Stora Enso Oyj

Ulla Paajanen Sainio - SVP, IR Karl Sundstrom - CEO Seppo Parvi - CFO, Deputy CEO and Country Manager of Finland

Justin Jordan - Jefferies Lars Kalbreier - Credit Suisse Robin Santavirta - Carnegie Mikael Doepel - Handelsbanken Linus Larsson - SEB Henri Parkkinen - OP Financial Group Chris Ellis - Barings

Thank you. Good afternoon, everyone, and welcome to Stora Enso's Q3 results call.

And we will have the same format. It will be our CEO, Karl Sundstrom, making the presentation together with our CFO, Seppo Parvi, and then in the end we will have a Q&A session.

So, Karl please go ahead.

Thank you, Ulla and good morning or good afternoon depending on where you are in the world. So, I would like to go through a couple of slides here.

And we actually had for the third consecutive quarter a growth in total sales of almost 5%. We managed to – for the group businesses we see basically the four growth divisions, which is excluding paper, we managed to get 11% growth on topline.

Operational EBIT of €290 million; that is a margin of 11.6 and it is over 32% better than the same period last year. Cash flow better than last year and we reached 13.9% return on capital employed compared to 10.1% a year ago.

The balance sheet continues to strengthen and net debt to operational EBITDA ended at 1.8 versus 2.1 a year ago, and the €50 million profit improvement program is delivering and we are having the results as of the third quarter 30% of the savings included. We actually call this a step change in our transformation and I think this slide here describes it.

You can see that of the profit improvement compared to last year almost 30 million is coming from Beihai. You are seeing packaging solutions 27 million; that is driven by good kraftliner prices and Varkaus actually came in on a run rate of 15% EBITDA, plus the strengthening of the restructured business in China packaging.

Looking at biomaterials, we are more than doubling its profit compared to a year ago. It is just due to sales growth of 14%.

We had no maintenance in the quarter, plus that we have also been able to drive additional volume out the [mills]. Wood products increasing 8 million and that is because of its growth, and continually high profitability delivered basically through the growth of building components and systems, and other high value-added products.

You have paper 23% lower. It is a bit of temporary headwinds, but it is also the matter of the business.

All in all ending up in a 11.6% EBIT margin, which is a very high level for us historically, but that is the reason why we call it a step change in our transformation. Today we also announced two investments of CapEx in sustainable growth areas; one in Enocell, where we increased the capacity in Enocell for dissolving pulp by 280,000 tons, and the investment is expected to be completed during the second half of 2019.

The targeted return on operating capital employed is over 15%. We are also increasing the compatibility of our Imatra Mill by investing 42 million in additional CTMP drying capacity, increasing the pulp capacity of the CTMP pulp in Imatra by 80,000 tons.

And this will support the commercialization of MFC to a greater extent than we have today. The targeted ROCE is over 20% supporting the strategic targets.

If you look on the transformation steps, and I will not go through all of these from the slides, but I want just to tell you that, you know, Beihai is supporting our growth. Varkaus LVL is supporting our growth.

Murów is supporting our growth; the Varkaus kraftliner. We have also announced today additional two big investments and earlier this quarter we announced that we are increasing the capacity and the quality in China packaging.

Also in this quarter we concluded the divestment of Bulleh Shah, as well as the [board] in Sweden. As well as we concluded negotiations of paper reduction and securing a €12 million cost savings at Kvarnsveden Mill.

Beihai board continues to ramp up ahead of plan. We have already made production out of that mill of 413,000 tons since the start.

In the quarter we produced 105,000 tons, which is more than double a year ago production, and we are expecting full production in the first half of 2018 and the breakeven in Q4 2017 remains. Before handing over to Seppo I just want to spend some thoughts and comments regarding our transformation.

From being a 30% non-paper company in 2006 we are now more than 70% of the sales in the four growth divisions. When you look upon the profits, it is now generated 90% coming out of non- paper.

That is doubling the amount versus what we had in the second quarter where it was [5%]. So the transformation continues, and we need a different level in our transformation.

With that, I would like to hand over to Seppo.

