Good afternoon, everyone, welcome to Stora Enso's Q2 result call. We are broadcasting today here from sunny Helsinki. I will now hand it over to Kalle, our CEO. Please, Kalle.
Thank you, Ulla. I'm happy to be here, good morning to the ones on one side of the globe, good afternoon to the other people on the other side of the globe. We announced our Q2 release today and our earnings, it was another quarter with progress. Sales came in slightly better than the same period a year ago, basically EUR 2 million higher. If you exclude divested and closures business, we're actually up 3.7%. If you look at the four growth divisions, which is basically the company excluding paper, it was a growth of 7.1%. This is the second quarter in a row where we have total growth for the total company. Operational EBIT came in at EUR 219 million, slightly below a year ago of EUR 226 million. We had solid cash flow from operations.
We came in on the same return on capital employed, we are basically the same excluding BI. Net debt to EBITDA improved from 2.2x a year ago to 2x, which is a step in the right direction again. The EUR 50 million profit improvement program is proceeding according to plans. In a portfolio like Stora Enso, it's a lot of moving parts, I will go through some of the highlights here before you get more details from Seppo later on in the presentation. If you look at consumer board, they are basically EUR 8 million down compared to a year ago. It's all due to three factors. It's logistic costs extra, which is partly driven by the strike we had in the Gothenburg container harbor.
It is provision within the consumer board division for layoffs in conjunction with the profit improvement program, its impairment of green certificates. BI came in at EUR -17 million impact on the EBIT, which is EUR 1 million better than last year. You have to remember that we reversed in this quarter EUR 4 million of the EUR 7.5 million provision we made in Q1 due to the turbine failure. Packaging Solutions growing EUR 23 million year-over-year, of which is all explained by Varkaus ramp-up combined with better kraftliner prices and the strong performance of China Packaging. Biomaterials increased EUR 5 million, that's coming from better pulp prices, also additional capacity coming out of our mills in Latin America. Wood products improved, that is also driven by the transformation projects, Murów and Varkaus. Paper had a challenging quarter and came down EUR 32 million.
Part of that explained by maintenance that usually has been in quarter three for Oulu, and lower sales prices. If you look at the big picture, you have to remember that because of new maintenance schedules for biomaterials and paper and some additional costs, we are EUR 15 million higher in maintenance costs in the second quarter this year compared to last year. We are coming in EUR 10 million worse off our guidance to you guys in conjunction Q1 for maintenance. If you take some of the steps of transformation that we performed in this second quarter and has been announced before this release, it is actually the CLT production unit for EUR 45 million in Gruvön that we announced in early July. We have also announced that we are going to build a corrugated plant in Tychy in Poland.
In June, we stopped production at PM8, we have also announced a decision to divest the Re-board business because it is not core. Today, we signed an agreement and made a separate press release regarding that we are selling our minority stake in Bulleh Shah Packaging. The buyer is Packages Limited, which is the majority owner. The reason for this exit out of the Pakistani market is very simple for us. First of all, the capabilities of that mill means that we are getting products that are not in our strategic focus. The other one is that we will never reach, in that mill, we believe, the 20% return on operating capital, which is the target for consumer board. The exit will be done under a responsible manner together with an external party who will make sure that we do that in the best way. Beihai.
We continue here to ramp up ahead of plan, I am very, very happy to announce that we are moving the EBITDA break-even from Q1 2018 to Q4 2017. We have also, in this quarter, added commercial shipments to two additional liquid packaging board customers. Now we have total of three liquid board customers taking volumes from Beihai. We delivered 90,000 tons of board from that mill in the second quarter compared to 4,000 in the first quarter. It is a fairly dramatic ramp-up. Before handing over to Seppo to go through some of the details of the divisions, I would like just to make a bit of reflection. We are now moving ahead and the transformational investments are driving our growth in the growth divisions. Today, 72% of our sales are coming from the four growth divisions and 95% of the profit.
As I said before, it was a bit of a challenge result-wise for paper, made a record cash generation which is very important. With that, I hand over to you, Seppo.
