Good day, and welcome to the Q4 twenty seventeen Stora Enso Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ulla Payenen Sainio, Head of Investor Relations. Please go ahead, madam.
Thank you. Good afternoon to everyone, and welcome to our Q4 and full year twenty seventeen earnings call. I will hand over this call first to Karl, our CEO and then our CFO, Stefko, and at that we will have a Q and A session. So Karl, please go ahead.
Thank you, and good afternoon or good morning, depending on where you are in the world. So 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's actually up 6.2% and that's for the fourth consecutive quarter in a row. For the whole year of 2017, 7% of our products and services are new.
That means that did not exist three years ago. That is almost a doubling compared to the same numbers in 2016. That means that our focus of innovation is actually paying off. Operational EBIT at $280,000,000 that is up 47% and we reached actually EBIT margin of just above 11%. Cash flow 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 twelve months of EBITDA is 1.4 times.
And the profit improvement program is going ahead and delivering a support to the earnings expansion. So 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. So we will propose from the Board a EUR $0.04 1 or 11% increase versus the EUR $0.03 7 that we paid out last year. And that's a very important part.
I always have this slide and that's 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 greater extent to Beihai, which is driving SEK29 million and I will come back to that later on. You get SEK39 million coming from Packaging Solutions, which a great part, almost half of it is coming from Warkaus. And 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 Verasel and Skuttgart explaining part of that. The third one was that we had some startup problems in Skuttgart. And the last one is that we had some external contracts that we entered in early twenty seventeen with long term pricing that is now terminated, but that meant that we missed an opportunity in the 2017. Wood Products up SEK8 million, driven very much around the expansion in Muro and the ramp up of Muro as well as in a number of small.
Paper, down SEK18 basically explained by Weizuloto and lower volumes and then you got SEK 8,000,000 from others and that is basically coming all from the forest associates, Beridik and Tonator. 2017 was a busy year and we have been working a lot with ramp up of new products and that is being explained in 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 divestments and closures, drawn 300,000 tonnes of SV. We have sold off Puma K, we have sold off Bulleja.
And then of the CapEx of around NOK350 million, we are focused which is not the maintenance CapEx, we are focused quite a lot of driving improvements in the product portfolio or enhancing capabilities in our growth areas. I'm very, 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 eighteen months to build and that was on budget and on time. We have probably done the fastest qualification on liquid board ever made.
And 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 separated disclosed. And 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. But I think with achievements with our mill in China, I think everybody can conclude that it's been very successful. Before handing over to
Sappo, I would like
to say that the transformation journey continues. And now in the 2017, 71% of the profit of the sales, 84% of the profit comes from the growth area. And I think you can see that the strength of the transformation is very visible in this report. The floor is yours, Hefort. Please continue.
Thank you, Karl. And I start with the financials that I think nicely summarizes actually the profitable growth that we demonstrated in the report today, as Karl mentioned. First of all, looking at the top line and sales growth. For the quarter, sales up 3%. And like Karl mentioned, this is our fourth quarter in a row.
And that then comes down to 2.5% top line growth for the full year, so reaching slightly over €10,000,000,000 when it comes to sales line. Operational EBIT at €280,000,000 for the quarter, up 47% year on year. And full year EBIT operational EBIT also clearly better than a year ago reaching EUR 1,000,000,000. Operational EBIT margin for the quarter 11.2% and also for the full year, we had double digit operational EBIT margin 10%. Earnings per share €0.22 for the quarter that is up from €0.12 a share a year ago for the fourth quarter and full year earnings per share €0.79 up from €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 payment operations, fourth quarter return on capital employed was 15.714.3% for full year. Cash flow from operations also continues to be strong. For the quarter, $519,000,000, up almost 13%.
Full year, 1,500,000,000.0, slightly below $20.16 figure. And that's because the reduction of working capital is now less than in the past. And that's there you should remember that we have brought down our working capital significantly over the last four years. And of course, the lower it gets, the less the more hard it is to reduce. But we are very happy with the level.