Thank you, Karl and I start with some of the key figures for the quarter that we have today reported. First of all, the sales line grew 4.8%, and like Karl already mentioned and this is now the third quarter in a row that we are showing growth and the growth is accelerating.

Growth excluding paper was over 11%. Operational EBIT increased 32.4% and was €290 million for the quarter.

Earnings per share increased from €0.16 to €0.24 a share compared to a year ago. And operational return on capital is above the strategic capital level of 13% at 13.9%.

Cash flow from operations also continued strong. It was more than €430 million compared to €390 million a year ago.

This is over 10% increase. Also good strong cash flow is visible to [indiscernible] operational EBITDA ratio.

That is not at 1.8 compared to 2.1 a year ago. Then moving to the results, and divisional performance and I start with consumer board, where Beihai mill ramp up continues ahead of the plan, and it is also reflected in the growth of the sales as well as improving profitability.

Sales increased 7% to €639 million and operational EBIT was at €86 million. That is a 28% increase compared to a year ago.

Beihai development continues in a positive manner as Karl mentioned, and power turbine is back in operation now after the incident that we had earlier this year. For this quarter, Q4 2017, we expect that Beihai operational EBIT is negative by €7 million compared to €38 million negative a year ago, and EBIT breakeven is expected in Q4 as we have earlier communicated.

Operational return on capital was 17.7%, a clear improvement from a year ago of 12.9%, which is now including Beihai. Excluding Beihai operations, return on capital was 40.5%.

And we have today announced an investment at Imatra Mills to add drying capacity for CTMP, an extension of the pulp warehouse. Then moving to packaging solutions, where profitable growth continues driven mainly by Varkaus kraftliner ramp up as well as improving performance at China packaging.

Sales increased 23% to €380 million thanks to Varkaus kraftliner as well as favorable prices and increased deliveries. And operational EBIT was a record high at €48 million.

That was driven by higher sales prices, better volumes as well as operational improvements in China packaging and Varkaus kraftliners as mentioned. In Varkaus we are expecting to reach full production during the last quarter of this year.

And we have already reached targeted operational EBITDA run rate of 15%. This is what we also promised when the investment was originally announced.

We have also decided on an investment of €16 million in China for capacity expansion as well as upgrade. It is our response to the increase in demand there.

This investment is expected to be completed by mid-2019. Biomaterials, favorable pulp cycle continues.

Sales increased 14% to €379 million thanks to increased deliveries and recent higher sales prices. And operational EBIT more than doubled to €88 million.

That was driven by higher pulp prices, increased volumes and lower maintenance costs. We also noticed that lower maintenance costs were mainly due to changed sequence of maintenance shutdowns.

Operational return on capital at 14.8%, almost at the level of the targeted 15%. Today we announced an investment at Enocell mill, pulp mill, to increase its dissolving pulp capacity from 150,000 tons to 230,000 tons.

Then moving to wood products, solid performance continues. Sales increased 10.5% excluding the transfer of Baltic wood sourcing.

Baltic wood sourcing was moved to segment Other in our report. Sales growth in the strategically important Building Components and Systems was 14%.

This increased mainly due to the increased volumes, higher prices and product mix. Operational EBIT was the highest in the third quarter in 10 years, driven by higher wood costs that were more than offset by higher sales prices and volumes, and operational return on capital at 21.3% above the targeted 18% level.

Our CLT investment in Gruvön in Sweden that we announced earlier is proceeding according to the plan. And here we are expecting to beginning the production in Q1 2019.

In the paper division, some temporary headwinds affected profitability and cash flow negatively. But it is good to note that sales of ongoing operations were stable, but we have some negative effects from Veitsiluoto Mill PM2 incident and negative FX.

And the divestments of Kabel Mill and Suzhou Mill site last year decreased sales by some €55 million. Operational EBIT decreased €24 million.

That is due to higher cost of Paper for Recycling, energy, wood, and chemicals, as well as negative FX from foreign exchange rates. Cash flow after investing activities to sales for the first nine months was 5.2% and Q3 only 0.8%.

