per hectare in year. And today, more than 4 cubic meter per hectare in year, so 115%.

And at the same time, the land value has increased by 250% in real terms.

And if we then look at this diagram, you can see exactly, as I said, if you bought a piece of land back in 1956 and then you used direct cash flow that you get from your harvesting operation and invest that in more land, step-by-step, now 2019, you can sell the piece of land that you bought and you have had a total return on 10% in these three components.

And as I said, at the same time, you've done something good for the climate. And if you look at green line here, you can see that the net contribution now from our growing forests and also the substitution effect that we have when we replaced fossil-based materials and fuels with materials from the forest. Renewable materials from the forest is on national level, 94 million tonne per year. And at the same time, we, of course, work to reduce our emissions from the industry. And here, we have calculated the total fossil emissions from Sweden, and that is in 2019 expected to be 38 million tonnes.

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Toby James Lawton, Svenska Cellulosa Aktiebolaget SCA (publ) - CFO [5]

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Thanks, Ulf. And now, yes, I would come on to the revaluation. The revaluation in our balance sheet as well.

So just here more of a reminder, we have our 2.6 million hectares of forest land, which I think you all know, and that means we are, of course, Europe's largest private forest owner.

We now have on the map you see on the bottom right, the forest holdings that we've acquired in Latvia and Estonia, which are included in our Forest holding, of course. And they're included also in the standing volume. You see here, we have an estimated figure for the year-end 2019, including our net growth this year in the Baltics volume, which is now 241 million cubic meters. That's around 3 million cubic meters refers to the Baltics. So the Swedish volume is basically 238 million. And that is 6% of Sweden's land area.

This is also a slide we have shown before, but just to remind, basically that the -- if I start on the right-hand side here, you can see the book value of our Forest land is SEK 136 per cubic meter, then we've got a few different market-level statistics. We have the levels that we buy and sell. And every year, we do buy and sell land to improve our area. And so we've purchased it in the last year, this is at SEK 286 and sold SEK 268. Then we have a market statistics from LRF, which is one of the available statistics, which is based on transactions in Northern Sweden, which is SEK 269 per cubic meter. So the market level is pretty stable between the different statistics. You can also -- there are other statistics available, which are also close to this level.

So there's a pretty well-accepted market level in terms of price per cubic meter, which is pretty much double what we have in our book value. And this is no secret. I think this has been -- we've talked about this many times as well.

And what we have seen this year, particularly, as there's been a few larger transactions, which would show that the transaction price on larger transactions is basically in line or even at a premium to the market statistics. We have 3 listed here. You see Bergvik Öst/AMF, Långvind/Holmen and then one in Latvia, the biggest one in Latvia, where Södra bought the Bergvik holding in Latvia.

And even though the biggest is obviously the Bergvik Öst transaction, and we believe that one was actually -- included a number of restrictions, which affected the price versus the market statistics, it was actually a little bit below the market statistic level but -- and included restrictions on supply contracts and on buyback rights and not being able to buy or sell land and so on. If it was free from restrictions, we believe it would have been at least at the market statistic level.

So we believe this was demonstrated that also large transactions follow the same transaction price for smaller transactions and the market value for smaller transactions is clearly double what we have in our books.

And this has led us to the review, which we announced at the end of Q2 and we've been undertaking. And this is the -- basically, we want to update you on the findings where we are today. And we intend to change our accounting method for accounting our Forest land to be based on the level of transactions, market transactions in our area.

And there are some 300 transactions in our part of Northern Sweden every year. So we believe it's quite a reliable basis for using -- determining market price to apply to our Forest land as well. And we intend to use those transaction prices and apply them to our Forest land.

And if we do that, and we use the available market statistics as they are today, we use the available volume estimated as of today, then the impact of that change, you can see here on the right-hand side, is basically to change from our book value today is SEK 34 billion, and it would increase to a range between SEK 63 billion to SEK 67 billion.

And we will allocate that total value between land and biological assets. In the past, we've only valued land at the original acquisition cost, which is pretty much 0 for most of SCA's land because it was acquired a long, long time ago. But we intend to value the land also to fair value and to divide the total market value then between biological assets and land.

And we will continue to use a discounted cash flow to value the biological assets, in the same way, we have done in the past. We intend to change the discount rate used from the WACC we used in the past to being a market return requirement for these types of assets.