Thank you, Kalle. I start with some of the key figures from the report that we have published today. First of all, the sales and like Kalle said, it is very positive and important sign of our transformation and a milestone that we have reached that we have now two quarters this year in a row where we can see growth of the reported top line. In Q2 it is marginal, but we have to remember that the divestments of the paper mills have reduced the sales line by EUR 90 million and despite that, we are showing a slight increase of the top line. Operational EBIT reported at EUR 219 million, slightly down due to the higher maintenance costs in the quarter. Profit before tax, excluding Items Affecting Comparability up 36.6%. That is thanks to lower financial net costs in the quarter compared to a year ago.
Main reasons there are foreign exchange gains from the US dollar denominated loans in China as well as lower losses from bond repurchases this year compared to last year. Earnings per share also up, excluding IACs up by EUR 0.07 and EPS basics up 20%. That is also affected by lower taxes in the quarter and that is coming from positive change in the deferred taxes in Q2 of this year. Return on capital excluding Beihai 12.4%, slightly below the targeted 13% level but at the same level with a year ago and solid cash flow from operations continues and it was EUR 365 million. This is despite the ramp-ups in Beihai, Varkaus and elsewhere increasing working capital and we continue to focus on working capital to keep it on the positive trend.
Net debt to last 12 months operational EBITDA came down to 2.0 reflecting the good cash flow despite the dividends that we have paid during the quarter. Moving to divisions I start with Consumer Board where sales increased by 5.2% driven by Beihai mill ramp-up. Operational EBIT declined by EUR 7 million due to the higher logistics costs and also provisions booked related to the cost improvement program as well as green certificate impairment. Beihai development continues positive as Kalle already mentioned and we expect board machine to reach operational EBITDA breakeven in Q4 this year, one quarter earlier than previously forecast. Operational EBIT improved by EUR 1 million versus last year for Beihai operations and here I want to highlight and remind that Beihai operations includes not only the mill but also the forestry operations there.
In Q3, we expect that operational EBIT in Beihai will be approximately EUR 17 million, so at the same level as in Q2 and this is for the total operations in Beihai. Power turbine damage repair works are ongoing and we expect that the turbine is back in operation during the second half of 2017. We reversed EUR 4 million of the provision that we booked in Q1. The provision was EUR 7.5 million and we made the reversal based on the latest information we have on the repair costs. Operational return on capital was 13.9% and excluding Beihai operations 34.3%. We also signed today agreement to divest our holding in Bulleh Shah Packaging in Pakistan and expect to close that transaction in Q3. Moving to Packaging Solutions where sales grew 21% thanks to Varkaus mill and China Packaging as well as favorable price development in Europe.
Operational EBIT was at all-time high EUR 40 million thanks to the same reasons and this is really a proof point for the profitable growth that we are reaching in Packaging Solutions but also in Stora Enso in general. Important to note this also at Varkaus kraftliner mill delivered first positive quarterly EBIT as expected and operational return on capital was 18.3%. Clear improvement from 7.7% reported a year ago and not far away from the targeted 20% level. We also announced investment of EUR 10 million to expand our corrugated plant in Poland in Tychy and signed an agreement to divest our Re-board business in Sweden. This is a business that we don't see as part of the flow of Packaging Solutions going forward. In biomaterials, where sales also increased due to volumes and higher prices, especially from Latin American pulp mills, sales increased 8.5%.
EBIT improved by 8.8%, thanks to the higher prices and delivery volumes. There was some negatives like higher logistics costs, higher maintenance costs due to altered sequence of maintenance shutdowns, and higher spending in R&D and innovation. R&D and innovations expenditure, of course, should be seen as an investment to future, where we expect to get the fruits later. Startup process at the Varkaus , the xylose demonstration plant in Raceland in U.S., is proceeding as planned. We expect that the first batches of xylose will be delivered towards the end of the year. Wood products also continued profitable growth, sales increased 1.6%, driven by the strategic investment in Varkaus LVL line and Murów sawmill. Good to notice that excluding Baltic wood sourcing operations that we transferred internally to segment other, sales would have been up 3.5%.
EBIT increased by 6.1%, thanks to higher delivery volumes and better sales prices, the increased wood cost had some negative effect in the result. Very happy to see the strong performance also on return on capital, where we reached 25.5%, clearly exceeding the strategic target level of 18%. Ramp-up in Varkaus LVL mill continues, we expect full production to be reached in mid-2018. That is about a year from now. We also announced a new investment on CLT production unit at Gruvön sawmill in Sweden. That is a EUR 45 million investment to address the growing wooden element, wooden building markets in Sweden and Scandinavia. Moving to paper, where strong solid cash flow continues and is clearly above the targeted level. Sales of ongoing operations decreased 3.6%, driven by lower sales prices in EUR terms and lower pulp sales.