We are now below 11% of turnover, which starts to be our targeted level, but we believe that there is still more that we can squeeze out from the working capital going further. Also, net debt to last twelve months of operational EBITA came significantly down from 1.9 per year ago to 1.4 at the end of this year. Then moving to Consumer Board and our divisions and thereby Karl already highlighted, we are proud to confirm that Beihai Mill reached operational EBITDA breakeven as promised. Sales were up 10%, thanks to improved volumes, sales prices and mix in Beihai. Operational EBIT improved 82% to €69,000,000 And return on capital excluding Beihai operations was 32%, also there improvement of over one percentage point.
And Beihai ramp up continues ahead of the plan. We also announced some new investments during the quarter, CPMP investment at Imatra Mill in Finland in October and also completed some of the previously announced investment projects like PE coating plant in Beihai and Imatra, also chemical plant at Skogalm in Sweden and MHC investments at Imatra and Forest Mills. Then 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 €58,000,000 That is coming from higher sales prices, especially containerboard, wood sales mix management and operational improvements in China packaging.
Also I want to highlight good performance in Austroleko in Poland as well as kraftliner business in Varicas, where we have now also reached profitability target or level that exceeds what we originally set as a target for the investment. And this has confirmed the success of the conversion we made at Valtas and we are extremely happy with the performance there. Return on capital, 6.9%, also excellent improvement compared to a year ago when it was 8.8%. Then moving to biomaterials, favorable pulp pricing environment has continued. Sales up 4% and operational EBIT 53%, reaching EUR61 million.
Tail to profitability was affected, as Karl mentioned, by higher maintenance costs because of the scheduling of the maintenance works compared to year ago and external contracts affecting the pricing or prices for the contracts. And we had also some issues with the start ups after the maintenance works done affecting the profitability. Investments in CyVos developed plant in Raceland is moving ahead and we are coming to commissioning phase now and expect to have commercial first commercial deliveries now during the year that has started. We also announced a new investment €52,000,000 at Ennocell mill to increase dissolving pulp capacity there. This is the second step where we are converting Ennocell mill to dissolving pulp and this was announced in October.
This also fully in line with the strategy we have announced for biomaterials where we concentrated our Nordic pulp mills on specialty pulps. I think the same case was Skutsar mill where we are now proceeding ahead Wolfspeed with fluff pulp investment project and expect that project to be completed in the second quarter of this year. Then moving to Wood Products, we also again the highest ever Q4 operational EBIT. Sales increased 6% excluding divested Boumedi and Baltic Wood Supply Operations that we transferred to segment Other earlier in 2017. Sales increases reflecting growth from strategic investment at Murrow in Poland, Wildcarts LBM and R.
Bellet mill. Mill. And I said this was highest ever fourth quarter operational EBIT that is thanks to improved net mill prices, increased share 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 Faragaz will continue and we expect to reach full production in mid-twenty eighteen. Also C and T investment in Kruger Sweden is proceeding as planned And there we are scheduled to begin production during the first quarter twenty nineteen, so more or less a year from now.
Then Paper, they also we are happy to confirm that they are back on track. They had a small hiccup in Q3 as you might remember. And already then we thought that we are confident that they are coming back. And that is the case now. Cash flow after investing activities to sales ratio was 6.3%, only slightly short of the targeted 7% level.
But sales and operational EBIT decreased somewhat. That's mainly because of the incident at the Weichtlauter Mill BM2 during the second half of the year. Then a couple of words about the Nordic wood supply situation that has been sort of a hot topic before the year and after because of the mild winter weather conditions in The Nordics. There are some possible limitations of Russian bird's plywood exports that may cause disturbance also to pulpwood exports. But 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.
And that they ensure 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. So that means single million, so nothing big. Then to add my part about the strategic targets.
