Good day, welcome to the Q2 Stora Enso Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ulla Paajanen-Sainio, Head of Investor Relations. Please go ahead, madam.
Thank you. Good afternoon, everybody. I'm Ulla Paajanen-Sainio, Head of Investor Relations here at Stora Enso, welcome to our Q2 2016 earnings call. With me here today, I have our CEO, Karl-Henrik Sundström, and our CFO, Seppo Parvi. We will start the conference by presentations from Kalle and Seppo. Please, Kalle, go ahead.
Ulla, thank you very much, good afternoon or good morning or good evening, depending on where you are in the world. It's been a very active quarter here at Stora Enso operation. It's actually a quarter where a lot of the parts of the jigsaw is falling into the right places. We have started up the consumer board mill in Beihai, we are ramping up ahead of time. We started before. The Varkaus cross laminated mill is ramping up, we solved the issues with the pulp mill that we had in the first quarter. We have also started up the LVL machine in Varkaus for wooden elements in the month of June. We have now three divestments of Kabel, Suzhou and IL Recycling, totaling EUR 289 million in cash consideration.
We have set ahead with a feasibility study for cross-laminated timber production at Gruvön in Sweden, we have had the first commercial contract from Lignin in Sunila. We did a Eurobond refinancing of EUR 300 million. If you look on the group financials, sales came in 1.4% lower than the same period last year. However, if you look at the business excluding the structured declining paper and the divested Barcelona mill, it's actually an increase by 3.6%. Operational EBIT increased by 9.2%, that includes a EUR 6 million bad debt provision in Paper division. We came in on a record cash flow of EUR 493 million, we kept for the fourth consecutive quarter in a row a return on capital employed of over 10%, we came down a little bit or below 13% if you exclude the Beihai mill.
We have continued to strengthen the balance sheet, net debt to EBITDA is 2.3 versus 2.7 a year ago, That is in the same quarter as you have the dividend. Cash flow has been strong. I think when you almost have a double-digit growth in the EBIT, I think it's also understanding to understand what's happening in the underlying business. If you look on the business like Biomaterials, had basically flat results despite a 6% decline in sales. We had a very strong performance in Wood Products, and we had other, we had a declining result of EUR 11 million. Half of that is explained by lower energy costs, and the other part is because we have less profit coming from land sales in Tornator and Bergvik. All in all, that's EUR 19 million or slightly more than 9% increase.
If you look on some of the one-time items that we're having in the quarter. Compared to the same period last year, we're having EUR 3 million higher EBIT impact in Beihai mill. Due to the ramp up and the clean-out of the issues that we had in Inpac announced in the first quarter, that's another EUR 9 million. We had EUR 7 million EBIT impact in the Paper division, one coming from the incident that we had during the second quarter at the Veitsiluoto mill, and then EUR 6 million from that debt. If you take that all together, you see the underlying performance of the business, and that's actually an over 18% increase.
As I said before, we have stabilized the business on a totally new level when it comes to return on capital employed, and as I said also earlier, that is the fourth consecutive quarter in a row. In basically one and a half year, we have managed to accomplish quite a lot. Everything from starting the Murów sawmill, the Sunila biorefinery, we have debottlenecked Imatra. We are building a Virdia demo plant. We are investing in two coating facilities, and we have recently decided to increase the capacity of fluff. At the same time, we have divested and closed a number of sites, and if you only take the paper examples here, which are the Uetersen, the Arapoti, the Kabel mill, and the Suzhou that has been announced. That is actually a reduction of one-third of all the paper sites.
Coming to the big events of the second quarter that we started up ahead of time, the Beihai mill, and we are now ramping it up faster than expected. Full production is expected in 18-24 months. The estimate, which is excluding the recently announced PE coating, remains at EUR 800 million. It do include the BCTMP, the mechanical pulp mill of capacity of 220,000. Right now, that is a very important investment for the future of Stora Enso. Coming to Varkaus. The transformation of Varkaus from a 280,000 ton paper mill to becoming a 390,000 kraftliner mill, plus an LVL, is ongoing, with the last part being ready in the month of June, when we actually started to deliver from the LVL machine, making wooden building elements. We are expecting full production in mid-2018.