Like I mentioned earlier, divestment of Kabel, Arapoti, and Suzhou mills reduced the sales line by EUR 90 million. Operating EBITDA decreased by EUR 37 million. Main reasons being extensive maintenance shutdown at the Oulu pulp mill, lower sales prices and divestments and closures as well as variable costs. That was somewhat offset by positive development of fixed costs that were lower. At Kvarnsveden mill in Sweden, we were moving ahead with the close of 100,000 tons SC machine capacity as announced earlier. An internal review that we started about a year ago has been completed now to address the topic of how to compete under increasing cost pressures and declining market conditions. We have in place a clearer and more efficient structure supporting improved competitiveness going forwards.
Looking at the strategic targets that are, as you can see from the traffic lights that we have added there also now, that they are ambitious but also reachable. Looking at the group level first, you can see the dividend. We are at the target, and we are distributing increase in dividends. Growth. We are growing faster than the relevant market. If you look at the businesses excluding paper, 7.1% growth during the second quarter this year. Debt ratios, both net debt to operating EBITDA and net debt to equity are below the target levels. Operational return on capital, excluding Beihai, like mentioned earlier, at 12.4%, slightly below the 13% targeted level. Something where we still need to work on is fixed cost of sales, where we are at 25.6% level, and we are aiming at 20% level, which we still believe is reachable and realistic target.
Looking at the divisions, Consumer Board, excluding Beihai, clearly above the 20% targeted level at 34.3%. Very happy to see Packaging Solutions improving the performance and reaching 18.3% return on capital, not far away from targeted 20% level. Biomaterials at 9.8%, and wood products, like I said earlier, clearly above the 18% targeted level at 25.5%. Solid performance continues there. Paper, strong cash flow, and we are reporting cash flow after investing activities to sales at 10.6% level, where the target is 7%. This is showing the good cash flow generation capabilities of the paper business we have in Stora Enso. With that, I hand over to you, Kalle.
Thank you, Seppo, for a good presentation on what's happening in the divisions. Guidance for the third quarter 2017. Sales are estimated to be similar to the amount of EUR 2,528 million recorded in the second quarter of 2017. Operational EBIT is expected to be somewhat or even clearly higher than the EUR 219 million recorded in the second quarter of 2017. Operational EBIT estimates include negative EUR 17 million impact of the ramp-up of the Beihai operations. Impact of the annual maintenance shutdowns is expected to be approximately EUR 10 million lower than the second quarter of 2017, and is included in the guidance. Beihai board machine expected to reach operational EBITDA breakeven in Q4 2017, one quarter earlier than previously forecast. Before going into the Q&A session, I only want to remind you, we are clearly seeing the positive contribution from our transformation projects accelerate.
Sales growth, excluding paper, at 7.1%. Total sales growth, excluding divestitures and closures, almost 4%. Accelerated profitable growth by Beihai, Varkaus, CLT and LVL, China Packaging and Murów. We are on a good track of moving away from the asset transformation to innovation and sales transformation. We have strengthened the balance sheet by solid cash generation. With that, I hand over to Ulla for Q&A.
Okay. Thank you, Kalle. Yes, operator, we are ready now for the Q&A session.
Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please press star, followed by the digit one on your telephone keypad. Please ensure that the mute function is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Once again, it's star one to ask a question. We will pause for just a moment to allow everyone to signal. Okay, we will now take our first question from Antti Koskinen from Danske Bank. Please go ahead. Your line is open.
Yes, thank you and good afternoon. First question about the Beihai Q3 guidance. Just to be sure that I get it right, so you guide EUR 17 million EBIT loss in Q3, versus EUR 18 million in Q2, but the Q2 EUR 18 million, I guess that includes the EUR 4 million reversal. Are you operatively or comparably guiding EUR 5 million improvement from Beihai? That's my first question.
We are guiding a EUR 4 million improvement, if I do the numbers right, because it was EUR 17 million in Q2, and we are guiding EUR 17 million in Q3 as well. Included in the EUR 17 million is the reversal of a provision that we took-
Yes
in Q1.