And then a little bit oversimplified, but the land then is the remaining value once you've taken the total value and taken off the biological assets.

The land is also supported, we have other cash flow streams which are not related to the biological assets, which very much support the land value. We have wind power, we have other items which support the value of the land, but the land is then the remaining value. And we expect this to be split roughly 70% to biological assets and 30% to the value of the land.

Then it's important to note also that the change in the value of the biological assets is reported through the income statement while the change in the land value is reported through other comprehensive income. So they get reported in different ways.

And then we should be remembered as well, there is a deferred tax item which offsets the revaluation. You always have to account for the deferred tax on the increase. We view that as an accounting effect. If you were, hypothetically, to sell these assets, you would sell them in a company form and you wouldn't incur that tax.

But yes, accounting method is we have to report deferred tax on the revaluation.

And then finally, we -- the review is ongoing, we are finalizing the details of the implementation of this message, which will continue into Q4, but we expect then to conclude this in Q4 and have this value then in our balance sheet at the end of the year.

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Ulf Larsson, Svenska Cellulosa Aktiebolaget SCA (publ) - President, CEO & Director [6]

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So if we then finally summarize the quarter, we can say that we have delivered a strong result, although we have rather tough market conditions if we compare with the third quarter 2018.

EBITDA was down 12%, but it was up 2% in comparison with the second quarter this year.

When it comes to the ramp-up of Östrand pulp, volumes were higher 2% quarter-on-quarter. But we have been limited by the economizer, but that one is now replaced. And we're looking forward for the production figures in November and December. We also, during the quarter, did announce a new paper machine in Obbola, SEK 7.5 billion investment. And then you have to keep in mind that we have already financed the SEK 8 billion investment in Östrand through operating cash flow since 2015.

The total return from the Forest in our region is 10% per year if we do the calculation from 1956 until now. And we are looking into revaluation of the Forest asset, and the spend today is between SEK 63 million and SEK 67 billion to be finalized in Q4.

So by that, I think that we open up for questions starting in the audience.

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Questions and Answers

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Linus Larsson, SEB, Research Division - Analyst [1]

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Thank you very much. It's Linus Larsson with SEB. I'll start with the Forest revaluation, and you're basically doubling the book value of your Forest holdings on your balance sheet. Does it, in any way, affect the way you operate? Does it in any way, for instance, change your view on indebtedness and -- or any other aspect of the way you operate?

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Toby James Lawton, Svenska Cellulosa Aktiebolaget SCA (publ) - CFO [2]

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Yes. Maybe I can -- I'll start, but I think -- I mean, the short answer is no, this is an accounting exercise that we think it's pretty well accepted that the market value is a very different value from the book value, and it's been hard to explain, I think, for us and others, why we can't value our asset that what is the pretty well-accepted market value. And that's what we intend to change to move towards the market value. Yes, it's not -- there's no intention to change the financial structure of the company or to change the way we operate. This is primarily an accounting exercise.

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Linus Larsson, SEB, Research Division - Analyst [3]

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And then also -- so you will maintain a DCF model under the part, which is the biological asset value? You will lower the discount rate? Will you also change some other inputs like, for instance, what type of inflation will you apply? And basically, my question is, what's the implication on the reported EBIT for 2020, let's say, because, I guess, the other inputs, [that] will be quite important to understand the ongoing biological revaluation report in EBIT on a quarterly basis?

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Toby James Lawton, Svenska Cellulosa Aktiebolaget SCA (publ) - CFO [4]

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Yes. I think that's a very good question. I think, basically, the discount rate is what we expect to be the biggest effect in terms of the DCF. We're still finalizing the details. So -- but I think the other assumptions we've applied in the past are still pretty much relevant to the current environment using an average of Wood prices and an average of harvesting costs and so on. So I think it's really the -- in terms of biological assets, it's the discount rate that will be the biggest change in the way the valuation is done. And then if we look at the effects ongoing in terms of earnings profile, we have a net growth in our Forest every year as well, which supports an increasing valuation. And basically, we see no reason why you would see a particular difference in the future trend versus the past trend. The past has also been subject to changes in pricing and environment. But we've had a pretty reasonable and steady profit contribution year-on-year and we see no reason that should change in the future. Of course, it's dependent on what happens in the future which no one here can really say what that is. But the practice is pretty similar to today in terms of biological assets and we don't see any big change.