We have solved the problem, as I've mentioned earlier, of the pulp mill. That was part of the reason we had a little bit of a setback in the first quarter, and we sorted that out towards the end of the second quarter. This is a little bit more details of the EUR 289 million in cash consideration from the announced divestitures that we have announced during the second quarter. This is an important part of the transformation, but also an important cash generator. Before handing over to Seppo, I would like just to remind you of this slide that I've been using for a number of quarters, that is showing the transformation from 2006 to year to date. As you can see, we are now having two-thirds of our sales coming from the growth area compared to 30% in 2006.
Over 80% of the profit coming from the growth area while it was only 38% in 2006. With that, I hand over to Seppo.
Thank you, Kalle. I start with some key figures related to profitability and our balance sheet. First of all, sales for Q2 this year were at EUR 2,526 million. That is 1.4% down versus a year ago. Excluding structural decline in paper and divestment, actually sales increased 3.6%, that is in line and meeting our strategic target to grow faster than the market. Operational EBITDA margin was 13.2%. That is clearly above 12.4% level a year ago. Operational EBIT increased 9% year-on-year for the fourth quarter in a row. Operational EBIT margin was 8.9%. EPS, excluding items affecting comparability, went down EUR 0.06 to imply three main facts. One of them being higher financing cost due to the bond buybacks.
We also had a negative effect from revaluation of currency denominated loans in Poland and China, a lower result from forest associates, that is Bergvik Skog and Tornator. EPS basic went down EUR 0.01. Operational return on capital employed, excluding Beihai project, was 12.5%, up from 10.9% a year ago. Cash flow from operations record high at EUR 493 million. Net debt to operational EBITDA decreased from 2.7 a year ago to 2.3, actually was flat against Q1 at 2.3, even though we paid the dividend. That is again a good proof point of the cash flow generation capabilities of our company. Going forward to divisions, I start with Consumer Board. The operational return on capital, excluding Beihai, was 35%. That is clearly above our 20% target for the packaging divisions. Sales grew 4.4% thanks to higher sales volumes and stable prices.
Operational EBIT decreased by EUR 2 million, but you have to notice that effect of Beihai Mill startup was EUR 18 million in the quarter. We have two important investments going on in the division relating to additional coating capacity, both in Imatra Mill in Finland and Beihai Mill in China. This is to meet the increasing demand for Food Service Board, mainly globally. Moving to Packaging Solutions, where sales increased 14% year-over-year, mainly due to ramp-up of kraftliner business in Varkaus and higher sales in Ostrołęka in Poland. Operational EBIT excluding Varkaus and Inpac in China increased by EUR 2 million. We are moving forward with the feasibility study, as announced earlier in Ostrołęka Mill in Poland relating to new potential containerboard machine. We expect to finalize this study by end of the year and come back to this subject in due course.
In Biomaterials, our operational EBITDA margin was 24.6%. Sales decreased somewhat due to lower sales prices and operational EBIT decreased slightly to EUR 57 million due to lower pulp prices, partly offset by positive FX effects. Important step was taken at Sunila Mill, where we signed the first customer agreement for the Lignin business. In Biomaterials, we have announced an investment at the Skutskär Pulp Mill to increase our kraft capacity by 160,000 tons, and that is on top of our current 250,000 tons capacity. Wood Products had a good quarter and an excellent Return on operating capital 25.6%. Sales went down 1.8%, mainly due to strategic reduction in external sawn goods trading. Important to note, the operating EBIT improved by EUR 10 million, mainly due to higher deliveries, improved product mix, meaning that more value-added products were sold in line with our strategy, and lower wood costs.
