Good day, and welcome to the Q4 2017 Stora Enso earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ulla Paajanen-Sainio, Head of Investor Relations. Please go ahead, madam.
Thank you. Good afternoon to everyone, and welcome to our Q4 and full year 2017 earnings call. I will hand over this call first to Kalle, our CEO, and then our CFO, Seppo. After that, we will have a Q&A session. Kalle, please go ahead.
Thank you, and good afternoon or good morning, depending on where you are in the world. We released today our Q4 and full year results, and I would like to start with saying that the headline is all about accelerated profitability. Sales came in 3% better than the same period last year, but excluding Paper, it is actually up 6.2%, and that is for the fourth consecutive quarter in a row. For the whole year of 2017, 7% of our products and services are new. That means they did not exist three years ago. That is almost a doubling compared to the same numbers in 2016. That means that our focus on innovation is actually paying off. Operational EBIT at EUR 280 million, that is up 47%. And we reached actually an EBIT margin of just above 11%.
Cash flow is strong, operational return on capital employed over 13% for the second consecutive quarter, and we continued with a strong cash generation and consolidated our balance sheet to net debt to last 12 months of EBITDA is 1.4 times. And the profit improvement program is going ahead and delivering a support to the earnings expansion. The other part is that we also proposed an increased dividend from the board to the AGM for the third consecutive year. And for me, this is a vote of confidence by the board in our strength as well as our transformation journey. We will propose from the board EUR 0.41 or 11% increase versus the EUR 0.37 that we paid out last year. And that is a very important part. I always have this slide, and that is basically demonstrating the strengths of our transformation.
As you can see, going from the 7.8% of operating or EBIT margin a year ago to slightly more than 11% this year is explained by, to a great extent, to Beihai, which is driving EUR 29 million, and I will come back to that later on. You got EUR 39 million coming from Packaging Solutions, of which a great part, almost half of it is coming from Varkaus. Then you have basically two equal parts, which is coming from China Packaging, as well as strong pricing development in our board mills and our board products in Europe. When it comes to Biomaterials, they are up 21%, and here we came in a little bit short from any expectations, and there are three reasons for that. We had two annual shutdowns in Veitsiluoto and Skutskär, explaining part of that. The third one was that we had some startup problems in Skutskär.
The last one is that we had some external contracts that we entered in early 2017, with long-term pricing that is now terminated, but that meant that we missed an opportunity in the second half of 2017. Wood Products up EUR 8 million, driven very much around the expansion in Murów and the ramp-up of Murów, as well as in a number of small. Paper down EUR 18 million, basically explained by Veitsiluoto and lower volumes. Then you got EUR 8 million from others, and that is basically coming all from the forest associates Bergvik and Tornator. 2017 was a busy year, and we have been working a lot with ramp-up on new products, and that is being explained in the improvement of the financial performance. We had made a letter of intent aiming at the structural change in Bergvik Skog.
We have done a number of investments and divestment and closures. Kvarnsveden, 100,000 tons of SC. We have sold off Puumerkki. We have sold off Bulleh Shah. Then on the CapEx of around EUR 350 million, which is not the maintenance CapEx, we are focused quite a lot on driving improvements in the product portfolio or enhancing capabilities in our growth areas. I'm very proud to announce that Beihai reached breakeven, and in the fourth quarter as we promised, and that is excluding any insurance compensation. The ramp-up continues ahead of plan, and the Consumer Board machine reached actually in the fourth quarter design capacity. This is a project that took 18 months to build, and that was on budget and on time. We have probably done the fastest qualification on liquid packaging ever made.
Now we've been able to reach design capacity of the board machine in the fourth quarter, including an EBITDA clean breakeven. Now on, the Beihai mill will not be separately disclosed. The reason for that is now we are going in in the global product portfolio Consumer Board, and you will be able to follow it from there. I think with the achievements with our mill in China, I think everybody can conclude that it's been very successful. Before handing over to Seppo, I would like to say that the transformation journey continues, and now in the fourth quarter of 2017, 71% of the sales, it's 84% of the profit comes from the growth area. I think you can see that the strength of the transformation is very visible in this report. The floor is yours, Seppo. Please continue.
Thank you, Kalle. I start with the financials that I think nicely summarizes actually the profitable growth that we demonstrate with the report today, as Kalle mentioned. First of all, looking at the top line and sales growth. For the quarter, sales up 3%, and like Kalle mentioned, this is now fourth quarter in a row. That then comes down to 2.5% top-line growth for the full year, reaching slightly over EUR 10 billion when it comes to sales line. Operational EBIT at EUR 280 million for the quarter, up 47% year-on-year, and full year operational EBIT also clearly better than a year for reaching EUR 1 billion. Operational EBIT margin for the quarter, 11.2%, and also for the full year, we are double-digit operational EBIT margin 10%. Earnings per share, EUR 0.22 for the quarter.