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Linus Larsson, SEB, Research Division - Analyst [5]

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And maybe just finally, on the forest side, you gave one figure on the renewable energy EBIT contribution, as you expect it in 2022. I think you said, if you add up all the nonwood revenue streams, what does it add up to in, say, annual EBITDA. I mean I understand wind is probably by far biggest, but you have some other revenue streams as well. What's the EBITDA contribution today or some time out.

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Toby James Lawton, Svenska Cellulosa Aktiebolaget SCA (publ) - CFO [6]

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I think another way of looking -- I think I give you the [feeling] you're after, but in another way, the wind power is the biggest other income stream. And we've included -- already secured wind power income in the cash flow streams allocated to the lands, together with the other 2. We also have hunting licenses and gravel income which we also have from the land. In future, there may be others, but those are the ones we have today. And when you look at the split then in value between land and biological assets, it's driven by those -- the relative cash flow streams from the biological assets and from those other income streams.

So together with one additional component, which I'm not risk of getting into details here, but the biological asset is a valuation over 1 production cycle. So the accounting principle is that it's only the physical trees that are standing there today. After 1 production cycle, of course, we will plant trees and then harvest them again, and that's many years into the future, so it's heavily discounted. But that also has a value. And that is also allocated to the land, that piece.

So those 2 elements basically contribute to this 30% that I mentioned, which is the land value. But the biggest part is the -- is this other income streams.

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Linus Larsson, SEB, Research Division - Analyst [7]

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Okay. And then maybe just somewhat related, maybe but somewhat shorter term on the -- you touched upon, I think, in your presentation the wood cost or the wood price trends that you're seeing? And in your industrial operations, when do you expect to see easing wood costs or to some degree, I think, you already are seeing, but in a more meaningful way.

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Ulf Larsson, Svenska Cellulosa Aktiebolaget SCA (publ) - President, CEO & Director [8]

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I think we -- as I said, we have a lagging effect of 3 to 6 months. So I think that's valid. We won't see too much in the fourth quarter. But then in the first and second, then that will come through.

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Johannes Grunselius, Kepler Cheuvreux, Research Division - Head of Forestry, Paper & Packaging [9]

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It's Johannes Grunselius, Kepler Cheuvreux. Just also related to the forestry side, do you have plans for maybe open up the transparency even more in the sort of, next year on the Forest side? I'm thinking about the nonwood profit streams that you might start reporting them?

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Toby James Lawton, Svenska Cellulosa Aktiebolaget SCA (publ) - CFO [10]

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We don't have any intention to report as a different -- another segment. I think we have given information about the income we see from wind power. So that we've given information on but not as a separate segment. We don't -- there will be some additional disclosure which comes in from the revaluation of the Forest, but the basic answer is that, no, we won't be sort of separating out the different part and reporting a new segment for...

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Johannes Grunselius, Kepler Cheuvreux, Research Division - Head of Forestry, Paper & Packaging [11]

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So I mean, the major thing is the wind, the hunting license, that's nothing in the northern part of Sweden, more or less, and gravel is more minor.

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Toby James Lawton, Svenska Cellulosa Aktiebolaget SCA (publ) - CFO [12]

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Yes.

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Johannes Grunselius, Kepler Cheuvreux, Research Division - Head of Forestry, Paper & Packaging [13]

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So, I mean -- And you mentioned both in your presentation, the obvious benefit of capturing carbon emissions. I mean if you think about the future in the next 1, 2, 3 years, do you see any sort of potential to get any financial rewards for that? There's a pricing for CO2 like emissions. Do you think you can capture some of that?

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Ulf Larsson, Svenska Cellulosa Aktiebolaget SCA (publ) - President, CEO & Director [14]

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Personally, I don't think it in the coming 1, 2, 3 years. But I mean, long term, I think it might be so. But that is nothing that we calculate on, of course.

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Johannes Grunselius, Kepler Cheuvreux, Research Division - Head of Forestry, Paper & Packaging [15]

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And then during the year, you have also made 3 purchases of land in the Baltics, what do you think there? Would you continue to buy land in the next few quarters in the Baltics? And if so, how much?