There, as the title says, steady progress continues in the right direction. And as you see, a lot the targets are green or yellow. Actually, there are still some red ones 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 pieces where it can demonstrate growth of 6% during the quarter or 8.5% for the full year. Also, metrics are moving to right direction. Currency is getting stronger. And operational return on capital employed that I mentioned for the quarter was to pound 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 of sales where we are at 25% level, but we are confident that the target of 20% is fully reasonable 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 knockout costs from the system and of course, to grow the top line. If you look at the divisions, also there we start to see green and yellow. Consumer Board, excluding PayHigh, 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 twenty six point nine percent and full year figure more or less at the targeted 20% level.
The higher materials at 10%, so below the 15% targeted level. But like mentioned earlier, there issues with the operational start up after the maintenance works as well as these external contracts that are affected average price for the quarter. And the maintenance schedule changes. So there also we believe that we are sort of coming back on track going forward. Food products, where we increased the strategic target to 20% in November from 18% that it was earlier.
And 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. And Paper, where the target is 7% cash flow after investing activities during the quarter at 6.3% and for the full year 5.5%. So strong good cash flow generation continues and almost at the targeted level. With that, I hand over to you, Gaurav.
Thank you very much, Stefko. And I will now go through the guidance. So sales for the 2018 are estimated to be similar to or slightly higher than the amount of €2,511,000,000 recorded in the 2017. Operational EBIT is expected to be somewhat higher than the EUR $280,000,000 recorded in the 2017. We have no major scheduled annual maintenance shutdown in the 2018.
And then just before we go into the Q and A session, I would like to summon 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 and excluding paper 6.2%. 13.5% in return on capital employed, second quarter in a row of above the target level for 13%. Solid cash flow generation, strengthened balance sheet. We proposed a higher dividend to the AGM and we are continuing to move from asset transformation to innovation and sales transformation. With that, I would like to open up for the Q and A session.
Ola?
Okay. Thank you, Paolo. Yes, we go now for the Q and A.
Thank you. Our you. First question comes from the line of Mikael Japs of Kepler Cheuvreux. Please go ahead.
Yes, hello. Good afternoon, everybody. I have two questions. The first one is about your growth CapEx. You're indicating SEK $350,000,000 for this year.
Then my question is really how should we think about this in a midterm perspective? Are you sort of do you have a long pipeline of similar projects as you described on one of your slide? Or should we expect this to gradually decline? That's the first question. And then the second question is around paper pricing.
We've read in Rensi and Zyn that for some paper grades, there's 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 and then Karl can take the paper pricing. First of all, if you look at our CapEx side, that is 5 to €600,000,000 typically, our maintenance CapEx is around $20,000,000,250,000,000 euros And forestry CapEx is about €100,000,000 that is needed for the replanting of the plantations. So the rest then €350,000,000 can be used for development projects and growth projects. And 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 expenditure to be at par with the depreciation.
And we are there now. And at the moment, we believe and we can also see that this is a sustainable level going forward. Of course, it's natural that there can be years that's slightly up or down, but I think this is pretty good level.
So yes, to give you a little bit more flavor on that, Mikael. It's and then we have the requirement for return. We are having We are having basically four three divisions with 20%. But if and that's 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.
They have pulp, which is lower and then in basically in paper it's all around cash generation, but also making sure that we keep the boilers up to date to don't take any risks. So that's the way and I can tell you, it's a lot of project that we have to go through and especially set forth. When we think about paper prices and we see movements for example in many grades that is on the right direction. And I would like to say that we see that it's slightly higher prices coming up. I'm not sure it's 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 Pensacola. Please go ahead. Your line is open.
Yes, thank you very much. My first question is in relation to the changes now happening at Baivik. And 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. So in November, we signed a letter of intent and that is to do with a new structure out of the old Bergvik. Basically, it was Bergvik West and Bergvik West. Bergvik West was they had a sole supply ship to our one of our biggest competitor in certain areas.