Okay.
My number tells me it's EUR 4 million.
Okay. Sorry, yeah, I remember it was 18. Okay, thanks. That's kind of the, if we look at the Q4, and you expect the EBITDA breakeven to be reached in Q4, I guess you are expecting rather similar kind of pace or whatever to Q4.
The reason is probably in your mind, why don't you get better in Q3?
No, not really, actually.
Okay. No, I would like to explain.
Yeah.
There is an improvement by EUR 4 million, yes.
When we start to prepare for the bigger volumes of what we would say would be the best profitable grades, we need to hold down a bit on the folding boxboard that we're doing today. That's the reason.
All right. That's very helpful. Thanks. Second question on biomaterials, and the recent pulp price increases, how should we think about the current prices and the timing when those prices will fall into your numbers in coming quarters? What's the timing at this time on the change in the pulp prices, please?
If I answer you the following. If I take from Q2 to Q3-
if you take European softwood, we believe they are stable. European hardwood will be slightly higher. Fluff, stable.
If you look upon China, then we believe softwood will be slightly lower, and then we see hardwood lower, and dissolving lower. However, then you need to understand the mix. Of our total sales of market pulp, 20% goes to China.
I think that gives you a good picture.
Yes. Thanks. Lastly, still on the maintenance, you give the EUR 10 million change going into Q3. I was just wondering, what is that number in the biomaterials division? The change in maintenance costs going into Q3 versus Q2.
It's not significant in biomaterials, as you know, we don't give figures per division. We guide the full group figures, there is nothing major there.
Okay. Those were all questions. Thank you very much.
Thank you, Antti.
Thank you. We will now take our next question from Mikael Jafs from Kepler Cheuvreux. Please go ahead. Your line is open.
Yes. Hello, everybody. Two questions. The first one is a broad one. For this year, your guidance for a CapEx EUR 600 million-EUR 650 million. As you scrapped the potential test line and machine in Poland, I am wondering how should we think about future CapEx in the light that you now are basically saying that you are moving from asset transformation to sales and innovation transformation? That is the first question. A second housekeeping question. Financial costs were a bit higher, if I remember well, in Q2. How should we think about financial costs for the remainder of the year? Thank you. Those were my questions.
The first one regarding CapEx is that we will come to guidance about next year a little bit later, but obviously, the long-term goal is over time to take us down to basically depreciation plus the replantation of the plantations, which today is about EUR 100 million. That is the aim we are having. We are right now into starting the season, budgeting and capital planning and capital allocation for next year. We will come back to you later on that one. The other one regarding financial, I hand over to Seppo.
In financial costs, I think that in general, if you look at the trend, net debt going down, and also we have been managing our loan portfolio by paying down, repaying all the higher interest rate-bearing liabilities and taking in new long-term money with lower interest rates. That way, if you look at the financial net sort of interest cost, that I would expect to go down. I think the thing where you have challenges then if you look at the, and try to compare quarter-on-quarter, year-on-year, the development, it is what I also commented on EPS, is that, for instance, this year, Q2, we have lower financial net than a year ago, and that is because we had positive gains from dollar-denominated loans in China.
Last year, and this year also, we did some bond repurchases, but the capital losses from repurchase were higher a year ago. That is, of course, difficult to model in. In general, I would say that you can look forward that interest net as such is going down.
Perfect. Many thanks.
Thank you. We will now take our next question from Robin Santavirta from Carnegie. Please go ahead. Your line is open.
Good afternoon, and thank you for taking my questions. Three questions, if I may. First of all, on the biomaterials division. I'm a little bit puzzled about the sort of average price if I look at the sales divided by the delivered tons. It's only, according to my calculations, up by 5% year-on-year, and spot prices, power spot prices have gone up more than that, and the dollar in Q2 has been quite strong. Could you just explain the dynamics there, and whether there's sort of a lag of a couple of months before the sort of spot pulp prices filter through into the BATL or your results?
In general, when you're using spot prices, are you using the ones on the FOEX?
For example, compared to the FOEX prices.
FOEX prices are without discounts. You have everything from 5% discount, depending on the grade, up to 30% discount on the price. It's very hard, and it's higher in certain markets than in others. It's very hard to really answer your question. Secondly, I think it's also important to say that there is a turnaround time between when you take the order of a new price until you deliver because you have a backlog of somewhere to two to three months.