Our new production line for LVL at Varkaus will start it in June, and full production is expected in mid-2018. We have also announced a feasibility study in Sweden to build a CLT production operation at Gruvön sawmill in Sweden. Moving to Paper, where EBITDA improved 42% year-over-year. Worth to notice that even though that the reported sales went down 8%, sales for the business excluding divestments and conversions went up 4%. There is some underlying growth in the remaining Paper business. Operating EBIT improved by EUR 31 million due to better sales prices and lower costs. Please note that this includes in total EUR 7 million for bad debt in Sweden and the incident at Veitsiluoto Mill. Cash flow from investing activities, the strategic target for Paper business was at 5.8%.
Worth to note is that the target 7% was actually exceeded if we exclude one-time restructuring cash costs coming from Kabel and Suzhou Mills during the quarter. We have started to look at how we manage the Paper business due to continuously increasing competition and cost pressures in this business, and we initiated a project to plan for the most efficient way to manage the Paper business going forward. We will come back to this subject in due course as the project moves forward. A couple of comments on the Eurobond refinancing we had in Q2. We issued EUR 300 million Eurobond in June for a seven-year period, and are very quite happy of the end result. There was a good window open on the market that we were able to utilize.
We did the transaction before the Brexit vote in U.K. The appetite for the bond was excellent. It was more than seven times oversubscribed. The coupon for the issue was 2.125% or yield of 2.17%, which is actually the lowest coupon ever priced in our rating category for seven-year bond. Very successful transaction. We also used the proceeds to repurchase bonds maturing 2018 and 2019, in total for EUR 352 million, and on top of that, another EUR 50 million of other bond maturing 2018. The main purpose of this transaction was not to increase our liquidity, but to restructure flow portfolio. Thanks to this, we have now extended our debt maturity profile to 4.4 years. To summarize where we are with the strategic targets.
I commented some of these already during the presentation, in a summary, growth target at 3.6% during the quarter, meeting our strategic target to grow faster than the relevant market. Net debt to operating EBITDA, clearly below the target at 3.0. The same for debt to equity, standing at 58%, also clearly down from a year ago, 70% on target of 80. Fixed cost to sales, still above target at 20%, but like said earlier, we are confident the 20% target is reachable going forward. Return on capital employed excluding Beihai was 12.5%, only a bit below the 13% targeted level. Consumer Board divisional target, 20% return on operative capital. Excluding Beihai, they were at 35%, so clearly above the target. Packaging Solutions still behind the target at 7.7%, but that is, of course, due to the ramping up of Varkaus operation and challenges in China in Inpac.
Biomaterials 8.9, which is the same level as a year ago, below the 15% level, but we had some maintenance works done at Montes del Plata having an effect on the profitability for the quarter also. Wood Products, like I said, excellent quarter. Return on capital at 25.6%, clearly above the 18% target level. Paper, excluding cash restructuring costs at Kabel and Suzhou Mills at 7.9%, or 5.8% including those, so at the targeted level there also. With that, I hand over back to you, Kalle.
Yes. Thank you very much, Seppo. Let's look upon the guidance for the third quarter of 2016. Sales are estimated to be similar or slightly lower than the amount of EUR 2,526 million recorded in the second quarter 2016. Operational EBIT is expected to be in line with or somewhat lower than the EUR 226 million recorded in the second quarter of 2016. These estimates include the negative impact of the scheduled annual maintenance shutdowns and Beihai Mill start-up, which are estimated to be approximately EUR 30 million and approximately EUR 60 million higher in the third quarter 2016 than in the second quarter 2016, respectively. Before we go into the Q&A session, I think it's important to remember that Stora Enso offers an interesting and successful transformation journey, strong focus on customers and innovation, strong profitable growth, strong cash generation, strong balance sheet, and sustainability and business focus.
With that, I hand over to Ulla for the Q&A session.
Thank you, Kalle. Yes, we are ready now for the Q&A session. Could we please get the instructions?
Thank you. If you would like to ask a question at this time, please press star one on your telephone keypad. Please ensure that the mute function on your telephone 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. We'll take our first question from Antti Koskivuori of Danske Bank. Please go ahead.