And Baer Bikvets had the sole supply ship to Stora Enso. With that, it was a link with a long term wood supply agreement that expires at the 2018. And in the bio economy, I think it's very important to make sure you have control of your raw material. And especially for the mills that the Swedish mill excluding Nimmola and Hilte, which has a different way they are supplied by Sudze, this is crucial. So that's the reason why we decided to split Bergvik up in this letter of intent that we are now working on.
And the progress is good and it's going to take some time to get to the final execution, but that's the reason. So in simple words, if you believe in the bioeconomy, you need to make sure you have good supply.
Excellent. So in other words, intention is to also maintain full ownership of your part coming out of Breivik?
Absolutely. Excellent.
And could you also tell us about the time line for the process? When do you expect the Bergvik situation to be resolved?
So I would say the following. I think you will see we will start to comment that in Q1, but I think things will start to happen in Q2, Q3. That is the plan right now. But I tell you, it's not easy negotiations and it's many parties involved.
That's clear. And one more question, if
I
may. It appears that the Varkaus conversion has been very successful and you've had 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?
So we are looking and obviously we have, but I will not share that with you. But one thing of having an infrastructure and small and medium sized pulp mills makes things quite attractive. But I just want to remind everybody, we built that mill for one fifth of the value of building at Greenfield. And I know how many of you were critical when we did it. So obviously, this is a good lesson for us for the future.
Very interesting. Thank you very much.
Thank you. We will now
move to our next question from Robin Santavirta of Carnegie Hall. 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? And what is the production targets for this year? And I would be happy if you could shed some light on the mix as well, sort of how will that progress during this year?
So in the slide on Page seven, you can see that the majority until the end of the year has basically been second grade in waste training people. The second biggest has been folding boxboard, not the highest quality folding boxboard, but folding boxboard. And the smallest part have been liquid packaging, but we have delivered liquid packaging. And 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.
So we are phasing out second grade And then we are increasing over time to liquid. And that's basically international prices on that one. So that's the journey. So that's why I feel very comfortable.
I'll just give a target in Q1 and we move that
Yes, that's right.
Q4 and did deliver strong.
You tell me anyone who has done this faster and better than us.
No, no, no. I understand that. I understand that. I was just wondering the proportion of second grade appears to be quite high. Is that it cannot be due to the properties of the machine.
It must be due to the market. But from what I understand, market is extremely tight in terms of virgin fiber cotton ball in China and in Asia overall at the So why aren't you producing more folding boxboard than
obviously we are watching So let me tell you, obviously we are trying to increase the ramp up with the liquid, we are doing as fast as we can and making sure that they are ready to take it, they want because they need it in China. But 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. And the new Chinese legislation will come into force the March 1 year. So depending on how hard they will do it, we will see really what's happening to other grades that is based on recycle.
Because 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. So we don't know, but obviously it is to make high quality folding boxboard and ramping up the liquid assets we can.
And also you have to remember that when it comes to second grade, it's part of the ramp up process that you have second grade qualities in your mix. As you see that over time, it will disappear.
I understand. Thank you. And then if I one more, if I may, on costs. Could you comment a little bit about the input cost outlook for this year, 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?
Yes. I think we don't see a big difference compared to 2017 in the big picture. I think post inflation pressures as such are relatively small. There are somewhat more pressures on the wood prices, but no drama there and oil chemical prices. But I would say overall, the picture is quite good.
And also, I think positive is that we have been also able to increase our selling prices compensating for the higher input prices. So it's well under control and manageable. It's not the main topic in that business at the moment.
Okay. Thank you. And just a short one finally on could you comment on the cost impact of the problems you had in Monte Sepolta in Q4? And are those mills now up and running well? Or is there still some sales of those problems going into 2018?
No. They are now out of it and they are going ahead. So they are working quite well.