This was mainly due to the lower EBITDA and normalized level for operating working capital during the quarter, after an exceptionally low level at the end of the previous quarter, second quarter. At the Kvarnsveden Mill in Sweden negotiations regarding the close of paper machine 8 were concluded.

This affected 122 people and annual cost savings are expected to be about €12 million. Then looking at the strategic targets, the step change that Karl just mentioned is also clearly visible.

We are showing growth that is clearly faster than the relevant market in terms of growth businesses divisions that we are in, and that was 11.1% year-on-year in the third quarter of this year. Also our debt metrics are looking better as a reflection of the positive good strong cash flow that has continued.

Both net debt to operational EBITDA and debt to equity ratios are clearly below the maximum targeted levels in our strategy. So staying with operational return on capital employed clearly above the targeted level both including and excluding Beihai operations.

Fixed costs to sales there we are still above the targeted 20% level and there [indiscernible] is to continue to bring it down from the latest 23.8% level that you can see on the table. Then looking at the divisions and where we are standing there with the strategic targets.

First of all with the consumer board, operational return on capital at 17.7% for the quarter, including Beihai operations a bit below the 20% level; and excluding Beihai at 40.5%. In packaging solutions, positive growth – profitable growth continues and we are now above the targeted 20% return on capital level at 22.4%.

Biomaterials also clearly improving compared to a year ago when they were at 6.7%, now 14.8%. So, almost at the targeted 15% level.

Wood products continues the solid performance and return on capital is above the 18% strategic target level and it was 21.3% for the third quarter this year. And in paper, cash flow after investing activities to sales at 0.8% and as I said earlier it was exceptionally low mainly due to the correction of the working capital level that was extremely low at the end of the second quarter, and a lower EBITDA level compared to the previous quarter.

Then, moving back to you Karl.

Thank you Seppo and I will go through the guidance and some conclusions before opening up for Q&A. So, sales are estimated to be similar to or slightly higher than the amount of €2,509 million recorded in the third quarter of 2017.

Operational EBIT is expected to be even in line with or somewhat lower than the €290 million recorded in the third quarter of 2017. The operational EBIT estimate for Q4 2017 includes the negative €7 million impact or the ramp up of the Beihai operation.

Beihai consumer board machine expected to reach operational EBITDA breakeven in Q4 2017. The impact of the annual maintenance shutdown is expected to be approximately €10 million higher than in the third quarter of 2017, and it is included in the above guidance.

I would like to point out that in biomaterials we will have both Veracel and Skutskär mill in annual maintenance, and we had no annual maintenance shutdown in the third quarter of 2017. I also would like to remind people that the seasonal pattern of previous years regarding consumer board will remain, which means it is a weaker quarter seasonally than the third quarter.

So, as a conclusion, we call it a step change in our transformation. So sales growth for three consecutive quarters, the project in China, Varkaus and Murów are driving sustainable profitable growth.

The sales growth almost 5% for the whole company, and over 11% for the growth divisions. We reached a return on capital employed of 13.9%.

This is the highest level than Q1 in 2001. Solid cash generation, improved net debt to EBITDA and we are all moving as you can see in the numbers from asset transformation to innovation and sales transformation.

With that, I hand over for the Q&A and Ulla.

Thank you, Karl. We are ready for Q&A now.

Yes, hello everybody. It is [indiscernible].

First of all congratulations to very good result. Then I have two questions, the first one is, you know, on paper, I know that this is not the focus area for you guys anymore, but we have seen quite a lot of capacity closures, and you are closing [indiscernible] in papers yourself, could you say a couple of words on how you see the dynamics in that marketplace playing out now as we enter the year end and the usual negotiations?

And the second is more of a technical question on you are expanding the dissolving pulp capacity, do you feel that you have enough sort of reach to existing customers, or will you go out sort of trying to attract new customers in that business? Those were my questions.

Thank you.

Thank you Michael and I just want to say that paper is less important profit-wise for us. It is still an important part when it comes to cash generation and support investments going forward.

And I believe that I have one of the best paper team there is. So it is very important for us still.