Thank you, and good afternoon from my side. About the Beihai startup. Now you have few weeks and months behind you, and you probably have more insight than you had before. Could you little bit talk about the outlook and the contribution of that mill? Now, if you kept the guidance more or less same for the H2, but how should we view the 2017? Is there going to be gradual ramp up or gradual improvement in the EBIT contribution, or is it more going to be step change at some point of the curve, or how should we view that? Then also, if you're willing to comment about your thoughts when the mill could reach EBIT breakeven, that would be very helpful.
Second question, the Paper division project where you say you're looking for the most efficient way to manage the business, what kind of toolbox you are talking about here? Is it cost cutting or more structural measures or maybe the strategy of the division? If you could elaborate a bit about that. Thank you.
Antti, thank you very much. Regarding the Beihai, even though we are ahead of the curve right now, we've only been running it slightly more than a month. Two months, actually.
Yeah
since we're running it up. Right now it's going ahead. We are ahead. We are producing more prime grades than we expected. However, I'm not at the position right now to give you any further notice of this, how it's going to ramp up. We're going to give you a guidance quarter by quarter. I think that is better. You saw it slightly different. We changed it slightly compared to what we said last time, and we came out a little bit shorter on the more positive side, 18 versus guided 20, and now we increased it to an additional 16 for the third quarter. Let us give us a little bit more, but right now all signals is that it's going quite well and we are producing more prime quality and more quantities than expected.
When it comes to paper, it is to make sure that we can have the right circumstances around paper that they can manage in a different way. It will be cost, it will be different ways because we have 5 divisions, four are growing and one is declining because the paper structure is declining. That means that we need to look upon how we work with it and how we set up certain things. I think it is important that we need to create a structure for paper that is future-proof. This is an internal project to be able to go for this. Did that answer your question? We will give you more information when we know more. However, because we are a big company and when this is all over the Paper division, it will be a lot of rumors.
I rather wanted to go out public with it that we have started it than answer a lot of rumors coming too young through other channels. Is that an explanation, Antti?
Yes, I think that's a good explanation. Thank you very much.
Thank you. We'll take the next question from Mikael Jåfs of Kepler Cheuvreux. Please go ahead.
Hello. Good afternoon, everybody. I have three questions. The first one would be around your new project regarding the paper business. Is it possible to give any examples or some color and flavor regarding what you will look out for except for the one that you already stated? The second question would be on Varkaus, the level of production in the kraftliner machine versus full production. Could you sort of give us some idea on where you are today, compared to a situation where the machine would run full? The third one would be around the dividends from Bergvik and Tornator. Could you just explain a little bit on how you accounted for those? Thank you.
Mikael, I will answer the first two questions, then on the dividends and how we account for that, I give to the expert Seppo Parvi. One typical example that we need to look upon is that, for example, when it comes to IT infrastructure. That's a typical example. Should we have a different light IT infrastructure for paper instead of being part of our system that we are developing for a lot more and for growth, for example? That's typical. Should we have the same HR support? All these things are coming in, and so forth. These are the typical examples.
Okay. That's fair enough.
It just started, and it's open. It might come up new things, and we will keep you updated about it. When it comes to Varkaus, if I remember right, I think we produced 67,000 tons in Q2, and we produced 60,000 tons in Q1. Full capacity will be reached during the first half of 2017, which is a little bit of a delay because we need to change out some equipment in the first quarter of next year. It's a one quarter delay versus the official plan.
Okay.
Did that answer your question?
Yes. Perfect. Thank you.
We take the dividend.
Okay. Relating to dividends from Bergvik Skog and Tornator. First of all, during the quarter, we have received about EUR 45 million dividends from Bergvik Skog and EUR 12 million from Tornator. This has no profit and loss effect. Of course, it has an effect on our cash flow and net debt. The reason why it has no effect on profit and loss when we get dividends from these Bergvik Skog associates is that we treat them as associate companies and book the net result of those two on one line in our operational EBIT line. It is already in our results, our share of the company result. When we get the dividend, it's of course cash flow wise, but no result effect in profit and loss.
Okay. Thank you so much.
Thank you. We will take the next question from Linus Larsson of SEB. Please go ahead.