Effective in monetary terms, we did not typically comment on this, but we have talked about some senior millions. Yes.
Okay. Thank you very much.
Thank you. Our next question comes from Mikael Doepel of Handelsbanken. Please go ahead.
Thank you. First, couple of follow-up questions. Firstly, on Beriwik. You gave the expected impact on your debt and cash outflows if and when you do that deal. But 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 that that matrix and the balance sheet impact is, but obviously by eliminating a counterpart in between, we will get gains. But and then I would say that we expect them to be able to take that down in the cost, the integrated cost of the total flow inside Stora Enso. And then 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, Grover, Skogal, Kvaansweden, Forge, Skutklar and Ola. And we believe that the forest in that part of Sweden is probably the most productive and they're good with the growth to three to 4% per year.
Okay. Thank you. Then on 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 reached EBITDA breakeven in the quarter. And 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 breakeven on that project?
I don't think you have to be Einstein to see the trajectory. And if you use a little bit imagination based on the EBIT breakeven Q4 and take the graph on Page seven, you'll come to that very fast. But we have decided not. Now this is part of the global product offering from Consumer Board and we will focus on that. We don't disclose Skogali, Matlalforsch and Ingeniois.
That's the way we have decided.
I think it was that sort of ramp up phase we wanted to help you to understand the negative effect on our But now it's kind
of more the business as usual and by color nature part of total portfolio of And consumer also given the complexity of a startup of a liquid board machine. We know that from the history of Souramso that has been complicated.
Okay. Then just a couple of short questions. Then on first of all, on Q1, there are no maintenance bigger maintenance shutdowns in the quarter. But could you tell us what's the delta in terms of maintenance Q1 compared to Q4?
So it's between so the quarter on quarter, so there will be SEK 50,000,000 to 60,000,000 less maintenance in quarter one, the impact.
Compared to quarter four last year?
Yes. And why do I say SEK 50,000,000 to 60,000,000 not an exact fee? Because 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 rates.
Okay. That's clear. Thank you. And then a final question You gave some comments on paper pricing, but what do you see in terms of packaging prices going forward now?
And also what's your take on the pulp price?
So I can give you it and I will tell you. So Consumer Board Europe prices are slightly higher. Consumer Board China stayed, but here is what's happening with the recycled paper, which is a joker. Craftliner stable, RCT containerboard slightly lower, corrugated packaging stable, Softwood Europe higher. Let's the pulp, I mean to the pulp now.
He wants to pull 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 Harry Taitonen of Nordea. Please go ahead.
Yes, good afternoon. The on the how big sort of disturbances do you expect from the pending conversions of the pipelines at Skorzar and Ennocell, will that sort of incur any sort of particular costs in sort of mid this year or later on top of the usual maintenance?
So we try to include what we know in estimates that we give. But so I it's included whatever it's included when we know it. But if it comes additional, then we probably have to give it in the comments like we did right now. Because conversions are a bit sensitive, especially you go from one grade to another and you have a stop, etcetera. So you can have startup problems.
So when we know it, we include it in the guidance. And if we have extra, we tell you.
But I think if things go as we assume it's sort of getting material. No.
Yes, yes. Okay. You gave quite a good summary of the price expectations just in the previous comment. But if you look at the Consumer Board division and if we see that the European prices are up a little bit and sort of then you are sort of improving the pricemix in China in a stable otherwise stable environment. But what will be the kind of the best guess for the kind of the business I'm
clear here. When I said Consumer Board, it's actually the FB grades in Consumer Board. It's not the liquid. The liquid has long
term they
have long term yes. So you have to be clear.
Exactly. Yes, that's what I was kind of partly after that you have a big part of the business in that business. So basically, what sort of average price increase could we be looking at, including the sort of the Breha price mix and the FBB liquid packaging board mix? I mean, is there any
You are in the of Okay.
