Good day, and welcome to the Q1 twenty seventeen STORE Enzo Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ula Payansanyo, Head of Investor Relations. Please go ahead, ma'am.
Thank you. Good afternoon, everyone, and welcome to Stora Ense's Q1 twenty seventeen conference call. And I will hand it over now to our CEO, Paolo Sundstrom. Please go ahead.
Thank you, and good afternoon or good morning depending on where you are in the world. And we would like to go into the presentation of the first quarter twenty seventeen. This is a big quarter for us. This is the first time in five year where we actually ended up with a top line growth at 2.1%. But more importantly, we are ending up with almost 10% excluding paper.
That is obviously driven by Beihai, the two rebuilds of Arkaus, the LVL as well as the board machine and the Murrow sawmill. Operational EBIT ended up at $215,000,000 with an 8.6% margin. And the reason for the decline versus a year ago and I will go into that more in detail a bit later on It's actually still lower hardwood pulp prices compared to a year ago, slightly lower paper prices and transformational cost by ramping up the Beihai, ramping up Murrow as well as ramping up LVL and the board machine in Warkaus. In Beihai, we had EUR 12,000,000 more cost than we had a year ago, which includes a €7,500,000 provision related to a turbine damage. And I would like to explain that this came in very late in the process.
It came in the March 31. So we have been working very hard and this is the best estimate that we have at this moment. Cash flow from operating activities on a healthy $178,000,000 and after investing activities 43,000,000 Return on capital employed 10%. And if we exclude the Beihai mill, it's 13,000,000 Net debt to operational EBITDA decreased from 2.2 a year ago to two times in the 2017. The $50,000,000 profit improvement program is proceeding according to plan.
The underlying business is showing good progress. If you look upon it, Consumer Board came in CHF 12,000,000 lower than a year ago. But if you look at the different parts, you can see that we had a provision, as I mentioned before, of the turbine of CHF 7,500,000.0, which means that it's actually only 4,500,000 lower in Bayag compared to a year ago. And on top of that, we actually had an impairment in our minority investment, Packaging. So all in all, the underlying performance of Consumer Board is $3,500,000 better than a year ago.
If you look on Packaging Solutions, here you can see the two effects. One is that our packaging business in China is growing slightly better. But more importantly, you see the effect of Warkaus now getting close to EBIT breakeven as we have predicted in the 2017. Included in this is the expensed feasibility study of Australoaca PM6 that we have decided not to go ahead on. Biomaterials coming down $31,000,000 versus a year ago.
Included in that is $16,000,000 of lower pulp prices, mainly hardwood pulp prices compared to a year ago and a write down on a credit loss of 4,000,000 Wood Products had the best first quarter in ten years and Paper coming down $9,000,000 partly because of less mills because we have closed down, but also price explaining about 5,000,000 of the $9,000,000 And then you have other basically making some additional provisions for land related issues with old sites. Turning out that we ended up at $2.50 But if you then look upon the underlying business with gradually improving pulp prices and a ramp up of payout that is faster than anticipated, this sends a good signal for the future. The transformation steps since 2016, you're all aware of them, but I just want to point out, we have a number of big mills starting up, the Beihai, Warkaus, Murrow. Have online. We have a number of important investments, especially when it comes to MFC and the Hainola mill.
On the other hand, we announced in the first quarter an additional proposed planned closure of paper machine in Florence, Vienna. That means that planned and actually closures through divestments or pure closures is up to 1,000,000 tons now of paper capacity. All of that have brought in around $300,000,000 of cash since the 2016. I just want to spend a little bit of time on the faster than planned ramp up of the Beihai mill. We would like to make sure that you're all aware of that we have actually shipped commercially both liquid and CUK board in China.
We have made FBB deliveries and we have continued increasing prices and volumes of the FBB volumes that we are using as a temporary training ground for the staffs. We expect full production in the 2018. And so far for a mill that is less than a year in startup, we're already producing 87,000 tonnes in the quarter. The TE coating is expecting to be ready by mid-twenty seventeen, adding additional value added to our foodservice boards. And Bayard Pulp Mill decision to be reconsidered as announced earlier is moving along the timeline that we are expecting.
Before handing over to Szepo, I would like just to remind you about our transformation journey from having a business that was basically less than one third of non paper sales and some slightly less than 40% of the profit ten years ago. And today the packaging, the biomaterials and the wood products divisions stand for 70% of sales and 80% of the profit. You might think that is a slow movement in ten years, but I will tell you, you all know also that once you put the pulp mill up, a board machine or a paper machine, they usually stay in use for fifty to seventy years. With that, I would like to hand over to Tekko.