That is up from EUR 0.12 a share a year ago for the fourth quarter, and full year earnings per share, EUR 0.79, up from EUR 0.59 a year ago. Operational return on capital, 13.5%. This is, again, second quarter in a row with return on capital above the targeted 13% level. Excluding Beihai operations, fourth quarter return on capital employed was 15.7% and 14.3% for full year. Cash flow from operations also continues to be strong. For the quarter, EUR 519 million, up almost 13%. Full year, EUR 1.5 billion, slightly below 2016 figure. That's because the reduction of working capital is now less than in the past. There you should remember that we have brought down our working capital significantly over the last four years. Of course, the lower it gets, the more hard it is to reduce. We are very happy with the level.
We are now below 11% of turnover, which starts to be our targeted level. We believe that there is still more that we can squeeze out from the working capital going forward further. Also net debt last 12 months operational EBITDA came significantly down from 1.9 a year ago to 1.4 at the end of this year. Moving to Consumer Board and our divisions, there, like Kalle already highlighted, we are proud to confirm that Beihai mill reached operational EBITDA breakeven as promised. Sales were up 10%, thanks to improved volume, sales prices, and mix in Beihai. Operational EBIT improved 82% to EUR 69 million, and return on capital, excluding Beihai operations, was 32%. Also there, improvement of over one percentage point. Beihai ramp-up continues ahead of the plan.
We also announced some new investments during the quarter, CTMP investment at Imatra mill in Finland in October, and also completed some of the previously announced investment projects by PE coating plant in Beihai and Imatra, also chemical plant at Skoghall mill in Sweden, and MFC investments at Imatra and Fors mills. Moving to Packaging Solutions, where again, we saw record sales and profitability. Sales up 18% to all-time high Q4. Operational EBIT also record high at EUR 58 million. That is coming from higher sales prices, especially containerboard, good sales mix management, and operational improvements in China packaging. Also, I want to highlight good performance in Ostrołęka in Poland, as well as kraftliner business in Varkaus, where we have now also reached profitability target or level that exceeds what we originally set as a target for the investment.
This just confirms the success of the conversion we made at Varkaus, and we are extremely happy with the performance there. Return on capital, 26.9%, also excellent improvement compared to a year ago when it was 8.8%. Moving to Biomaterials. The favorable pulp pricing environment has continued. Sales up 4%, and operational EBIT 53%, reaching EUR 61 million. There, the profitability was affected, like Kalle mentioned, by higher maintenance costs because of the scheduling of the maintenance works compared to a year ago, and external contracts affecting the pricing or prices for the contracts. We had also some issues with the startups after the maintenance work's done, affecting the profitability. Investments in Xylose demo plant in Raisio is moving ahead, and we are coming to commissioning phase now and expect to have first commercial deliveries now during the year that has started.
We also announced a new investment, EUR 52 million at Enocell mill to increase dissolving pulp capacity there. This is the second step when we are converting Enocell mill to dissolving pulp, and this was announced in October. This is also fully in line with the strategy we have announced for Biomaterials, where we concentrate at our Nordic pulp mills on specialty pulps. That is the same case for Skutskär mill, where we are now proceeding ahead full speed with fluff pulp investment project and expect that project to be complete in the second quarter of this year. Moving to Wood Products. There also again, we had highest ever Q4 operational EBIT. Sales increased 6%, excluding divested Puumerkki and the Baltic wood supply operations that we transferred to segment Other earlier in 2017.
Sales increases reflecting growth from strategic investment at Murów in Poland, Varkaus LVL, and Ala pellet mill. Like I said, this was highest ever fourth quarter operational EBIT. That is thanks to improved net mill prices, increased sale of value-added business, one important strategic decision that we have taken and that we are moving and implementing fully for the business. Ramp-up of the LVL production at Varkaus mill continues, and we expect to reach full production in mid-2018. Also, CLT investment in Gruvön, Sweden is proceeding as planned, and there we are scheduled to begin production during the first quarter 2019, so more or less a year from now. Paper, we are happy to confirm that they are back on track.
They had a small hiccup in Q3, as you might remember. Already then we thought that we are confident that they are coming back, and that is the case now. Cash flow of investing activities to sales ratio was 6.3%, only slightly short of the targeted 7% level. Sales and operational EBIT decreased somewhat. That's mainly because of the incident at the Veitsiluoto mill PM2 during the second half of the year. A couple words about the Nordic wood supply situation that has been sort of a hot topic before New Year and after because of the mild winter weather conditions in the Nordics. There are some possible limitations of Russian birch plywood exports that may cause disturbance also to pulpwood exports.