Of
last question, I mean, just sort of really double confirming your guidance sort of policy. And when you say somewhat better, mean, that it means basically 10% to 25% improvement roughly compared to the Q4 level. And that's what you aim in Yes. Numerical ways to Yes.
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 and good afternoon everyone. Switching divisions, I just want 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, so a 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.
Is that correct? Just trying to ask the question in view of taking a view on future containerboard prices.
You're talking about the containerboard external deliveries 1,000 tonnes. That's the question, two and Can 74,000
clarify the $274,000,000 number that you're quoting for Q4 twenty seventeen, is the number I should be using? Or just north of €1,000,000 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 and the sensitivity?
Absolutely right. So this 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. So you're absolutely correct.
And in that is Hainola, Varkas, Ostroleka. So it is OCP board, it's kraftliner and it's fluting, semi chemical fluting.
Thank you. And obviously, your major kraftliner and testliner producer two days ago talked about achieving some price increases in February, I believe €50 a ton on kraftliner and €40 a ton in testliner. Is that something that you've been targeting similarly? Or can you comment on price increases that may be possible in Q1 twenty eighteen for these grades?
So what I said quarter on quarter is that kraftliner is stable. We believe it's stable. For RCP 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 Sappo.
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 as far as getting to a 20% tax rate. But what 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 2017.
2017, 2018, yes.
Okay. All right. Thank you Okay. Very
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 called out the step change, that's about 20%, slightly higher pulp prices, better paper prices, better mix at the high, not much cost inflation. And then I would assume a negative FX, but 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 will be going out to Q1 versus Q4? Correct.
Why do you say that?
Basically, just called out maintenance would be lower to the tune of 50,000,000 to $60,000,000 That alone would lift numbers 20% broadly speaking. And then you have positive pricemix, the high better pulp prices, some paper prices, not much cost inflation, and you call that not much impact from harvest issues in The Nordics. So how do we not come to a appreciably higher number than 10% to 25% higher EBIT sequentially? What are the offsets?
So we have slightly lower on RCP containerboard, which is Ostrolekka, it's a big machine. We have slightly lower on dissolving China, which is most of our dissolving. And we are having salary increases coming, which is part of the normal.
Sure.
So when we do the numbers, we feel that it fits quite well with our guidance.
Right. And in terms of FX, how should we view that on a sequential basis? Think you called out €23,000,000 in Q4. Is that a more material headwind in the first quarter?
What would As that our you policy is to hedge 50% of the coming twelve months cash flow. And as you know, Dow has been recently moving somewhat against us, if you look at the business. So 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. You I appreciate what you're saying, the bioeconomy, etcetera. 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. So I guess, you weighed all the pros and cons. But to lower returns by 100 basis points is pretty sizable. So why could you not make a long term agreement again within the framework of Berwick as you must be doing in Siedelet for example, and that wood catchment or wood supply agreements as opposed to So adding
it to your balance the discussions obviously that was one option to just extend it for another fifteen years. That option was not viable. Not because we didn't want.
Right.
You
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 us at the time that Palynziq School was set up.
Understood. So the question is, would you be sorry, go ahead.
So you yes, I still remember your last question, but go ahead please.
No. So the question then is, you be interested in acquiring more forest lands if that was an opportunity?
It's very much depending on where it is. But 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 West. It's a bit of a unique situation. And as you're right, it's 1% on the return on capital employed and it's 0.6% in net debt to EBITDA. And if I remember right, we have a very well working relationship with Tonoto, 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, the Gruyverm, Skogal, Forscht, Skjordkar and Ola.
So it's a bit of a unique situation.
Understand. That would be about 50% of all your Swedish, wouldn't it, if I recall correctly? Is that about right?
No, it's no, the only number we've given before is 50% of total Sweden.
No, that's what I'm saying. Yes,
of total, but they do not supply to Hilte and Nymala to because they are getting it elsewhere. So 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 misrepresented when it comes to the production levels because you're already at close to 400,000 tons. But should we look at the sort of split between the different grades, but that would still be appropriate if we ran the same chart by calling it 400,000 tons.