Thank you, Karl. And I start with some key figures first of all. And sales reported sales line like Karl said already is showing 2.1% growth. And this is important milestone in our transformation demonstrating growth for the first time in five years. Operational EBIT was €215,000,000 compared to €248,000,000 a year ago in Q1 and this is a reflection of startup costs and lower pulp and paper prices versus Q1 twenty sixteen as well as additional transformational costs like R and D and innovation costs that are adding to fixed costs.
But of course, those are should be seen as investments in future, not only as costs. Operational return on capital employed excluding Beihai was 12.9%, more or less in line with our strategic target of 13%. And net debt to last twelve months operational EBITDA was two point zero at the same level as at the 2016 and down from 2.2 a year ago. Then moving to divisions and I start with Consumer Board, where important milestone in at the Beihai mill was reached when we made first commercial deliveries of liquid package import and CUK from the Beihai mill. CUK is coated unbleached kraft board.
Sales increased 8.3% driven by Beihai and operational EBIT was stable excluding Beihai operations. Higher volumes in consumer goods were offset by slightly lower sales prices in local currencies. Beihai operational EBIT was negative 33,000,000 compared to €21,000,000 a year ago. But you have to note that this includes provision of €7,500,000 related to the technical power turbine incident we had there at the March. So taking that into account actually Beihai was operationally performing better than we expected as this €33,000,000 loss is in line with our guidance for Beihai performance in Q1.
In Q2, we expect cost to be approximately €18,000,000 and this is at the same level as the year ago. And also result includes €3,500,000 asset impairment at the Puleshahr Packaging in Pakistan. The personal return on capital was 12.2% and excluding Beihai mill 38%. So the solid excellent performance at the Consumer Board division continues. And like Karl already mentioned, we are reconsidering the plan to build chemical pulp mill in Beihai in China as announced earlier and there the negotiations and plans are going ahead as expected.
And investment of €9,000,000 was announced during the quarter. We invest more in MHC production at Imatra Inkron and Khorst wheels. Then comments on Packaging Solutions, where we clearly start to see that Varkar's investment is really paying off. And it's demonstrated when you look at the sales growth of 18.4% of Packaging Solutions division. In addition to Warkaus kraftliner mill ramp up effect, also higher volumes in containerboard in general corrugated business is reflected there.
Operational EBIT is €17,000,000 higher than Q1 last year, great improvement at Warkaus that's €9,000,000 as well as China Packaging €10,000,000 improvement. You might remember that China had some issues and problems during the first half of last year and they are coming back nicely now. We also expensed Osterreicher vis a vis this €34,000,000 where we have decided not to go ahead and proceed with the plans for the expansion of Osterreicher RCP containerboard mill. And Vargas kraft panel mill ramp up is proceeding well and EBIT breakeven is expected to be reached in Q2 this year, so during the coming weeks or months. Operational return on capital increased from 3.2% a year ago to 11.1%, thanks to improved profitability.
And we also announced €28,000,000 investment at the Haina Fluting Mill in Finland to improve quality and capacity. And we expect that this investment is giving return on capital above 20%. Then moving to Biomaterials, where pulp market is gradually improving. Sales increased 5.1%, thanks to currencies moving in our favor, and that was more than offsetting lower sales prices, especially hardwood pulp. Also, our pulp volumes as such were higher than a year ago.
Operational EBIT decreased €31,000,000 due to lower European hardwood pulp prices and higher variable costs. There was also a great loss of €4,000,000 booked in Fire Materials. And as you know, we are investing in innovation and R and D capabilities in Fire Materials and that is adding costs at the moment. All we all know that there has been nice run when it comes to hardwood pulp prices during the first quarter, but prices are still below the levels we had a year ago. Turbine incident that happened here at the end of last year at Denesomni in Finland cost €5,000,000 additional cost during the first quarter this year.
That is less than we originally expected. We gave a guidance of €10,000,000 in the Q4 call. So that was managed better and with lower additional cost than we expected at the time. Then also a start up at the Rieslunk mill is proceeding as planned where we produce potash to silos and that is a demonstration plant. And we expect to deliver first batches of silos still in this year.
Also first commercial deliveries of limnene from suing a mill were shipped during the quarter. Food products, there are also new products and solutions that drive growth and profitability. Sales increased 8.9%. Growth is coming from our strategic investment at Warkar's LVL mill and Muro sawmill in Poland. Also CLP and Classic saw volumes were higher as well as prices improving also profitability.