Right. Of course, the discounts I understand, but the sort of lag is what I'm seeking.
Okay.
You say it's two to three months.
Yes.
The discount rates, I understand, are quite similar at the moment compared to, for example, one year ago.
No, they have actually increased according to our information.
They have? All right.
Yes.
How much? Is this a market phenomenon more or-
It is very hard to say because I can only see what we have done and so forth, but it is not really to disclose because I think it is also slightly different depending on what sort of customer, what contract you are taking, and how long it is.
Thank you. I understand. On consumer board, now the second quarter, actually the, I guess, third quarter in a row with declining sort of average prices. What is explaining that? Is it FX or simply average prices declining?
Consumer board prices are very stable. It could be probably a bit of the mix, and you have to remember that we are ramping up in Beihai with folding boxboard. You cannot really following it because
Still a lot of the volume coming out of Beihai of the 90,000 ton. A lot of that, as you can see on my little graph, is actually folding boxboard, which has a very different price level than liquid CUK and food service board.
Good. Thank you. I understand. Then finally on Beihai and the liquid packaging, sort of new customers, you say three now. Are there any major customers that you are still sort of doing the test rounds with?
Yes
There are still some.
Yes
the major customer.
We don't go into that. It's small volumes still that we are delivering commercially, and it's also on certain grades. We have three customers, and there are a couple of more to go after. We don't want to name any of them.
Good. Thank you very much. Thanks.
Thank you. We will now take our next question from Lars Kjellberg from Credit Suisse. Please go ahead. Your line is open.
Yeah. Thank you. I just wanted to return to Beihai a bit, and if you could talk us through a bit, what is going better than expected in terms of your timing and the ramp-up? Is that a better market growth, or is it your specific ramp-up that is doing better? Also when you talk about liquid packaging board and you're ramping that up potentially at a quicker pace, you've said earlier, if I recall correctly, that you would probably cannibalize about 100,000 tons that you're currently selling from Europe into China. If you can comment a bit how that's proceeding, and where those 100,000 tons, if that's the right number, where they're going to land. Then I have a couple of follow-ups beyond that.
What is going better is that first of all, it's probably the fastest qualification on liquid packaging board ever made. That's going better. It's also going better in regards of getting out high quality folding boxboard and high quality CUK with the bulkiness that makes it quite unique. On that side. I would say that team is doing really well. That, I would say is very well. The efficiency, it's been among the best performing machines a couple of times in the last six months, which is very unusual. Usually, you need to have a team who worked on the machine for a couple of years. This team, who has been trained both in Imatra, Skoghall and Fors, have actually learned to run this machine. It's a very good machine so far. I would say these are the things.
About these 100,000 tons, they are basically sold out already. That we will replace in China over time. We are actually squeezed on liquid right now.
Very good.
CUK.
In terms of the turbine that malfunctioned, has that actually delayed the progress of this machine? Would you have been better off if that wouldn't have happened?
Maybe a week or two, because what we managed to do was actually to increase the power supply from the grid, which was a backup line, and we've been running basically, I think we had one week down.
Yeah. Even less.
No significant. We've been able to, the CTMP to keep that running as well. We didn't lose a lot of time. You have to understand, well, it was two days before the quarter end that it happened, and then the machine stood basically when we were doing the quarterly report, so we were a bit shell-shocked.
Understood. Shifting just to wood products for two seconds. Of course, that's an area that you do comparatively very well in. You're investing quite a lot of money in it. What are you seeing in terms of demand trends, housing, construction, et cetera, and that gives you confidence that this is a good place to put more money behind?
First of all, if I take Murów first, that is basically focusing on glulam for the Japanese market, and its unique offering that we're having. That is driven by that. You have the LVL, which is a new product for us, and it fits very well with the CLT, and that is when you want to build wooden elements to build multi-tenant houses. Today, I think in Sweden, I think it is about 10% of all multi-tenant house that are built out of wood. There are studies made that that will double in a very few years. We see that as a demand. It's actually so that, for example, at NCC, they are screaming at us to get this CLT plant up as fast as possible.
Because today, when we supply this biggest CLT building in Sweden or in the Nordic, the 7,000 cubes to Växjö, we have to ship it from Austria.