We are very happy and pleased with our wood sourcing organization in Finland and Sweden that has been doing excellent work here and actively managed challenging harvesting conditions and enabled stable wood inventories at the end of the year. That they ensured undisturbed wood supply to our mills. There's, of course, some financial impact of this, but there's no drama. We expect the financial impact to be only marginal, but that means single EUR millions, so nothing big. To end my part about the strategic targets. There, like the title says, steady progress continues in the right direction. As you see, a lot of the targets are green or yellow. Actually, there are still some red spots that we need to work on to be fully happy and satisfied when it comes to the strategic targets. We are happy about the growth.
We are growing faster than the market, and I don't think there's many businesses that can demonstrate growth of 6% through the quarter or 8.5% for the full year. Our debt metrics are moving the right direction. Balance sheet is getting stronger. Operational return on capital employed, like mentioned, for the quarter was above the targeted 13% level and 11.9% for the full year figures. We still need to work and keep an eye, of course, on fixed cost to sales, where we are at 35% level, but we are confident that the target of 20% is fully reachable and realistic. Means that we need to keep our eye on the cost structures, also continue to work on our internal processes, and to ensure internal efficiencies and knock out costs from the system. Of course, to grow the top line. Look at the divisions.
There we start to see green and yellow. Consumer Board, including Beihai, at excellent level for the full year at 36%. Packaging Solutions, like I commented earlier, excellent performance and improvement versus a year ago. Q4, clearly above the targeted 20% level at 26.9%, and full year figure more or less at the targeted 20% level. We have Biomaterials at 10%, so below the 15% targeted level, but like mentioned earlier, there were issues with the operational start-up after the maintenance works, these external contracts that are affecting average price for the quarter, and the maintenance schedule changes. There also we believe that we are sort of coming back on track going forward. Wood Products, where we increased the strategic target to 20% in November from 18% that it was earlier. There also for the full year figure, they are 20.5%, so already reaching the revised target.
Again, a proof point that they are at the new level when it comes to profitability of the business. Paper, where the target is 7% cash flow after investing activities through the quarter 6.3%, and for the full year, 5.5%. Strong good cash flow generation continues and almost at the targeted level. With that, I hand over to you, Kalle.
Thank you very much, Seppo. I will now go through the guidance. Sales for the first quarter of 2018 are estimated to be similar to or slightly higher than the amount of EUR 2,511,000,000 recorded in the fourth quarter of 2017. Operational EBIT is expected to be somewhat higher than the EUR 280 million recorded in the fourth quarter of 2017. We have no major scheduled annual maintenance shutdown in the first quarter of 2018. Just before we go into the Q&A session, I would like to sum up this. Sales growth four consecutive quarters in a row, which makes us very pleased. 7% of what we sold in 2017 did not exist three years ago. We classify that in accordance with many industries as new products and services.
The project of strategic importance, the product mix, and the favorable prices that we have lived with for a while now drive profitable growth. Sales growth, as I said, in the fourth quarter, 3% for the totality, excluding Paper, 6.2%. 13.5% in return on capital employed, second quarter in a row of above the target, the level for 13%. Solid cash flow generation, strengthened balance sheets. We proposed a higher dividend to the AGM. We are continuing to move from asset transformation to innovation and sales transformation. With that, I would like to open up for the Q&A session. Ulla.
Thank you, Kalle. We go now for the Q&A.
Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please press star one on your telephone keypad. Please ensure that the mute function on your phone is switched off to allow your signal to reach our equipment. If you wish to cancel your request, please press star two. Again, please press star one to ask a question. Our first question comes from the line of Mikael Jåfs of Kepler Cheuvreux. Please go ahead.
Yes, hello. Good afternoon, everybody. I have two questions. The first one is about your growth CapEx. You are indicating EUR 350 for this year. My question is really how should we think about this in a midterm perspective? Do you have a long pipeline of similar projects as you describe on one of your slide, or should we expect this to gradually decline? That is the first question. The second question is around paper pricing. We have read in RISI that for some paper grades, there is quite substantial paper price increases already seen in January. Could you give us a comment on how you see that situation? Thank you.
Okay. If I take first your capital expenditure question, Kalle can take the paper pricing. First of all, if you look at our CapEx guidance, it is EUR 550 million-EUR 600 million. Typically, our maintenance CapEx is around EUR 200 million-EUR 250 million. Forestry CapEx is about EUR 100 million that is needed for the replanting of the plantations. The rest, EUR 350 million can be used for development projects and growth projects. This starts to be now in line with the guidance we gave, I think, two or three years ago, saying that we are bringing down our capital expenditures to be at par with the depreciation. We are there now. At the moment we believe and we can also see that this is a sustainable level going forward.