Is that the way we should view it? And 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 be 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 New Year. But are you sensing seeing anything of this in your December and January demand? And if so, do you see a pent up demand post the China Lunar New Year?
You can shed any light Yes. On that, that would be
So I would like to say the run rate was that we passed the SEK $450,000,000. That's why you see the steepness of the curve. But coming back to China, the situation in China the following. It is very unknown what's happening. When they stop the import of recycled paper and put a law that it has to have an impurity rate of 0.5 percentage points, 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, very hard. And even in this legislation they want to close down a lot of the small mills that is under 300,000 tons. But 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. And we will not really know that until early March when the new law is enforcement. Say if it is going to be according to what they have stated and they've done the same in plastic, they are not taking in recycled plastic into China or scrap metal or certain impurity levels as well.
So if they are playing this hard and it's fairly high up in the new plan, that means that it's going to be very little recycled bought or paper in China is going to drive the demand of virgin pulp to a higher extent. And that will be having effect on the whole Chinese market. But right now, we don't know. So we are following it this daily. But we do believe that the trend is there, which means that virgin products in China is actually going to have a better future than recycle.
Maybe 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. And 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. And Energy costs are, of course, higher during the winter months. So that's having an effect in the guidance as well. It is sort of typical seasonality.
That's right. Karri, I think you I appreciate your sort of long and medium term response because that's 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 or consumer board mills.
So usually, I think it's next week on Thursday, lunar year starts. And that's historically in all industries slowing down because usually the gifts and the products has been made already during December. So it's historically a slowdown in all industries just before and then it takes a while to start up after the lunar year.
But you're not seeing anything strange or awkward in your order books, It's kind of normal as far as you're concerned.
Yes. Very good. The only thing is that a lot of newsprint is right now going from Europe to China.
Why is this that?
Because of the recycled paper.
Understood. Very good. Thank you.
Thank you.
We will now take our next question from Antti Koskivovori 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 whether something exceptional in Q4 seasonally in 2017 versus 2016?
That would be the first question. The second question, I would like to come back to you on FX. And maybe you'd 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.
So one of the reasons regarding having slightly better output of the Europeans, if you exclude is that we had good production both in Skogal and in Eematra in the month of December. That's what you note there. So 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. So I will ask Seppo to help me on this one.
Unfortunately, Karl, I don't have a crystal ball with me either. But last year full year FX from FX was €50,000,000 negative sort of net effect for the full year. And Q4 was €23,000,000 on group level. And assuming that guidance rates would stay where they are and keeping in mind our hedge ratio of 50%, I would say, so that we're after maybe half of what we had in the last year 2017.
Okay, very helpful. Thank you.
We will now move to our next question from Alexander Berlung of Bank of America Merrill Lynch.
Thank you. Thank you very much. So I just wanted to clarify a bit on the containerboard prices, because 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're getting a full hike on kraftliner, six per tonne in February and almost a full on testliner. And we saw prices going up in The U.
K. I just wonder if it's kind of a different markets or if it's something specific to kind of Scandinavian exposure?
I can only say this is what we say is that they are stable. And that's what we're seeing. And the RCT slightly down is also an effect what we believe coming from the less export of paper waste to China. But that's 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 Berenberg. 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. So just curious to hear whether you think three times is relevant? And if so, sort of does that mean you're looking at acquisitions, etcetera?
Thank you.
We will revise that target and 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 the 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 or closing remarks.
Okay. Thank you. Thanks on my behalf for everyone for the active questions this time. And I will hand this call now over to final words from Karel.
Thank you very much for participating. And I would like to share with you 2017 was a year where a lot of things happens in the right sequence. And from a company perspective, the last time we had a profit over 1,000,000,000 was in 02/2001. So 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. And 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.