It's actually, we started to work with this four or five years ago, and demand has just increased, and we need to hurry up here so we gain this market and nobody else, because this is the first CLT plant in the Nordics.
Okay. Final question from me. Currencies obviously shifted quite dramatically over the past, call it six, seven weeks. How are you hedged? Can you share any color on when we should see an impact from, in particular, the dollar weakness we've seen in [Europe] now?
Yeah, it's Seppo here. Maybe I take this one. Like we also said earlier, we follow our policy that we hedge about 50% of the annual cash flow. Typically we have higher hedge ratio for the short term and a bit less for longer term. That means that in short term, it takes a bit longer time before the effect is visible in the profit and loss. Just to remind you that if you look at the total exposure, dollar 10% move is about EUR 120-121 million before the hedges.
Understood. There's any difference between the different business areas?
Of course, if you look at the divisions, highest exposure we have in biomaterials because of the bulk being priced in and pricing based on dollar. There is some effect in other divisions, like in paper and also somewhat in consumer board, depending on the export volumes outside Europe. Main effect is in biomaterials.
In essence, what you're saying is we're not going to see any impact this year of any significance. It's really going to be a 2018 impact if
There will be if it is remaining where it is or if it goes more to wrong direction, there will be some effect, but not full effect visible.
Understood. Thank you.
Thank you. We will now take our next question from Mikael Doepel from Handelsbanken. Please go ahead. Your line is open.
Thank you. A couple of questions. First of all, on the consumer board business. You mentioned that there were some provisions and some impairments taken in the quarter. Could you quantify those?
Basically the whole package of the additional logistic cost, partly caused by the strike in Gothenburg and the profit improvement provisions and the green certificate makes up basically all of the EUR 8 million.
You don't want to split that up, I guess.
Maybe I can give you some flavor. The extra logistics cost here talk about some couple EUR million, EUR 2 million-EUR 3 million. Profit Improvement Program-related provision is in the range of EUR 1 million-EUR 2 million and green certificate-related write-off was something around EUR 1 million, a bit below EUR 1 million. That gives you some flavor on magnitudes.
Okay. Thank you. That's helpful. Still staying in consumer board and just a question on Beihai. You brought forward the EBITDA break-even guidance for Beihai. Would you dare to give a guidance on when it will break even on the EBIT level? Would Q2 next year be a good guess?
No. I am not that brave. Let me pass EBITDA break even and we can talk about EBIT.
Okay, fair enough. A couple of questions still. First of all, on the EUR 50 million Profit Improvement Program, how much of that could we expect to see, I guess, late this year? How much will go into next year?
Roughly half will be visible this year still, and second half next year.
That would be, I guess, an annual run rate.
That's an annual run rate, yes.
Okay. Then finally, on the Q3 guidance, which I guess implies some EUR 50 million or so improvement compared to Q1. Maintenance is one thing. Beihai is basically flat quarter-on-quarter. What would you say are the main drivers for such a significant earnings uplift?
If I talk about it, you will see continuous improvement from Varkaus.
You will see continuous improvement from Murów and from Varkaus LVL. You will see improvements in consumer board. You will continue to see improvements from China Packaging, also in Packaging Solutions.
Obviously we expect to have a slightly better or a better result in paper.
Okay, that's very helpful. Thanks a lot.
Thank you. We will now take our next question from Harri Taittonen from Nordea. Please go ahead. Your line is open.
Yes, thank you. Good afternoon. Following up on the EUR 50 million program, you booked some costs related to it in the second quarter. Is there some sort of cost remaining related to that program still? That would be my first question.
There might be some relatively small extra cost to be booked as provisions. Nothing significant as this is not any sort of major headcount reduction program. It differs from the other previous programs that we have been running from that respect. Nothing significant.
We're talking about EUR 50. That's not a lot. No.
Okay, exactly. All right. The second one related to the structural assessment of the paper business and that you are now done with that and the structure is ready. Can you elaborate a bit, like what has been the core changes there? Earlier you talked about IT, sort of the platform, HR, things like that, but what is the change in this? Are we now going to see some sort of step or change in Q3 from Q2 related to that?