Of course, it is natural that there can be years they slightly up or down, but I think this is pretty good level.
Just to give you a little bit more flavor on that, Mikael. We have the requirement for a return. We are having basically three divisions with 20%. That is very simple to understand. We invest and we have a lot of possibility. That gives a very good way for the organization to start to pick and choose, because we believe that this is sustainable. You have Pulp, which is lower, in basically in Paper, it is all around cash generation. Also making sure that we keep the boilers up to date to not take any risks. That is the way, I can tell you, it is a lot of project that we have to go through. When we think about paper prices and we see movements, for example, in many grades that is on the right direction.
I would like to say that we see that it's slightly higher prices coming up. I'm not sure. I believe it's the level of what you read in RISI, that's one, but it's going in the right direction.
Okay, many thanks.
Thank you.
Our next question comes from Linus Larsson of SEB Enskilda. Please go ahead. Your line is open.
Yes, thank you very much. My first question is in relation to the changes now happening at Bergvik. I wonder if you could share some of your strategic thinking around backward integration and forest land. What should we expect you to do for the long term when it comes to your Swedish forest land holdings? Thank you.
In November last year, we signed a letter of intent, that is to do a new structure out of the old Bergvik. Basically, it was Bergvik Väst and Bergvik Öst. Bergvik Öst they had a sole supply ship to one of our biggest competitor in certain areas. Bergvik Väst had a sole supply ship to Stora Enso. With that, it was a link with a long-term wood supply agreement that expires at the end of 2018. In the bioeconomy, I think it's very important to make sure you have control of your raw material, especially for the mills, the Swedish mill, excluding Beetham, which has a different way they are supplied by. This is crucial.
That's the reason why we decided to split Bergvik up in this letter of intent that we are now working on, the progress is good, and it's going to take some time to get to the final execution. That's the reason. In simple words is, if you believe in the bioeconomy, you need to make sure you have wood supply.
Excellent. In other words, your intention is to also maintain full ownership of your part coming out of Bergvik?
Absolutely.
Excellent. Could you also tell us about the timeline for the process? When do you expect the Bergvik situation to be resolved?
I would say the following. I think we will start to comment that in Q1, but I think things will start to happen in Q2, Q3. This is the plan right now, I tell you, it's not easy negotiations, it's many parties involved.
That's clear. One more question, if I may. It appears that the Varkaus conversion has been very successful, obviously you've had support from good markets as well. What scope is there in the group of further similar projects going forward? Could you tell us a bit about your work on that side, please?
We are looking, obviously we have, but I will not share that with you. One thing of having an infrastructure and small and medium sized pulp mills makes things quite attractive. I just want to remind everybody, we built that mill for one fifth of the value of building at greenfield. I know how many of you were critical when we did it. Obviously this is a good lesson for us for the future.
Very interesting. Thank you very much.
Thank you.
Our next question from Robin Santavirta of Carnegie. Please go ahead.
Yes, hello, thank you. I was wondering if you could comment about Beihai and especially the board machine there. What is the sales mix at the moment? It appears that you are producing at capacity, but only generating EBITDA breakeven. What are you selling at the moment? What is the production target for this year? I would be happy if you could share some light on the mix as well, how will that progress during this year?
In the slide on page 17, you can see that the majority until the end of the year has basically been grade 2 and waste, training people. The second biggest has been folding boxboard, not the highest quality folding boxboard, but folding boxboard. The smallest part have been liquid packaging. We have delivered liquid packaging. I think it's a huge improvement
In a very short period to reach the design capacity in such a short period. The other thing is, if you look at that graph, you see the mix. We are phasing out grade 2, we are increasing over time to liquid. That's basically international prices on that one. That's the journey. That's why I feel very comfortable. I understand also that we had a target in Q1, we moved that- Yes, that's right to Q4 and did deliver as promised. You tell me anyone who's done this faster and better than us.
No, I understand that. I was just wondering, the proportion of grade 2 appears to be quite high. Is that it cannot be due to the properties of the machine, it must be due to the market. From what I understand, the market is extremely tight in terms of virgin fiber carton board in China and in Asia overall at the moment.
Yeah.
Why aren't you producing more folding boxboard than-
Obviously we are watching what's happening.
Is it simply because of the market?
Let me tell you. Obviously, the wrap up with the liquid, we are doing as fast as we can and making sure that they are ready to take it at once, because they need it in China. There are certain criteria in how fast you can ramp up with the big converters. When it comes to folding boxboard, we are going as fast as we can. The new Chinese legislation will come into force the first of March this year. Depending on how hard they will do it, we will see really what's happening to other grades that is based on recycle. If they are as hard as the legislation is, and they will implement it as hard as they have said, then it will be a lot more folding boxboard prime grade in Beihai.