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Ulf Larsson, Svenska Cellulosa Aktiebolaget SCA (publ) - President, CEO & Director [16]

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Yes. I mean the long-term target we've said is 100,000 hectares in 5 years’ time. And I mean, now we've done 30,000. And I mean, we are looking into new opportunities. And we like to -- we like to buy land, both in the Baltics, but also in Sweden, if possible.

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Johannes Grunselius, Kepler Cheuvreux, Research Division - Head of Forestry, Paper & Packaging [17]

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Why do you think 100,000 is sort of the land area you want to buy? Is there any reason behind it, any analysis or so?

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Ulf Larsson, Svenska Cellulosa Aktiebolaget SCA (publ) - President, CEO & Director [18]

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Not at all really. But I mean, we have -- I think it's good to have a critical mass. If it should be -- I'd like to see the Baltics as the sixth Forest district, and you need some volume from your own land in order to allocate resources for harvesting, silviculture, everything like that. But in addition, we like to buy forest from small private forest owners as we do in the region in the northern part of Sweden. And also, we like to buy forest from -- I mean, from bigger [players]. It could be the state, it could be entrepreneurs and things like that. So I think it's more related to some kind of critical mass. But long term, we have, as I said, I mean, when we calculate the total return from the Forest, we have had 10% per year as an average since 1956, and we think the potential is maybe even bigger in the Baltics.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [19]

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Christian Kopfer, Nordea. Just a few follow-ups for me. Firstly, if I did the calculation or I compiled for -- in the third quarters. It looked like cost per tonne came down a bit in Q3 versus Q2. Was that the seasonal lower overhead cost? Or was it a combination of doing the business unit more effective?

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Toby James Lawton, Svenska Cellulosa Aktiebolaget SCA (publ) - CFO [20]

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I think it's probably -- it's a small change. The wood cost is stable. The volume is slightly better and the trimming is getting better [over] time. There's a slight improvement. And you should remember, we're also part of this Rotterdam sale, that the logistics operation is part of each business unit and part of that also helped. So I think it was not underlying, it's a small cost improvement, but not -- the wood cost is the big one, of course, and that's flat, and we expect that all set to be flat into Q4 before the wood -- the lower wood pricing that we see now starts to come through to the industries early next year.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [21]

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Understood. How far are you from your -- if I remember correctly, you expected costs to come down around SEK 350 per cubic meter out with the new mill, how far from that are you now?

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Toby James Lawton, Svenska Cellulosa Aktiebolaget SCA (publ) - CFO [22]

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I think we're on track pretty much in line with the volume development. So I mean, it's really driven by the volume development and the fixed cost coverage. We're not yet there, but we're closing in. And I think once we get there, then we'll have that. So you could say we're probably 2/3 or 3 quarters of the way there based on the volume development.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [23]

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Okay. That's great. Finally for me, on the -- you mentioned that you had some income from byproducts...

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Toby James Lawton, Svenska Cellulosa Aktiebolaget SCA (publ) - CFO [24]

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In Q3.

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Christian Kopfer, Nordea Markets, Research Division - Senior Analyst of Metals, Mining & Oil and Sector Coordinator [25]

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Was that the income or is that the income pretty representative for also the coming quarters ahead? Or...

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Toby James Lawton, Svenska Cellulosa Aktiebolaget SCA (publ) - CFO [26]

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It is actually a little bit seasonal. We're a big seller of wood pellets in Sweden. And this quarter -- so it's been seasonally as a strong quarter. And of course, it's a winter market. So I don't think you'll see that level all year, but I think it's more of a winter market. So Q3, Q4 tend to be stronger seasons for that market.

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Ulf Larsson, Svenska Cellulosa Aktiebolaget SCA (publ) - President, CEO & Director [27]

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But what's good for us is that we're working in this integrated value [chance]. I mean we benefit both from a higher sawdust price but also from producing pellets and we use lots of pellets in our own, more or less, but also, I mean, sold externally. So this will be...

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Gustaf Schwerin, Pareto Securities, Research Division - Analyst [28]

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Gustaf Schwerin from Pareto. Just one question from my side on your geographical Pulp sales split. Now in Q3, if you've done any changes to that versus the last quarter?