But if you look upon paper, I think you have heard closures and there has been discipline in the way the industry is taking down capacity is the recent announcement. So when I look upon paper, I think the demand will continue to be weaker, and then with the prices going into Q4 to be more stable, and you have to remember that Q4 is the strongest quarter historically for paper within Stora Enso.

So, I expect that to be an important part of our Q4 result, like it's been in the last couple of years. I hope I answered your questions in that one.

When it comes to dissolving part, we all as we have previously announced, moving more to specialize our northern pulp mix. So, Skutskar is now basically only fluff, now we will make a nozzle sell to basically only being dissolving part.

And then you have the similar where we have the LVL Mill production. And for NBSK where we are a more original player in old mills, the competition will increase.

So, that's why we are moving into areas where we traditionally have had a long and strong relationship with very important customers on the dissolving part. And the mill has been sold out throughout the period and the quality is good.

Now we can offer that more to the existing customer base but we also had contact with a number of customers over time who have actually asked us to supply, but we have been supply constraint given that the lower quantity. And if you look on the pricing and the profitability on dissolving versus NBSK, for us it's a big difference.

We are moving into a more profitable segment with also more stable customer relations. I hope I answer your questions on that point.

Yes, perfect. Many thanks.

Okay.

Thank you and good morning everyone. I got to just want the interrelated question regarding I suppose paper and the refining.

Mostly in I guess well I suppose even both the packaging paper and then paper division you called out increased the cost. And of course the flip side is you're benefitting from increasing by refining profitability.

Now, I guess my question is really just regarding national support in China which of course is impacting the cargoes of mixed paper don’t you see that that are going into China at the moment. You are most closer to the China than frankly any and most of them is.

So, I guess I'm just interested in your view as to what you think this ultimately result or how it result or does it result, frankly, in 2018 in terms of do we see some agreements on OCC cargoes importing to China and therefore the stabilization in European OCC prices and equally presumably at the margins perhaps some less demand for pulp. Or how do you see the interplay between OCC and all prices going forward from China?

So, first of all I think China as a nation or actually taking this with sustainability very seriously and a part of that is that by stopping the import of the unsorted which in certain cases could be close to garbage coming into China had been and they probably bit when bit over the top when they basically even sorted was stopped. I think the sorted will be eased out but maybe not to the same level as it was before.

That will obviously make a choice for the Chinese Board and paper manufacturers if they can afford to stay in business because the only replacement is actually wood and pulp. And that probably is not going to go over so fast as some people expect because I think they quote us they will have on the imported sorted paper will be less than ever before.

That's how I read the situation.

Okay. And then do you have a view on obviously see imports in China because obviously European OCC prices are collapsing at the moment because of China's actions?

No. it's the same like you can use that.

It's the same analysis, okay. Just one follow-up question just on very specifically that the CapEx announcements that you made today, old percent's will stop.

Can you give us any sort of thought about guidance for 2018 CapEx for Stora Enso group in relation to the 600 and 650 for this year? I know you talked in terms of longer term CapEx trending down towards appreciation but I'm assuming as you continue to announce new investments that maybe pushed back slightly into '19 or '20?

Hi, Seppo here. As you know, we don’t give guidance for 2018 yet.

We compact it at later. But on general terms in the big picture, the CapEx guidance I've given earlier still stands that we are bringing CapEx towards and we will keep it around depreciation level also going forward plus what we have to replan in the plantations.

Yes. It's about how we deal.

Yes, thank you.

Thank you. Just a couple of questions.

Starting with Enso. So, how should we see this, what do you, how much pulp are you taking out of paper pulp today and if you kind of are you going to phase that out or you're going to be in the proper change from paper pulp to dissolving wood pulp?

Second question is about China and how you view the situation in China, of course there's a lot of moving parts in terms of the fibre situation of course. But how does that translate into your pricing in China and demand for your Virgin Fibre Board?

And also, do you find any opportunities in your system to raise paper pulp capacity, for example in Montes del Plata and if so do you have any plans to do so?

So, or you're talking about additional investments in Montes del Plata if I start from the back?

Well, if that's necessary or the bottom like you know what you can do. There's a lot of such projects around of course given the what seems to be very good returns on smaller investments in to squeeze out a bit more pulp from existing assets.