Thank you very much. Good afternoon to everyone. May I just come back to the previous discussion about this project that you have initiated in your Paper division? You are quoted on one of the newswires as saying that this is a question of internal measures only. Can you just clarify or confirm that this is not a matter of a potential ownership change of your Paper division?
As I was quoted in that report from, I think it was from Direkt, it is an internal project we are running.
Yeah. That is very clear. You gave some examples of what that might entail. Thank you very much for that. On something completely different than FX, could you give us some idea of the sequential FX development Q3 on Q2? Not least, taking into account the recent development of the Brazilian real and any thoughts on that maybe timing-wise? Maybe it is not even third quarter, maybe it is coming later, but it was a major positive last year. How should we think about that in the next couple of quarters?
Seppo here. Maybe I take this FX-related question. During the quarter, the positive FX effect was about EUR 28, 29 million. It is less than last year, and full year we estimate some EUR 75 million roughly positive effect this year versus last year from FX. Earlier in the year, we have been talking about EUR 100 million. Now it's a bit less. There is some positive coming from the FX. In short, we occasionally get questions on Brexit. How did that affect us? Of course, we get negative from pound sterling being weak, but at the same time, USD has been getting stronger, Swedish crown weaker. Net-net, we are marginally better off in short term, at least when it comes to currency. No major effect from that side.
The longer terms effect of Brexit is not because we can compensate, because we are selling goods and products that don't being produced inside U.K. We can adjust our prices. The longer is what's happening to the U.K., but even more importantly, what happened to the Europe economy with the Brexit.
Your question on Brazilian real, just to remind that 10% move is about EUR 13 million on our results. It's not so significant if you compare to USD or Swedish crown, for instance.
Great. That's very helpful. Thank you very much. One last question, if I may. Inpac has been a bit of a burden recently. What was the EBIT contribution in Q2? Any guidance as to what you expect in the third quarter?
Well, we don't comment more in detail individual units. It's less than in Q1. That has not been performing as well as expected because of some customer losses mainly. We are working on improving the customer product portfolio there going forward.
The aim is to improve the performance of Inpac.
Q2 is better than Q1.
Absolutely. Q2 is better than Q1. Absolutely.
It wouldn't be far-fetched to think that Q3 would be even slightly better?
Everything we say is included in the guidance that we've given. We don't give on individual.
That's okay. Thank you very much.
Thank you.
Thank you. We will take the next question from Lars Kjellberg of Credit Suisse. Please go ahead.
Thank you. Good afternoon. A couple of questions. I was a bit curious on, not so much on the guidance per se, but the maintenance cost you are talking about, the EUR 30 million sequential increase, that would imply almost EUR 60 million in maintenance cost in the third quarter. How should we see that heading into Q4? Would that be a material sequential reduction in the maintenance activity?
As you know, Lars, we give guidance only for the coming quarter. We have listed now for your benefit in the interim report annual maintenance schedule. Compared to that, I cannot comment much more. Of course, if you look at the total maintenance cost this year versus last year, it is coming down. If you take into account the fact that we have been closing some capacity, divesting some units. In that sense, if you look at the full year figure, it is of course less than last year.
Looking at your schedules, I was sort of under the impression it would be a similar maintenance cost in the third quarter versus the second, which was of course a big step up from zero in Q1. Just to get the numbers right. You are basically talking EUR 30 plus the EUR 28. That is the right number for Q3?
Just to be straight, the increase between Q1 and Q2 was EUR 28 million. An increase from Q2 to Q3 is about EUR 30 million. We are not giving the absolute figures as such out. It's the difference between the two quarters.
Kind of understand.
That's what we are guiding and telling all the time.
Okay. No, that's fair. You've done your bond refinancing. What sort of impact should we see, if any, on your net interest cost going forward?
That should be, of course, coming down as we were repaying higher cost bonds by replacing those with lower cost. Average interest rate now is about 4% in our loan portfolio.
What is the delta there, just to be clear?
You have to remember EUR 300 million is only a fraction of the total loan portfolio. We are talking about some decimals on the average interest rate.