We don't know that yet. We also know that some of the big companies in China has already ordered, OCC and recycled paper based on the old purity of 1.5% impurity. We don't know. Obviously it is to make high quality folding boxboard and ramping up the liquid as fast as we can. Also you have to remember that when it comes to second grade, it's part of the ramp-up process. It changes, yes you have second grade qualities in your mix. As you see that over time, it will disappear.
I understand. Thank you. One more, if I may, on costs. Could you comment a little bit about the input cost outlook for this year, perhaps especially in terms of wood procurement costs? What are you seeing? What do you expect for this year, and what do you expect overall for the cost inflation in 2018?
Yeah, I think we don't see a big difference compared to 2017 in the big picture. I think cost inflation pressures as such are relatively small. There are somewhat more pressures on the wood prices, but no drama there, and oil chemical prices. I would say overall, the picture is quite good. Also, I think positive is that we have been also able to increase our selling prices, compensating for the higher input prices. It's well under control and manageable. It's not the main topic in the business at the moment.
Okay, thank you. Just a short one finally on, could you comment on the cost impact of the problems you had in Montes del Plata and Skoghall in Q4? Are those mills now up and running well, or is there still some tails of those problems going into 2018?
No, they are now out of it, and they are going ahead. They are working quite well. I think in monetary terms, we don't typically comment on this, but we are talking about some single millions. Yes.
Okay. Thank you very much.
Thank you. Our next question comes from Mikael Doepel of Handelsbanken. Please go ahead.
Thank you. First, a couple of follow-up questions. Firstly, on Bergvik. You gave the expected impact on your debt and cash outflows if and when you do that deal. Could you shed some light on what kind of an earnings impact do you expect that deal to bring to your numbers if it materializes?
I don't really can disclose that. I think the debt matrix and the balance sheet impacts this. Obviously by eliminating a counterpart in between, we will get gains. Then I would say that we expect then to be able to take that down in the cost, the integrated cost of
Of the total flow insights to Stora Enso. Obviously, avoiding any risk of price increases if there was somebody else owning this property, because it's a huge part of our wood supply for all the mills, Gruvön, Skoghall, Kvarnsveden, Fors, Skutskär and Ala. We believe that the forest in that part of Sweden is probably the most productive, and really good, with a growth of 3%-4% per year.
Okay. Thank you. Coming back to Beihai , as you said, it's been good progress on the ramp-up and volumes are coming up quite nicely, and you reach EBIT break even in the quarter. I understand that you are not giving the exact numbers anymore, but perhaps you could shed some light on when you expect to reach EBIT break even on that project.
I don't think you have to be Einstein to see the trajectory. If you use a little bit imagination based on the EBIT break even Q4, and take the graph on page seven, you'll come to that pretty fast. We have decided not. Now, this is part of the global product offering for consumer board, we will focus on that. We don't disclose Skoghall, Imatra, Fors, and Ingerois. That's the way we have decided.
I think it was that sort of in the ramp-up phase, we wanted to help you to understand the negative effect on our results, now it's more the business as usual.
Yeah
like Kalle mentioned, part of the total portfolio.
Yes
of consumer portfolio.
Also, given the complexity of a startup of a liquid board machine. We know that from the history of Stora Enso, that has been complicated.
Okay. Just a couple of short questions then. First of all, on Q1, there are no bigger maintenance shutdowns in the quarter, but could you tell us what's the delta in terms of maintenance Q1 compared to Q4?
It's between quarter-on-quarter. There will be EUR 50 million-EUR 60 million less maintenance in quarter one. The impact.
Compared to quarter four last year?
Yes. Why do I say 50-60 and not an exact figure? It is a bit of a movement, especially on the impact side. If we keep the machines down at a certain level when they do the short maintenance breaks.
Okay. That's clear. Thank you. A final question on pricing. You gave some comments on paper pricing, what do you see in terms of packaging prices going forward now? Also, what's your take on the pulp price?
I can give you it, and I will tell you. Consumer Board Europe, prices are slightly higher. Consumer Board China, stable. Here is what's happening with the recycled paper, which is a joker, kraftliner, stable. RCT containerboard, slightly lower. Corrugated packaging, stable. Softwood Europe, higher. That's the pulp. I'm into the pulp now. He asked for the pulp as well. Hardwood European pulp, higher. Fluff Europe, slightly higher. Softwood China pulp, slightly higher. Hardwood China, stable. Dissolving China pulp, slightly lower.
Okay. That's clear. Thank you very much.