Yes, okay. So, we are constantly the bottlenecking and we have actually increased the capacity all the time during this year in Montes del Plata.

And obviously these are the type of project that we like because it's on an existing site and profitability levels are extreme. So, we were continuing doing that and obviously Montes del Plata is one of the ones we are looking on that part.

But also we are ourselves to see that if we can get more after that. When it comes to here nozzle, now I go back to your first one.

So, today we are selling basically 325,000 tons of NBSK and 150 tons of dissolving pulp. Going forward when this is ready, we will basically have which is new, we will ink we'll start with soft wood dissolving pulp about 245,000 - 246,000 tons.

Then we will increase the hardwood dissolving pulp from 150 to 184 basically meaning that the new pulp production will go from what we have today, 475,000 to 431 and obviously when we start to take down the NBSK like, that will disappear from the market and then over time until we have constructed ready the second line, that will come out. So, certain part of the NBSK will disappear.

Then the question regarding China. So, what I believe will happen, if China for various reason limit the import of either recycled paper or OCC, that would probably be especially if they got to go from mix to more sorted, over time which I think and even on the sorted it will be lower.

Gives an opportunity for Virgin Board. And that means that obviously having our new nice mill in China, gives an opportunity for an additional business and also on a different value scale than before.

I hope I answer your three questions with that, Lars?

Just if I may clarify it. You mentioned creep at Veracel and Montes del Plata.

Can you quantify roughly where you are today versus where you were a year ago in terms of volume?

3% to 5%.

Okay. And I didn’t quite catch what you said about NBSK.

Some will just later disappear, right. But is this the phasing, when should we see the paper pulp component disappear and or started disappearing, when should the NBSK basically see?

Hi, Seppo here. Of course there is time lag when it comes to getting the increase in ton and tossed to the side and get that implementation done.

So, it will take couple of years before we are there and can start it fully with dissolving pulp production. It will not disappear when it is still there has reduction, then we need to approach it.

Understood, thank you.

Yes, good afternoon. First of all in terms of consumer board and your business in Europe and your business in folding boxboard or carton board or where all.

What is your pricing outlook for 2018? I know some of your competitors and I believe U.S.

will have announced price increases. So, what is going on, is the market really as tight as the price increases implicate or how should we view the pricing outlook for 2018 in carton board in Europe.

So, if you look on the demand, it's getting stronger and if you look on prices, they would say stable. You have to remember that in consumer board, most of the contracts are on a longer period.

I would and especially if you take the UK, Liquid and Food Service Board, they are annual or biannual contract. That is basically 60% of the business.

The pure Folding Boxboard is about 30% and over that I would say around 75% 80% is actually on annual contract. So, it's very limited, which means that is the prices are stable.

So, that's what happened and we are capacity constrained right now and we are trying to increase that partly by introducing more MFC or getting the pulp mill with the getting more capacity out of the matter. That's why we're doing the bottlenecking investment in Imatra.

Right, thanks. And then in terms of Beihai.

Yes?

Even if prices are announced but effect is not that big, so it's stable. And that's something that I think is good.

Good, that's clear. In terms of Beihai, now you reported now operating loss of 13 million in the quarter.

How much is from the actual machine and how much is from the plantations. And what's the depletion of the plantations per quarter?

We are not specifically splitting the result between the mill and plantation. So, this is for the total.

But what we have been saying is that the mill we expect to be EBITDA breakeven now during Q4. And they cause the depletion that of course depends very much on the harvesting volume of the months and quarters.

So, it is not one-to-one, it depends on that. Because the more we harvest or the less we harvest, that has an effect on the depletion cost.

I don’t have now here any bigger product previous quarter but it's like I said varying a bit between the quarters. And we did given the guidance that for the total operation in Beihai it's minus seven in the quarter.

I think with this and the comment I'll set for you, you're pretty well off.

Yes, thank you. Then finally in terms of the paper business, I understand did you have some problems in Beihai still what with I guess it being to now.

Can you quantify what kind of earnings impact that had on that division in this quarter and what is the altitude now for Q4?