Understood. When you're looking at your CapEx, you obviously provided guidance for the current year. I think we're all quite curious what you're thinking about 2017, I understand that's subject to potential decision regarding Ostrołęka. Can you provide any guidance excluding Ostrołęka and also the impact of the divestitures of Kabel and Suzhou, how that would potentially impact your CapEx in 2017 onwards?
I can only repeat, Lars, what we have been also telling earlier that now that we are ready with the big projects, we expect our capital expenditure come down towards depreciation levels that we have given also plus EUR 100 million for the forestry.
That would apply in the range of EUR 600 million?
We are thinking about EUR 600 plus, EUR 630, EUR 650.
Okay. Just one final question from me. You're looking at the fluff products market, and I appreciate that it is a nice growing market, but at the same time, this is a market that is seeing a tremendous amount of new supply coming into. How do you think about selling that fluff into the market? Is it a meaningful sort of return on that investment versus continuing with paper pulp?
Lars, this is Kalle. Yes, because we are one of the very few producers of fluff in Europe. Secondly, there is a consolidation happening on the global fluff market, which means that it's actually very well received with the customers.
Effectively what you're saying that customers would like to have someone else to do business with. That's essentially what you're saying?
Yes.
Very good. Makes sense.
That was the reason basically. First, the proximity in Europe. Europe uses a lot of imported fluff, and suddenly we have become one seller, and that's one of the reason why we increased capacity. This investment for this 160,000 is a marginal increase of an existing mill, so with an infrastructure. It's a good deal.
Very good. Makes perfect sense. Thank you.
Thank you. We will take the next question from Mikko Ervasti of DNB Markets. Please go ahead.
Thank you. Good afternoon. A couple of questions from me. Can you please give some comments about the pulp price developments in the hardwood and softwood and their impact on your ASPs now going forward into the second half of the year? Another question on the Wood Products business. You had a strong result now in the second quarter, and this LVL line started in the end of the quarter. Will there now be like a heavy cost burden without these volumes really going forward into Q3? What kind of magnitude would there be? Just to help us understand the rest of the year for that unit. Thank you.
If I look upon the pulp prices, so to say, going forward and for the next quarter, I would say that softwood Europe is stable, hardwood Europe is stable, softwood China stable, hardwood China slightly higher. You have to remember that the cost investments for some good reasons are not that high to produce wood mechanically. If I remember right, investments in Varkaus for the LVL machine is some EUR 40 million, and that depreciate. We haven't given.
No, in general, if you look at the Wood Products and LVL investments and the scale is totally different compared to Beihai.
Yes.
The effect, there is of course some small effect, but it's relatively.
Yes
small figures. Whatever, it is included in our figures, but as it is in relative terms to size of the company and other figures, not significant.
No.
We have not specified it separately.
No.
Okay. Thank you.
Thank you. We'll take the next question from Harri Taittonen of Nordea. Please go ahead.
Yes, good afternoon, Harri Taittonen. Well, first question on the linerboard market overall, what you are seeing there, and there's been sort of price increase announcement by some of the competitors and potential seen there, but how do you see that in terms of kind of the acceptance for your products from Varkaus?
Yes. For Varkaus kraftliner, we see it slightly higher in the kraftliner in the next quarter.
Right. Okay.
Fluting, probably slightly lower. On containerboard based on recycled paper, it's stable.
Okay. Sort of just a question on the group level, kind of the wording on the guidance, as sort of I've understood that the code is more or less that in line is ±10% and somewhat below is anything up to 20% lower. This was the wording you used last quarter around and the clean EBIT ended up being about 9% lower. Three months ago, was this sort of outcome pretty much on your mind when you gave the guidance after Q1? Was this Q2, did it give surprises to you compared to what you thought of them in world in April?
What I would like to say, you got it right on how the interpretation should be. We were cautious due to the Beihai and the Varkaus startup. Everybody in this industry who's been starting up machines of this size knows how challenging it is.
Of course. Yes. Would you say that, you essentially repeat the same guidance now, the reason is slightly different now. You refer to more concrete cost bases in it.