First of all, this gives paper a platform to be more competitive. They don't have to participate in a lot of the other common things we are doing in the group, supporting the growth that we have in the growth divisions. Which means that they have a more of an independent structure, which helps them to sort of say, ring-fence their own cost and work with them. That's the whole purpose. For them, in things like new systems or new processes or other things, they have a more independent way of dealing with it, which gives them an easier task to continuously drive costs down.
Okay, sure. Thank you. Then finally, third question. Comparing the two presentations, one in Q1 presentation and this presentation, and looking at the Beihai assumptions, looks like that you have revised those volume and sort of mixed assumptions a bit also going forward. It looks like now you're looking at folding boxboard production lasting a bit longer and maybe a bit more gradual volume ramp-up between sort of 2018, 2019 to 2020. Is there something you want to say on that or what the thinking behind that change between these two charts is?
It's a continuous discussions of doing this. One of the big things that we have done is that we have made a decision that we are not going to have any sale of second grade.
Yes.
That is actually a cost of poor quality. That will be repulped, which will affect a bit, and has already affected a bit, the production volume, because that is not counted as production. The other thing is that we have seen that the possibility of getting into a premium position on certain premium folding boxboard boards is actually better than we thought before. That gives us also longer time to build up for new products. For example, CKB or CUK is a very new product to China, and maybe we are a bit more conservative how fast we can launch it. This is something that will continuously change in our S&OP discussion and long-term planning. You shouldn't read too much.
You should just read into, maybe we are a little bit more mature than we were when we did this slide maybe nine months ago.
Okay, understood. Thank you very much.
Thank you. We will now take our next question.
Thank you
Question from Linus Larsson from SEB. Please go ahead. Your line is open.
Thank you very much. Good afternoon to everyone. A couple of questions on consumer board, please. You did, in detail, go through the year-on-year development in the second quarter and why the consumer board ex Beihai was somewhat weaker. Now that we look into the third quarter, I wonder if you could help us bridge the development versus the second quarter. Beihai is flat. Maintenance is, I guess, up EUR 20 million or so. What are the other moving parts in terms of seasonality and other when we look at consumer board Q3 operational EBIT versus Q2?
You have in the guidance and in the report, we are having maintenance in Imatra and
If you see what I mean.
I see what you mean.
That's fair enough. On Beihai, the guidance that you provide for the fourth quarter sounds very encouraging. If I understand it correctly, you are referring to the actual machine. It's an EBITDA breakeven for the machine rather than the totality of the Beihai operation. Would you care to give any sort of idea around what kind of EBITDA you would expect for the whole Beihai operation in the fourth quarter, for instance?
Linus, as you know, we guide only full company or full group on operational EBIT level. The thing in Beihai, just to explain you a bit why we don't want to go into details there, specifically relating to forestry, and it very much depending on the forestry volumes, how much is harvested and how much wood is sold. That is increasing or decreasing the result between the quarters and months significantly sometimes. That's why when talking about the EBITDA breakeven, we have been focusing on mill because that is more stable and we can better control the forecasting process for that. There are less change in parameters relating to mix of the wood and volume and market prices.
I see. I guess that's at least partly an offsetting factor that you will see rising harvests as your wood demands go up, and therefore higher depletion in your forestry assets in Beihai.
Correct. The higher the harvesting, the higher the depletion cost.
Yes.
That is right. The only thing you have to remember, Linus, is that we have more plantation than we need right now since we are only running it on the CTMP.
There is a swing factor what we sell in the market. Of course, when the trees and when the volume goes up, it means that in reality, the fixed costs go down.
Yes.
That is helping the profitability level.
All right. Yeah. Then just one lastly, and that's a detail on Beihai, but you're ahead of plan, and you specify in which ways previously on the call. In one way, you had the, I guess you could call it a negative development. When you look at production, it's actually lower in the second quarter compared to the first quarter. Could you just explain if there was anything, if we should read anything into that, please?
That's why I was explaining that we are repulping second grade, and we don't count that as production. That we started in Q2. That was trying to say on the previous year. Deliveries were 90,000, production was 81. That is because a couple of thousand tons has been repulped because we don't want to create a second-grade market.
Excellent. That's very clear. Many thanks.
Thank you, Linus.
Thank you. We will now take our next question from Justin Jordan from Jefferies. Please go ahead. Your line is open.
Thank you. Good afternoon. Just staying on the theme of Beihai for a second. According to RISI in China, Tetra Pak is rationalizing from four to three plants. I'm just wondering, has that got any impact on you in China, specifically, for that rationalization?