It is quite limited because they need to account things from our coverage, we only talk about a couple of million euros effecting the finance those. That's deductible.

Good, thank you. And then, finally in terms of import cost inflation, you are talking in the paper division about that and that's up dwindling margins but new margins a bit.

What is the altitude now for the rest of the year and for the start of 2018? And is there, there must a quite big difference between Europe and Asia, or am I correct?

Yes. Well, in general I would say that yes there are some inflation pressures and cost increases when it comes, especially freighter cost but both would like commenting the wood products, the division comments and RCP paper for recycling.

And also for in Asia and transportation logistics cost. But in general I would say, still like I said earlier that inflation pressures such are not very huge in total picture but it's effecting some divisions more than others and it's most visible in paper business today.

Okay, thanks. And finally on RCP if I may continue, what is the situation for you guys at the moment in Europe.

I would assume RCP prices are going down with the China situation at the moment. Are you expecting lower RCP prices for the rest of the year now, are you actually seeing now lower, are you buying with lower prices now comparative this summer for example?

Likewise you see from perspective, it shows that the recycled paper market has been a bit under turbulence because of the China market or Chinese the seasons on imports. And that has made that in especially the U.S.

the recycled paper and OCC prices have been coming down. There has been a similar effect in Europe, maybe not as strong as in the U.S.

but it's becoming more and more visible. The next, it also depends of course very much on what are the next steps by the Chinese authorities on this error.

But you have to think Europe on RCP is an isolated market. I don’t think that you will ever allow imported recycled paper.

So, it even though it's fluctuating and effecting China because we used to be we are next exporter in Europe. But I don’t see the flow going the other way around with waste import into Europe.

I think that is something that would probably not happen. So, have that in mind.

No, definitely not. But the FX part is restricted to China than we will probably have some more RCP in Europe and that will probably press prices down in Europe.

But that is what that probably or so meant.

Yes, that's what he meant.

Exactly, that's what I meant that we see. But it's also good to know this at still at the moment year-on-year prices are higher even there have been declining.

Exactly. Thank you very much.

Thank you.

Thank you. I would first of all like to drill a bit into the guidance for Q4.

And just to start with and to make everything as clear as possible. What your guidance is basically saying given the definitions of the wording that you have is that the Q4 operational EBIT should be or could be either 25% below Q3 or 10% above Q3.

Is that correct?

Absolutely, yes.

Okay, good. And then as a follow-up on that.

I'm just trying to understand why earnings could drop as much as to say 20%. Because if you look at on the delta going into Q4, we have Beihai which is a net positive, Varkaus should be a net positive.

Pulp pricing is probably going to go up as will volumes, then you have on the negative side obviously consumer board seasonality which Karl mentioned already but also paper seasonality as a positive. And then you have the maintenance of course.

But you know net-net, I'm struggling to see how we could see such a big drop in earnings from Q3 to Q4. So, is there anything any other specific things that we should be aware of when thinking about the fourth quarter.

The way I would think about it, Mikael, is that we have a set of rules that defined the guidance. We cannot with this wording and that's something we are going through the board and everything with.

That's how we talk about it. But obviously that gives you a range of results.

And I don’t think I need to say much more than that. But going down 25% that we don’t believe.

So, this is the way of giving you a guidance a range where you will have no in certain assumptions about the midpoint.

But like also mentioned earlier by Karl, and you message yourself we have higher maintenance cost during the quarter especially for instance Veracel mill will be. And then the seasonality does squeeze us every year in Q4.

Especially for consumer board.

And that's got to remember keep in mind. So, quarter is a bit shorter than other quarters and that has an effect also.

Okay. That's helpful, thank you.

Then a question on Beihai. Things seems to be going ahead there and progressing ahead of plan.

And I was just wondering since you are saying for example for the Varkaus, Kvarnsveden Board Mill that you reached the planned EBITDA run rate of 15% in the quarter. When everything is in place in Beihai and the mix and everything is perfect and all the stars are aligned, then what kind of an EBITDA margin would you expect to get from that mill?