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Toby James Lawton, Svenska Cellulosa Aktiebolaget SCA (publ) - CFO [29]

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Yes. I think we -- good question. We mentioned in the last quarter, we had a bigger -- a big increase in Asia. That's pretty stable between Q2 and Q3. So we haven't increased further from where we were in the second quarter but we still have a significant volume placed in Asia.

Over time, as we grow our volumes in our core markets, we expect that to come down again, but that's -- that would take, yes, a couple of years.

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Ulf Larsson, Svenska Cellulosa Aktiebolaget SCA (publ) - President, CEO & Director [30]

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But, in general, you can say that we have a stronger market in Europe. Now that I think you also saw the report from [SCTS] recently and, I mean, they had a healthy organic growth on [tissues] domain, consumer of NBSK. So we have a slightly stronger market for the moment being.

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Johannes Grunselius, Kepler Cheuvreux, Research Division - Head of Forestry, Paper & Packaging [31]

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It's Johannes here again. Could you say perhaps something about the -- I mean, you -- it was pretty obvious that you had tougher markets in the third quarter, but how should we think about the fourth quarter, if you perhaps can mention what sort of sequential price decline we can have in kraftliner, for instance, that would be helpful?

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Ulf Larsson, Svenska Cellulosa Aktiebolaget SCA (publ) - President, CEO & Director [32]

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I mean we don't give forecast, but as I said, in solid wood products, where you don't have any official statistics, really. I mean, we lost 5%, 5% to 6% price-wise from Q2 to Q3. And I think that we will lose another 5% to 6% in the fourth quarter.

And again, it's not due to consumption. It's due to availability of logs, and it's easy to increase capacity, and that is what's happening now, just in order to avoid destroying sawlogs in Central Europe.

Pulp, again, I think I said that I mean, we have seen our prices coming down to $8.25 and we see Chinese prices, net China prices was up now to $5.69 or something like that and that is if you take away the discount, more or less on the equal level. And when it comes to inventory level, they are on 30 -- close to 35 days now in long fiber, which is on a healthy level, I would say. The question mark is the inventory level on short fiber, where you're up on 60 days, so -- but we don't know what -- where that will go. Kraftliner, we have had 4 consecutive months now with unchanged prices. And I mean, we see that you have some price pressure now on testliner prices. We don't know really what kind of impact that will have on kraftliner prices. We see that inventories for ourselves is very -- on a very low level and we have a stable demand. We will have a planned maintenance stop in the fourth quarter. So that's the situation for us.

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Johannes Grunselius, Kepler Cheuvreux, Research Division - Head of Forestry, Paper & Packaging [33]

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And now I suppose you will have slightly higher -- I mean, higher cost quarter-over-quarter because Q3 is softer on [personnel] cost, right?

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Toby James Lawton, Svenska Cellulosa Aktiebolaget SCA (publ) - CFO [34]

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Yes, that's what we have an effect due to the holiday period, which reduces the fixed cost somewhat in Q3. It is not dramatic, but...

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Johannes Grunselius, Kepler Cheuvreux, Research Division - Head of Forestry, Paper & Packaging [35]

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It's about 50 or so?

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Toby James Lawton, Svenska Cellulosa Aktiebolaget SCA (publ) - CFO [36]

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Yes. The majority of that is in the paper division for us.

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Ulf Larsson, Svenska Cellulosa Aktiebolaget SCA (publ) - President, CEO & Director [37]

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So if we don't have any further questions from the audience, I think we can open up the telephone, the telephone line. Please, operator?

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Operator [38]

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(Operator Instructions)

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Toby James Lawton, Svenska Cellulosa Aktiebolaget SCA (publ) - CFO [39]

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Looks very quiet.

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Operator [40]

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(Operator Instructions) No further questions. Please continue.

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Jonas Mårtensson, Svenska Cellulosa Aktiebolaget SCA (publ) - President of Forest [41]

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Good. Okay. Yes, we more or less expected everyone to be on Easter leave, but they seem to come here instead, for which we are very grateful. Sorry, autumn leave.

Thank you for the interest you've taken in SCA's report. We look forward to seeing you again after the year-end on the report for the fourth quarter, January 30. Thank you very much. Bye.