I don't know about, I can't really say about Tetra Pak. I only know that Tetra Pak is growing in China, I don't know if that means that they have fewer but bigger plants. I don't know.
Okay. All right. Just moving divisions to Packaging Solutions. Obviously, very strong growth in EBIT year on year. One thing I'm just conscious of is that they, I guess in Q3, you've got the Varkaus shut, which was in Q4 last year. Is that going to be impactful for this division in terms of increased maintenance costs in Q3 vis-a-vis Q3 2016?
Let me think. We are having maintenance in Varkaus in Q3.
There's nothing major relates to maintenance in Packaging Solutions in Q3. Varkaus has maintenance, right, it's not major topic.
Thank you. Just with regard to Varkaus and obviously the backdrop of increasing kraft prices that we're seeing across Europe, can you just give us some sense of how quickly Varkaus or Stora Enso generally benefit from rising kraft prices that we see on screen through FOEX or PIX or whatever? I'm just kind of curious what sort of timeline there might be to when you actually see the benefit of that in reported revenue and EBIT.
I would say it's two to three months.
Okay. Thank you for that. Just-
It's depending on the contract and how fast we can do it and if you can do it faster, but usually it's two to three months.
Okay. As we sit today, then there should be some more benefit to come in Q3 from price increases that seem to have been achieved, shall we say, in May, June.
Yes. Just coming to your maintenance question, you should remember that in Q2, we had Ostrołęka maintenance, and now in Q3 we have Varkaus. That is also smoothing the difference between the quarters.
Thank you. Okay. Just one final thing, just on, again, staying on the theme of kraftliner. Sorry, there's been, obviously, across the industry generally, some announcements regarding a further 50 EUR ton price increase from August. Is that something that Stora Enso is participating in also?
When we talk about kraftliner, we believe the prices quarter on quarter will be higher, without going into specific EUR amount per ton.
Okay, thank you.
Thank you. We will now take our next question from Mikko Ervasti from DNB Markets. Please go ahead, your line is open.
Thank you very much and good afternoon. Following up on the biomaterials and on the earlier pulp ASP question. I understand the lags in discounts, but purely compared to your competitors who have reported already, your ASP growth looks a bit weaker. Can you still please elaborate a bit on this? Do you have longer contracts or what's possibly causing this? That's my first question. Thanks.
Seppo here. I can comment. Of course, I don't know who are the competitors you refer to, but of course, mix of the portfolios differ. We have, if you look at the total 2.15 million tons, we have about 900,000 tons is short wood pulp, 800,000 is softwood pulp. We have dissolving pulp, 150 and 250,000 tons of fluff. On top of that, we have some 50,000 tons of brown kraft pulp. Depending what kind of mix people have in their portfolio, I think that has an effect. Difficult to comment more on that.
Okay, that's fine. Then the second question on the consumer board, excluding Beihai, excluding it. You talked about the cost movers there. Looking at just the volumes, it seems that the second quarter deliveries are down by more than 2% year-over-year. What's happening there? Can you explain? Is it the strike impact or the LPB switch or something in the underlying market, please? Thank you.
We certainly did miss certain things when it comes to logistics problems. That's for sure, and that hits also the working capital we couldn't ship. Otherwise it's for me more a mix question.
Mix question, okay. Okay, thanks very much.
Thank you. We will now take our last question from Lars Kjellberg from Credit Suisse. Please go ahead, your line is open.
Yeah. There's obviously quite a few questions on what your guidance really means, right? Could you just elaborate for those that don't know you that well, what does in line mean? What sort of range you're talking about? What is somewhat and/or clearly higher mean in terms of quantum versus the prior quarter?
In line is ±10. The other one is 10-25. The last one is 25 and upwards. Percentage points.
Percentage points. Okay. Very clear. Thank you.
Thank you.
Thank you. There are no further questions in the phone queue at this time. I'd like to hand the call back over to you for any additional closing remarks.
I will say, this is Kalle Sundström here. First of all, thank you for participating in the call. We are looking for the future with great enthusiasm. Our transformation is clearly visible in the numbers we are doing. Don't forget that we have now a CMD in London, the 8th of November this year. You are very welcome, all of you. Thank you very much.
Thank you.
Thank you.