We have not been specific on the EBITDA. What we have said when we announced this that in those days we did not have the specific target for each division.

What we have said is over time when we ramped up the machines and we get the real mix because still most of what we deliver out of Beihai is actually SPD and we have been training the personnel on that. And then when we get into the desired mix which is liquid, CUK, as well as Food Service Board, that should be around the level of 13% which was the total for the total group.

That's what we have said. And if you do that and you know that what we have invested and you know the depreciation, you can go backwards and see what this targeted EBITDA is.

And just to remind us the total mass event it's about 1 billion, right?

The products, mill products would sell of course 800 million and the plantation's about 200. So, about a billion like you said this could, the figure.

So, it's at least 13% with you know that billion, then.

Right.

Okay, that's clear, thank you. Then just a final question on pulp and the pulp markets.

We have obviously already touched a bit upon this. But the market seems to be extremely strong and I guess one reason is if the recycle import then but then I guess other things also at work there.

What's your take on the market right now, what you see happening there and do you expect the prices to continue to move upwards as many producers have announced further price increases?

So, in general if you look on the demand, we see in obviously softwood Europe: stable, hardwood Europe: stable, fluff Europe: slightly stronger, softwood China: stronger? Yes.

Hardwood China? Significantly stronger and dissolving China?

Stronger. That's how we look upon the demand year-over-year right now.

Then going in its stable and higher prices in going forward based on the announcement. The other thing you have to take into account is that they are closing down capacity in China.

And then if you ask the enduits [ph] and the Valmet's of today, they have seen order books of new projects. That's what the CEO of Valmet just went out the other day and said.

Actually today. So, and if you build a new pulp mill and announce it today, it early as its 2020 or 2021 when they're up and running.

Which means that even if it's a commodity will move in prices over time but I think we will not see the same amount of new capacity coming in to the market as we've seen in the last four years. That's my view upon it.

Seppo here. Also I think you also there but there has been some operational challenges in mean some of the paper mills and that is also having an effect on the market and availability of pulp.

And this has of course a positive impact on that. Pulp.

But then mid pulp what do I say?

Paper.

Yes, you meant pulp, yes, okay, good. Okay, that's all for me, thanks a lot.

Thank you.

Thank you, very much and good day to everyone. Would like to follow-up on consumer board and if we exclude Beihai for a moment, it looks as if you've had year-on-year decline in your earnings in the remaining part of that business the past three quarters.

Could you talk a bit about what's behind that, please?

Hi, Seppo here. I think it's somewhat like I revert earlier but there are some inflation of course in certain like wood costs typical, some energy sector related cost.

So, other than that we got a stable run operations. And as you know the price, price is typically are fixed a bit for longer term, so before we get fully compensated for the increase.

Input cost, it takes a bit time. No drama, it's such otherwise in the business.

So, it's actually 10 million down year-over-year when it comes to it, and it's basically all coming from the increased input of variable costs and it will take time for us to work that too because of the fixed on the long term contract time of type of arrangement we're having. But it's obviously also that we're addressing port of that in a profit improvement program where we have now got 30% in them.

This was one of the reason why we launched it in the early part of this year.

Right. And because it's an increasing year-on-year decline also apart from being a decline over the past three quarters.

And what should we expect for the fourth quarter. Is that will it get even worse in such a year-on-year comparison before it gets better or what's the situation in your mainly European business, I guess?

Like Karl has said, as we are now moving forward with the profit improvement program and expect that to kick in and have the effect on the operations. We think that will of course help that to fight against the cost inflation.

But as you know we don’t give a specific guidance for different divisions in the guidance for the whole group and all this is included in the guidance that we have given.

But let's talk about the groups and on the fixed costs that you touched upon earlier, you have a target to get to below 20% in relation to sales. Is there a timeline on that target and how will this materialize going forward?

So, if you look upon those target that Seppo went through, these were first time published at the Capital Markets in May 2015. We have always said that they are realistic but challenging.

And now we have reached basically green or yellow of all except two. Even the one of them has been yes green when it comes to paper cash generation we had over 10% in the last quarter.