And operational EBIT increased €6,000,000 And we had higher volumes and slightly higher sales prices especially for Spruce. We have also a feasibility study in progress in Sweden for new CRT feasibility facility there and we expect to finalize that no later than in connection to the group Q2 reporting. We have announced €12,000,000 investment at the Biocomposite Granulation production in Jutteville in Sweden. And we also have been selected as a supplier to various CLT buildings in Europe and Australia during the quarter. And this will demonstrate that the wooden buildings are future.
In Paper, we had stable sales excluding divestments and good performance in that sense continues. Operational EBITDA decreased €50,000,000 That's because of lower sales prices in euros, stable variable costs and higher comparable volumes and lower fixed costs. At Wanswern Mill in Sweden, we started co determination negotiations regarding a plan to reorganize the mill. This includes a permanent closure of 100,000 tonnes of SC paper by the end of Q2 twenty seventeen, if moving ahead as planned and this would affect the maximum 140 employees. We expect annual cost savings of €12,000,000 from the plan.
Our internal project to review how to create the best conditions for the Paper division to compete under the increasing cost pressures and declining market conditions is proceeding as planned and more information will follow once we are moving forward. Then to close with the summary of strategic targets, where clearly, as said also earlier, we are reaching the target to grow faster than the relevant market, where the growth was 9.7. And also balance sheet, we would say net debt to operational EBITA is at two point zero and debt to equity at 46%, so clearly below the strategic target levels. Fixed cost of sales came down to 24.1%. You remember we have been around 25% last year most of the year.
And it's of course positive is coming down, but more needs to be done. And we continue on our work to continuous improvement as well as on the announced profit improvement program to reduce both variable and fixed costs. Operational return on capital employed was 12.9% excluding Beihai, so in line with the strategic target of 13% and including Beihai we were at 10% level. Look at the divisions. Our divisional targets Consumer Board excluding Beihai was at 38% level.
And we are especially happy for Packaging Solutions improving the return on capital from 3.2% a year ago to 11.1 times the improved performance both in Waterhouse and in China. Biomaterials at 7.9%. This is of course reflection of the still low hardwood pulp prices. And Wood Products at 16.4% continues to demonstrate solid performance. Paper cash flow was seasonally low at 4.3%, but we are confident that paper business continues to generate good cash flow also going forward.
Then I
hand over back to you, Karl. Thank you, Seppo. And I will now go through the guidance for the 2017. So sales are estimated to be similar to or slightly higher than the amount of €2,497,000,000 recorded in the 2017. Operational EBIT is expected to be in line with the €215,000,000 recording in the 2017.
Operational EBIT estimates includes negative impacts of the ramp up of payout operations of €80,000,000 Impact of the annual maintenance shutdowns is expected to be approximately €30,000,000 higher than in the first quarter twenty seventeen. And it's important here to understand that the mills affected by the annual maintenance shutdown is Ostroleka in Packaging Solutions, two mills in biomaterials Montes Del Plata and Zunila, And then we have the Ullo mill for paper. Before handing over to the Q and A, I just want to do a bit of a summary. We believe this is a promising start of 2017. The transformation project has started to deliver sales growth.
And excluding paper, we are almost at 10% growth. This is a big step for us. As I demonstrated in an earlier slide, the underlying business showed good progress and strong promise for the future. Because it's so many moving parts, it's important to understand the details. The strengthened balance sheet that we have acquired and we have a healthy cash generation.
And we are now really moving in from asset transformation to sales and innovation transformation. With that, I hand over to Ulaf.
Yes. Thank you, Karl. And here I want to remind you that we are going to arrange our Capital Markets Day in London, 11/08/2017. So there will be further details distributed soon, but please make a reservation to your schedule already now. And operator, please, we can now start the Q and A session.
Thank We will take our first question from Mikael Doepel from Handelsbanken. Please go ahead. Your line is open.
Thank you and good afternoon everybody. First of all, on the I would like to ask on the CapEx or let's say growth investments. So just to be clear for first of all, on Ostroleka, is this project now totally scrapped? Is it postponed?
As we write in the report, we have stopped it and we have also taken the consequence that you have to do accounting wise by charging the feasibility study at an expense.
Okay. And in terms of the pulp mill in China, again, just to be clear there, the objective is to remove it from the investment list?
It has been removed as we did in the previous and we even have, as we have announced, an MoU with the local authorities. Now it is how the deal and the return of land will be done.
Okay. And then to some extent relating to this, how do you arrive at your CapEx guidance for this year? Because you have maintenance CapEx of about €250,000,000 And if you would assume that you hit the lower end of the guidance of 600,000,000 you have a gap of €350,000,000 Could you give some more details on that?