I think obviously we are more secure about Varkaus because we have solved the pulp production problem that we have there. I am probably even not more cautious about Beihai because it is just two months of operation.
Yes.
Then we are having higher maintenance sequentially.
Absolutely. Okay. Thank you. Sort of the last question on the Wood Products, this was an impressive improvement in earnings, you have done the same in the second quarter a few years ago, it then was fairly short term improvement. How sustainable, or as it were, you referred to the improved efficiencies and the lower wood cost, which is kind of suggesting that the improvement is more sustainable.
It is seasonable driven partly, but it's also lower wood cost. I would like to repeat that when it comes to return on capital employed, for the last eight quarters, I think compared to historic and anybody else in this industry in Europe, we have outshown them and invested on return on capital employed. It is a bit volatile, but it's volatile on a higher level now.
It's less volatile than in the past.
Yes.
If you look at the history of Wood Products.
Yes.
Okay. Excellent. Many thanks.
Thank you.
Thank you. We will take the next question from Mikael Doepel of Handelsbanken. Please go ahead.
Thank you. Good afternoon. Just quickly coming back to the question about the Paper division and the project that you have launched there, I do appreciate that what you are saying is it is an internal project right now. If you think further out, further down the road, would you be willing to discuss also some external options or partnerships regarding this business that might or could lower your exposure to that business?
As I have said always If somebody is coming to me, offer me the value that these good assets are worth. You see now we have improved two quarter in a row, strong cash generation, if you exclude the one-time payment for Suzhou and for Kabel, it is actually yielding very well, above the target. I am willing to discuss. I am not willing to be bigger and longer in paper. I go back to my old statement.
Yeah.
Is that clear?
What I'm thinking here is that, given that your CapEx levels are obviously or should at least come down from levels that we have seen in the last five years or so, the importance of this cash flow that you are getting might become a bit smaller than it has been previously. That might perhaps change your view on things.
That's not the reason why we're doing this. This is an internal to make sure that can generate cash and if it would be something like you're discussing, the value is even higher.
Yeah.
Exactly. I think the emphasis is on the word how to manage paper business.
Yes.
Okay. That's clear. Thank you very much.
Thank you. The next question is from Oskar Lindström of Danske Bank. Please go ahead.
Hi, good afternoon. I'd like to follow up on Harri's question around the liner market, but focus more on the Consumer Board market and how you see the outlook there, and then specifically about your liquid packaging board business and I realize you have longer contracts there. Are some of these, or how many of these contracts are coming up for renegotiation ahead of next year? That's my first question. The second question is around the recycled paper market, and if you see, how do you view the risks of new capacity there impacting kraftliner?
You're absolutely right. We have a very good market share or a strong relative market share in Consumer Board. I think it is, we are 40% bigger than our nearest competitor in size. With Beihai, we were 1.7 times bigger than our nearest competitor, which is giving us a huge strength. Those contracts, if I remember right, I think there are renegotiations next year with one of the big clients. That's what I have in my memory. I'm not 100% sure. That's David. When it comes to recycled paper, in the second quarter, there were some price pressure in it. For our Ostrołęka mill, which we have increased the output of, we compensated by more volume, so we don't notice it. There is always a risk that there are other people building, and that you have to be careful about.
That's also why we announced the feasibility study ahead of time to make sure people understand that we are looking at it. That's a very important part of the feasibility study if we think if somebody is building at the same time. Also, I think you can convert a lot of paper machines to recycled board mills. We need to be aware of that they will not be as efficient as the machines you're having in like PM5 in Ostrołęka, and they don't have the same technical feature.
If I may, a follow-up question on that last. Do you think, it might be a bit difficult to answer, but do you feel that maybe there's too much concern among investors or in the market about the conversion of paper machines into board machines?
I think that it's always good to have, so we don't create what we created in paper, too much structural overcapacity. That's why I think if you go into this, you need to exactly know where you build it, how well integrated you are with the box plant corrugators, your own or external. A recycled containerboard, it only travels about 1,000 kilometers. A corrugated box travel 20-30 kilometers. You need to know exactly where you're building it and how you have the rest of the setup around. It's important where you are, and you have to be cautious. There's always room. What?