Thank you.
Thank you. Our next question comes from Harri Taittonen of Nordea. Please go ahead.
Good afternoon. How big sort of a disturbance is to expect from the pending conversions of the power plants at Skutskär and Enocell? Will that incur any sort of particular costs in mid this year or later, on top of the usual maintenance?
We try to include what we know in estimates that we give. Whatever it's included when we know it. If it comes additional, we probably have to give it in the comments like we did right now.
Yes
Conversions are a bit sensitive, especially you go from one grade to another and you have a stop, et cetera. You can have startup problems. When we know it, we include it in the guidance, and if we have extra, we tell you.
I mean, if things go as we assume, it shouldn't be material.
No.
Yes. Okay. You gave quite a good summary of the price expectations just in the previous comment. If you look at the Consumer Board division and if we see that the European prices are up a little bit, then you are sort of improving the price mix in China, in an otherwise stable environment. What would be the best guess for the business area average pricing?
Just to be very clear, when I say Consumer Board, it's actually the FBB grades in Consumer Board. It's not the Liquid.
Exactly.
The Liquid have long-term-
Exactly
They have long-term, yes. You have to be clear.
Exactly. Yes, that's what I was partly after, that you have a big part of the business in that business. Basically, what sort of average price increase could we be looking at, including the sort of the Brahe price mix and the FBB liquid packaging board mix? I mean, is there any?
I say-
Any sort of range that you could give me?
You ain't getting it enough to understand what I say.
Well, I hope so. Thank you. Okay, the last question, just sort of really double confirming your guidance policy and when you say somewhat better, it means basically 10%-25% improvement roughly compared to the Q4 level, and that's what you-
That is correct.
in numerical ways to say. Yes. Yeah. Okay.
That's correct.
Thank you very much. Thanks.
Thank you. We will now move to our next question from Justin Jordan of Jefferies. Please go ahead.
Thank you. Good afternoon, everyone. I'm switching divisions. I just wanted to talk about Packaging Solutions for a second, I just want to just clarify something in your disclosure. When you talk about board deliveries external, the number of 274,000 tons in Q4, this is your deliveries to external customers, so essentially your market board exposure. This is obviously as distinct from what you use internally to make your own Packaging Solutions. Am I correct?
Correct.
I just wanted to ask the question in view of taking a view on future containerboard.
You're talking about the con-
Sensitivity
containerboard external deliveries, 1,000 tons. That's the question. 274,000 tons.
Yes, exactly. I just want to clarify that the 274 number that you're quoting for Q4 2017-
Yes
that is the number I should be using or just north of 1 million for the year of calendar 2017. That's the number that we should be using in terms of trying to think about sensitivity to changes in, let's say, benchmark kraftliner or testliner prices in Europe in 2018?
Sure.
the sensitivity to the-
Absolutely right. We are long in board in Packaging Solutions, and that is how long we are in board. We are not using everything internally. We are selling mostly outside. You're absolutely correct. In there is Heinola, Varkaus, Ostrołęka. It is RCP board, it's kraftliner, and it's fluting, semi-chemical fluting.
Thank you. Obviously, your major kraftliner and testliner producer two days ago talked about achieving some price increases in February, I believe EUR 50 a ton on kraftliner and EUR 40 a ton on testliner. Is that something that you've been targeting similarly, or can you comment on price increases that may be possible in Q1 2018 for these grades?
What I said quarter on quarter is that kraftliner is stable. We believe it's stable. For RCP-
Okay
containerboard, we say slightly lower.
Okay. All right. Okay. I appreciate you've given very detailed guidance on pulp prices and outlook for 2018. Just one very small question, probably really for Seppo. I guess the tax rate for 2017 was slightly lower than I think many of us were expecting. I think longer term you talk about it aspiring or getting to a 20% tax rate, but specifically for an income statement for 2018, what sort of tax rate should we be expecting at a group level?
Well, I think like I said earlier, that longer term we expect to be, say, around 20%, for modeling purposes, 20% effective tax rate is a good figure.
We were a bit lower in this quarter, if I remember, 17%.
17, 18.
Yes.
Yeah. Okay. All right. Listen, thank you very much.
Okay.
Thank you. We will now move to our next question from Lars Kjellberg of Credit Suisse. Please go ahead.
Thank you. If we could start, coming back to the guidance for the quarter. If I just look at the maintenance cost, you call that a step change, that's about 20%, slightly higher pulp prices, better paper prices, better mix at Beihai, not much cost inflation. Then I would assume a negative FX, why don't we see a bigger pickup given all the other positive components when you basically have all of it in maintenance cost? What are the offsets?
You mean around the Q1 versus Q4?
Correct.