So the guidance we have is 600,000,000 to $650,000,000 We are we started on a low level with CapEx of 88,000,000 I think in the first quarter, pure and then biological assets of some €20,000,000 if I remember right. But please, Seth, I have
to with the zero point Yes. So if you look at the 600,000,000 to €650,000,000 guidance, first of all, you have to remember it includes about €100,000,000 in total for the biological assets. That's replanting at the plantations in Brazil, Uruguay and China. That leaves about $50,000,000,550,000,000 euros for the fixed assets. And out of that, like you said, about $20,000,000,250,000,000 euros is maintenance CapEx.
That means that there is about EUR 300,000,000 for development and growth projects. And then how that money is going, you know we are building the PE coating plant both at the Imatra Mill and Beihai to have PE coating capacity. We have announced the Plat project Plat investment about €18,000,000 at Skutsar mill in Sweden. We are working in Finland for the consolidation of corrugated packaging business that's about 19,000,000 annual or fluting mill investment that I mentioned, MFC investments, etcetera. So there are a lot of sort of bigger or small or medium sized investments where the money is.
And of course, we have not allocated auto money yet, so there might be some new small interesting opportunities popping up still. And then don't forget the Skogal chemical plant. Yes, exactly.
Okay. And then just a final question on Beihai. You're guiding for a net operating loss of EUR 80,000,000 in the second quarter. And there you have a depreciation 10,000,000 So that's an EBITDA of only minus 8,000,000 And still you guide for reaching EBITDA breakeven in Q1 twenty eighteen. Is there some reason to assume that this you wouldn't make stepwise progress now towards that target?
Is this are there some costs coming up in, let's say, Q3 or Q4 that we should be aware of? Because I think if you continue on this path, you should reach that breakeven much faster.
We are a bit conservative in the guidance here because we just had the accident with the turbine that we don't really know. And we got a bit worried about that and we are still in investigation about it. We have managed to get the pulp mill up and running and we are going to do whatever we can. But that's we need to see and understand a bit more because it just happened a few weeks ago and this is a complicated matter.
Okay. Thank you very much.
And we will take our next question from Nico Ewasti from DNB Market. Please go ahead.
Thank you very much and good afternoon. So my questions are also around the board. So on some public sources, we've read that in Immacrant, there have been some stoppages now in early Q2. Is that true? And is that in your maintenance guidance?
Because you earmarked your these maintenance costs and the ones you mentioned as the annual maintenance. So do you have some of these investment related stoppages or other stoppages that could affect the Q2 results?
I'm at Ematra in Q3, we have not had any strange things at IMATRES. I've actually been Head of Consumer Board as a division manager, so I don't know who is spreading these rumors. IMATRES been running really well.
Okay, okay. It was a risky article, April 6, but we can get back to that. Then on the kraftliner side, can you please comment what has been the impact from competitor supply issues? And how do you expect that to impact the operating rates and prices?
Kraftliner has been running well. The demand is slightly stronger. And we also have seen prices quarter on quarter to become slightly higher. So Kraftliner is running well.
Okay. Then and finally on the Austral Lake non investments. So, we knew about this new capacity around the the first communication of the feasibility study sort of said that the new we knew at that time that the new capacity is coming from competitors as well. So were you hoping that some of that capacity would not come? And what has happened geopolitically?
And will this affect your current operations there, please?
Geopolitically, I would like to point out to talk about global geopolitical situation. And right now, we that's part of it. But it's a big study that we've done and we don't take lightly on investing 400,000,000 plus. So we have done everything from recycled paper, new capacity, the geopolitical situation, which have a tendency of not favoring free trade any longer in a certain way. And based on all the inputs put together, we decided not to go ahead with the mill.
And consequently, we expensed the $4,000,000 I don't take $4,000,000 in the income statement as a light decision, but we have done that now.
Okay. Thank you very much.
We will take our next question from Robin Santavrita from Carnegie. Please go ahead.
Thank you and good afternoon. I was wondering about the guidance, the EBIT guidance for Q2. Now you report an operational EBIT of $215,000,000 but if I do the math right, if you sort of deduct the extra cost of Enel Cell and the asset impairment, the feasibility study in Osoleka, the power turbine accident, you end up at sort of a clean EBIT of €240,000,000 And I understand you have €30,000,000 more maintenance now going into Q2, but still I guess pulp prices are going up and you're probably enjoying those with a bit of a lag. You have less cost in Beihai, less clearly less cost ramp up cost in Beihai, less cost in Barkaus. Where is sort of the negative delta going from Q1 to 2Q?