You're not overly concerned about overcapacity in the sort of medium term, a couple of years out?
I am not over concerned about the area where we operate, which is in the Ostrołęka area and Eastern Europe. There I'm not concerned. I might be more concerned when it comes to Central Europe. Yes.
All right. Thank you.
Thank you. We will take the next question from Kevin Hellegård of Goldman Sachs.
Good afternoon. I just wanted to check up on in terms of contracts for both pulp and paper. If you expect
pulp prices to be stable into 3Q. Does that mean we have seen the full effect of the lower hardwood prices, or will contract mean that there's still a bit of weakness in terms of pricing coming into 3Q? Then in terms of paper contracts, how are recent contract negotiations looking? Is there pressure on prices, or do you expect them to stay stable as well?
Of course, in the pulp market, typically prices are monthly or max quarterly basis. I think it's fair to say the effect is more or less in the figures already. When it comes to paper, it is right now impossible to say where they're going because we are in negotiations. I'd rather not answer that because I might be wrong or I might be right. We are right now negotiating the whole-year contract in publication paper.
Okay. Thank you.
Thank you. We'll take the next question from Tom Burton of Bank of America. Please go ahead.
Hi, guys. Thanks. I just had one question left over. Most of mine have already been asked. It's on the other segment, because in your numbers today, it seems that that was where a lot of the variance versus expectations seemed to come. I wonder whether you could help in terms of guidance and how we should think about that going into Q3 and for the rest of the year.
Yeah. Exactly. Maybe I take this one. We know that it's challenging for you, this segment, other, because there are many different items driving it. If you look at the result development during the Q2, there were, I would say, two main drivers. One being low energy prices, and second one being the results from the forest associates, Tornator and Bergvik Skog, where we had less, for instance, real estate gains, land sales related things. Difficult to give you sort of clear guidance where you should be going with that. I think it's not far fetched if you take sort of an average from what you have seen with the past three, four quarters.
Okay, fine.
Does that make sense?
Okay, thanks.
Thank you. We'll now move to Mikko Ervasti of DNB Markets. Please go ahead.
Thank you very much. A follow-up question. Regarding this operational EBIT and the one-time items you have now specified, I just quickly browsed through the other presentations from the past, and this time around, you really seem to like to highlight these one-time items. Can you now confirm that these are truly of one-time and one-off nature and not repetitive in a sense like bad debts can probably happen every now and then, and these impact issues are sort of internal efficiency issues you have, but you want to quantify these. Can you please elaborate on that? That would be very helpful. Thank you.
First of all, I think whenever we have had a bad debt of size, we have always disclosed it, and this was a fairly big one. That I cannot guarantee not happening again, even though we are working extremely hard for it not to happen. The other part in that schedule is mainly related to Varkaus and that part of the ramp up. I wanted the people to understand when you ramp up, you get the full depreciation and you gradually increase your capacity and your margin while you're trimming the machine. That will continue for both Varkaus and Beihai. We are saying that we will be EBITDA breakeven in the third quarter and EBIT breakeven towards the end of 2016. This would be that. It's to show the underlying business for you.
Beihai, here we are ramping up during the next 18 to 24 months.
Okay, this is actual ramp up.
That's why we will
I know the invention of the ramp up.
Yes. That's why we will guide now going forward the impact of Beihai continuously. That's why we also give you guidance on when we will be EBITDA or EBIT breakeven for Varkaus, helping you getting your models right.
All right. Thank you.
Thank you. That will conclude the Q&A session. I'll now turn back to the speakers for any additional or concluding remarks.
Yes, thank you very much for spending a full hour with us. I'm honored with that in the midst of vacation time, especially in the Nordic. I think it's important to remember that we are in a transformation. We are moving ahead quite fast. We happened a lot in the second quarter. What I'm especially proud of is that the underlying business is very strong improvement. We are ramping up two mills at the same time. We continuously generate a lot of cash. We are strengthening the balance sheet. Thank you very much. Have a nice summer.
Thank you.
Thank you.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.