But this one is something that we need to work over a longer period. And I'm quite surprised if I reflect that to the basically coming after the first quarter 2015 where we are today and but I believe that is an achievable target, it's going to take some time and we need to strive towards that when we got the sales coming up.

And is this a general, I mean, this gap between the reality and your target, is that the general situation across all your business areas or is it in particularly one or two business areas?

Very. Of course, the target that’s such diverse from division to division because some divisions are in growth mode and there is versus more expenditure when it comes to R&D work, which is of course usually that's an investment for future.

And then if some other business is where we are of course have to be more cost conscious because of the declining volumes, I can say. But they are of course the targeted lever and lever that they are is different compared to both this buyer materials where we are clearly putting money into R&D work.

And that is also what Karl was referring to. That when you look at this long term target, you need to keep in mind that there are two ways to do it.

You got of course need to be cautious on cost and continue to improve your cost structures and then you need to build growth. And the other can both of them as you can see from the strategic targets that are clean already.

So, we are creating the growth and we are getting the growth going forward. And that way to investments that we are making to higher fixed cost and R&D points, that's going to pay off and improve the ratios going forward.

I know the time we can then reallocate the R&D expenditure for instance and that way also to work on it.

It's not impossible, it's challenging. Right now, it seems like it's the most challenging but if you would have asked me in 2015, I probably would have said some other goals were challenging.

So, we are working on it.

Great. Thank you, very much.

Okay. Thanks and good afternoon.

I have two questions, one additional question regarding Beihai. After your second quarter results in this conference call, you mentioned that what comes to liquid packaging board production that you had three customers and couple of customers at the test phase.

Then what kind of development you had regarding customer phase during the third quarter. And the second question is related to currencies.

That what kind of a currency hedges you have at the moment in place and mainly regarding the U.S. dollar whether you made some changes during the third quarter and what should we expect from the currency effects when going forward if we stay on the current level.

Thank you very much.

So, at this moment we have three qualified liquid packaging customers and we are ramping them up. And if you look around if you have three you basically have most of them, if not that many.

During the period, we have also qualified other customers on CUK and also on neutral cost but they are not as big as this one. So, it's progressing and I will still tell you that a qualification of three liquid board converters in about a year, it's a world record.

With that I hand over to the currency.

Yes, thanks. On the currencies, the biggest currency is first of all for us U.S.

dollars, Swedish krona and British pound. They are 10% strength in of each.

In the case of dollar mix, and it's a $15 million, Swedish krona SEK89 million, and British pound EUR31 million. And our policy when comes to hedging is on rough terms that we are about 60% hedged when it comes to coming 12 months cash per all.

We of course move a bit around plus minus 50 depending a bit on the volume developments and the view on the market. But in the case of dollar, we are not being changing the hedge ratio as such forward.

If then if look at the FX for the quarter, for the quarter on the group level the FX was about EUR20 million negative. But may think about the hedging, you also need to keep in mind that it's a dynamic market, so it's not black-and-white.

And it's basically now since summer U.S. dollar has been moving to wrong direction but on towards the headwinds it's fair to say that partly the increase is of the pulp prices have been driven by the fact that the dollar has been getting weak.

So, it has been compensating also for the currency development and actually more than compensated. So, the recent drivers and dynamics like we always said that some place even if you get positive from the currencies, then on part the pricing dynamics is working part of what direct sum and other way around.

It's not of course one-to-one the correlation but there is some correlation of that.

Okay, thank you very much. Very clear, thank you.

Hi, good afternoon. It's just on your strategic target, you speak rather strength of the balance sheet and leverages now down to 1.8 times.

And it's three times net leverage that look like above or is there is something you might like to revive?

So, it's an old target and it's not long ago if you take into history of Stora Enso that we were above three. I feel very comfortable around two and obviously that's an area for discussion.

Okay. And that was useful, thank you.

Thank you.

Okay. Thank you everybody and I want to say good bye on my behalf and then I will hand it over for the final words from Karl.

Please go ahead.

No. Thank you very much for sharing your time with us.

We feel that we had a solid performance, stage growth, profitability growth and taking a step change in our transformation. So, thank you very much.

Thank you.