Would say First of all, I think
the maintenance, yes. But the maintenance of that €30,000,000 I would say roughly 50% is coming into the public. So the benefits because of the annual shutdowns will come later. Then I said a little bit we have been a little bit worried about the effects of China even though we have estimated it to be 2018, but we are still in early phase because of the turbine.
Right. So perhaps the guidance includes some sort of uncertainty related to the turbine problem in Yes, it does. But
that is also why we give a range in the guidance. That's why we have a range.
I understand still. And
I'm sorry, but when you get the turbine problem in New Mill that has been running flawlessly, you get a bit worried. And we are working on it. And we don't have all the answers. Unfortunately, I have to be a little bit vague about it, but we've been a bit conservative here.
Right. Then could you comment about I mean, demand appears to be picking up quite well across the board. What is driving that? What markets are we talking about? And is it the sort of inventory situation?
Or is it the macroeconomics improving? So
first of all, we are in a very strange situation today. You have a geopolitical that has stabilized in at least the last weeks, but has been a little bit up and down, right? We are having elections in a number of important European countries and they are going in a certain way right now. We have a maybe change about the view on free trade coming up last yesterday, I think it was an issue regarding Will NAFTA stay? But the underlying demand in Europe, we can see it's picking up.
Because if I look upon it, so Consumer Board globally is slightly stronger. It's slightly stronger in kraftliner, in RCP containerboard, in corrugated board, it's slightly stronger. And wood products are kind of stable on a high level. And if you look upon Europe, softwood is stable on pulp side, hardwood is stable, fluff is actually growing. And in China, you see stronger on each and every pulp grade.
And papermaker I would say that we look. So there is a bit of a pickup. I think you can see that across many industries today that has been reporting recently that is surprisingly better than what you would have expected when you just read the newspaper about the geopolitical situation. It was a lengthy answer. Sorry about that.
No, no, agree. Yes, good. Thank you very much for that. Thanks.
And we will take our next question from Justin Jordan from Jefferies. Please go ahead.
Thank you. I've just got sorry to be a broken record here, but just on the maintenance shut. I appreciate you've previously flagged obviously in the Q4 results all of the shuts that you're calling out as it were in Q2. I just want to check that within the €30,000,000 that you're flagging, there's no additional cost for 2017 overall versus the prior internal management estimation, shall we say, a quarter ago? So what I'm going say is, for 2017 overall, are you now expecting the total maintenance impact to be higher than you did three months ago?
It's Zepoj, maybe I can take that. There's no change in plans and cost figures as such for the maintenance. And the phasing of the maintenance for this year is what we expected earlier already in the beginning of the year. It also reflects very much the normal cycles we have with the maintenance in the previous years.
Great. Yes. Okay. And just switching divisions then, just to the Consumer Board division. You talk about obviously 87,000 tons of production in Beihai in Q1.
I'm just trying to look at your total board production in Q1 twenty seventeen versus Q1 twenty sixteen. It's up 86,000 tonnes. So it would imply that everything else is actually negative. Is that actually true?
So the 87,000 tonne is And probably in some areas, we are down a bit, but
we are up in Varkas. So maybe I should take that question with me and ask Ula to come back to you all about that. But in general, you have to remember, especially in Consumer Parts, like we have been fully loaded already for some time, and that's why it's important that we ramp up Beihai, which is then generating growth not only in China, but as we are able to shift volumes from Europe, that gives us opportunities to grow the European and other markets in addition to China and Asia.
Right. So I appreciate you will be redirecting some volumes that would have gone to China back into Europe as it were. But essentially, you're basically flagging to us. You're at maximum production as it were within your European footprint.
So we have been full in Consumer Board mills for at least especially in Matte and Skogal for at least four years.
We
have been full at Ingreuz and Forsch. We have actually ramping up Warkaus and we've been full at Heinola for at least three years and we've been full at Austroleka for at least two years.
Okay. All right. Thanks for clarifying.
As there are no further questions, I'd like to hand back to the speaker for any additional or closing remarks.
Okay. Thank you. Thank you, everyone, for the very active participation. And we have still our AGM today. So we will be speaking to that to there.
But before that, I will still hand it over for Karl for the final First
of all, thank you for participating. I know it's a busy day for all of you, and it's a lot of reports happening this week and especially this day. But I would like just to keep mentioning for you, we have growth now. The strategy is paying off. If you look on the underlying results, it shows very good progress and a strong promise for the future.
We have had an incident in Beihai, which took us a little bit by surprise at the very end of the month of March and that we have discussed. But we are going forward and I look very positive to the future. Thank you very much.
Thank you.
Thank you.
I will conclude today's conference. Thank you for your participation. Ladies and gentlemen, you may now disconnect.