We think it's quite a good-
Yeah.
quarter guidance.
Yes.
Can you elaborate a bit more?
Why do you say that?
You just called out maintenance would be lower to the tune of EUR 50 million-EUR 60 million. That alone would lift numbers 20%, broadly speaking. You have positive price mix, Beihai, better pulp prices, some Paper prices, not much cost inflation, and you call that not much impact from harvest issues in the Nordics. How do we not come to a appreciably higher number than 10%-25% higher EBIT sequentially? What are the offsets?
We have slightly lower on RCP containerboard.
This is also true, like it's a big machine.
We have slightly lower on dissolving China, which is most of our dissolving. We are having salary increases coming, which is part of the normal.
Sure.
When we do the numbers, we feel that it fits quite well with our guidance.
Right. In terms of FX, how should we view that on a sequential basis? I think you called that EUR 23 million in Q4. Is that a more material headwind in the first quarter?
As you know, our policy is to hedge 50% of the coming 12 months cash flow. As you know, USD has been recently moving somewhat against us, if you look at the business. It is slightly more negative, but no drama there either. We are talking about relatively small differences between the two quarters.
Right. Okay. Just want to come back to Bergvik as well. I appreciate what you're saying, the bioeconomy, et cetera. Would you then consider to increase your ownership of trees or-- Because you obviously also called out that owning this land mass will depress, I think you said your return on capital by about 100 basis points. I guess that you weighed all the pros and cons, but to lower returns by 100 basis points is pretty sizable. Why could you not make a long-term agreement again within the framework of Bergvik, as you must be doing in Tornator, for example, and that wood catchment or wood supply agreement, as opposed to-
So-
-adding it to your balances
the discussions, obviously, that was one option.
Yes.
To just extend it for another 15 years. That option was not viable.
Okay.
Not because we didn't want.
Right.
Also, if you think about the bioeconomy and strategic importance of forest assets and biomass, it's also I think a different view that we have as a company on value and importance strategically when it comes to forest assets than we had for instance at the time that Bergvik Skog was set up.
Understood. The question is, would you be
Can-
Go ahead.
I still remember your last questions, go ahead, please.
No, the question then is, would you be interested in acquiring more forest lands if that was an opportunity?
It very much depending on where it is. We don't have any other place where we actually have so much of the wood supply from one source all around our mills, like in this part, the Bergvik Skog. It's a bit of a unique situation, as you're right, it's 1% on the return on capital employed, and it's 0.6 in net debt to EBITDA. If I remember right, we have a very well working relationship with Tornator, but that's only 10% of our wood supply in Finland. While the wood supply from Bergvik is much, much higher, especially if you only look upon the mills, as I mentioned, Gruvön, Skoghall, Kvarnsveden, Fors, Skutskär, and Ala. It's a bit of a unique situation.
Understand. That would be about 50% of all your Swedish wood nets, if I recall correctly. Is that about right?
No, the only number we've given before is 50% of total Sweden.
No, that's what I'm saying, 50%. Yeah.
Yes, of total. They do not supply to Hylte and to Nymölla because they are getting it elsewhere. That's telling you a bit of importance.
Understood. Just two more questions if I may. Just on Beihai, because it is interesting, and you've done an incredibly good job in ramping it up so quickly. I guess slide seven is slightly misrepresentative when it comes to the production levels, because you're already at close to 400,000 tons. Should we look at the sort of split between the different grades, that that would still be appropriate if we ran the same chart, but calling it 400,000 tons. Is that the way we should view it? Also, if you could just shed some light, because you are operating in China, of course, on the Chinese situation. What we can read from the outside is that December and January seems to been very weak when it comes to board production.
A lot of board mills taken downtime, which may be a seasonal impact, of course, ahead of the Chinese Lunar New Year. Are you sensing, seeing anything of this in your December and January demands? If so, do you see a pent-up demand post the China Lunar New Year? If you can shed any light on that'd be helpful.
Yeah. I would like to say the run rate was that we passed the 450. That's why you see the steepness of the curve. Coming back to China, the situation in China is the following. It's very unknown what's happening. When they stopped the import of recycled paper and put a law that it has to have an impurity rate of 0.5 percentage point, that is impossible to get without processing the paper.
Okay. If they are serious, like they say they are, it's going to be very hard. Even in this legislation, they want to close down a lot of the small mills that is under 300,000 tons. We don't know if they're going to go for a soft implementation of this new legislation and admit under a certain period 1.5% impurity, which is the legislation today. We will not really know that until early March, when the new law is in enforcement. If it is going to be according to what they have staked, they've done the same in plastic. They are not taking in recycled plastic into China or scrap metal of certain impurity levels as well.
If they are playing this hard, and it is fairly high up in the new plan, that means that it's going to be very little recycled boards or paper in China. It's going to drive the demand of virgin pulp to a higher extent. That will have an effect on the whole Chinese market. Right now, we don't know. We are following it daily. We do believe that the trend is there, which means that virgin products in China is actually going to have a better future than recycled.
Lars, just to come back on your question on guidance, just to remind that what you need to keep in mind also, it's a winter quarter, so to speak. That means that, for instance, in the forest associates, the harvesting volumes are typically less seasonal, and that has an effect also on the result. Energy costs are, of course, higher during the winter months. That's having an effect in the guidance as well, because of typical seasonality.
That's right. Kalle, I appreciate your sort of long and medium-term response, because that what you talked about. I was more thinking about the near-term sort of demand trends in China and what seems to be very slow demand and a lot of downtime taken also from virgin fiber.
It-
consumer board mills.
Usually, I think it's next week on Thursday, lunar year starts, and that historically in all industries is slowing down, because usually the gifts and the products has been made already during December. It's a historically slowdown in all industries just before, and then it takes a while to start up after the lunar year.
You're not seeing anything strange or awkward in your order books. It's.
No
kind of normal as far as you're concerned.
Yes.
Okay.
Yes.
Very good.
The only thing is that a lot of newsprint is right now going from Europe to China.
Why is that sir?
Because of the recycled paper.
Understood. Very good. Thank you.
Thank you.
We will now take our next question from Antti Koskivuori of Danske Bank. Please go ahead.
Yes, thank you. Maybe two questions from my side. The first being on Consumer Board and deliveries in Q4, when I look the deliveries excluding Beihai, they were up 30,000 tons or so year-over-year in Q4. Is this due to capacity creep at European mills or was there something exceptional in Q4 seasonally in 2017 versus 2016? That would be the first question. The second question, I would like to come back still on FX and maybe you'd be willing to share some thoughts. How do you see the FX impacting you in 2018, if we assume that the spot prices would prevail throughout the year? Thank you.
one of the reason regarding having slightly better output of Europeans, if you exclude, is that we had good production-
both in Skoghall and in Imatra in the month of December, and that's what you note there. that-
it's good operation, I would say. When it comes to the FX, if I know the FX, I probably should have a different job. I will ask Seppo here to help me on this one.
Unfortunately, Kalle, I don't have a crystal ball with me either. last year, full year effect from FX was EUR 50 million negative, sort of net effect-
for the full year.
Q4 was EUR 23 million on group level.
Assuming that the currency rates would stay where they are, and keeping in mind our hedge ratio, 50%, I would say sort of rough there, maybe half of what we had in last year, 2017.
Okay. Very helpful. Thank you.
We will now move to our next question from Alexander Berglund of Bank of America Merrill Lynch.
Thank you. Thank you very much. Sorry, I just wanted to clarify a bit on the containerboard prices. You said on the kraftliner stable and on the recycled side, slightly down. I just found it a bit surprising because some of your peers are saying that they are getting a full hike on kraftliner six EUR per ton in February and almost a full on testliner, and we saw prices going up in the U.K. I just wonder if it is kind of a different market or if it is something specific to kind of Scandinavian exposure.
We only say that this is what we feel that they are stable, and that is what we see. The RCP slightly down is also an effect, what we believe coming from the less export of paper waste to China. That is our assumption for the quarter.
Okay. Thank you very much. Thanks.
We will now take our final question on today's call from Chris Ellis of Barings. Please go ahead.
Hey, good afternoon. I was just curious to hear about your thoughts on your strategic targets from a balance sheet point of view, given the strength of the balance sheet. You've kept your net debt to EBITDA at three times, you're sort of half that now and the outlook for 2018 as Beihai ramps up, looks positive. Just curious to hear whether you think three times is relevant, and if so, does that mean you're looking at acquisitions, et cetera? Thank you.
We will revise that target, that has been discussed with the board. It's an old target, and I think I would like to have a net debt to EBITDA who starts with a one.
Very clear. Thank you.
There are no further questions in the queue. With this, I would like to turn the call back to our speakers for any additional closing remarks.
Okay. Thank you. Thanks on my behalf for everyone for the active questions this time, I will hand this call now over to final words from Karl.
Thank you very much for participating. I would like to just share with you, 2017 was a year where a lot of things happens in the right sequence. From a company perspective, the last time we had a profit over EUR 1 billion was in 2001. I think we're taking huge steps forward, and I believe that the growth is coming. Our innovation strategy is working. We are delivering two quarters in a row, above 13% return on capital employed, we are looking very positively for 2018 and especially the first quarter. Thank you. See you next quarter.
Thank you.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.