Good day, and welcome to the Q2 STORA Enzo Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ula Payanen, Head of Investor Relations. Please go ahead, madam.
Thank you. Good afternoon, everybody. I'm Ula Payanen, Senior Head of Investor Relations here at Storanzo and welcome to our Q2 twenty sixteen earnings call. With me here today, I have our CEO, Karl Sundstrom and our CFO, Stefo Farri. And we will start the conference by presentations from Kalle and Seth Paul.
Please Kalle, go ahead.
Thank you very much and good afternoon or good morning or good evening depending on where you are in the world. So it's been a very active quarter here at Storanso operations. And 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 and we are ramping up ahead of time. We started before.
The Warkhaus kraftliner mill is ramping up and we solved the issues with the pulp mill that we had in the first quarter. We have also started up the LVL machine in Warkhaus for wooden elements in the month of June. We have announced three divestments of carbon, such as IL recycling totaling €289,000,000 in cash consideration. We have set ahead with a feasibility study for cross laminated timber production at Gruyvern in Sweden. And we have had the first commercial contract from the Lignin in Sunnila.
And then we did a Eurobond refinancing of $300,000,000 If you look on the group financials, so sales came in 1.4% lower than the same period last year. However, you look at the business excluding the structural declining paper and the divested Barcelona mill, it's actually an increase by 3.6%. Operational EBIT increased by 9.2 and that includes a €6,000,000 bad debt provision in Paper division. We came in on a record cash flow of $493,000,000 and we kept for the fourth consecutive quarter in a row a return on capital employed of over 10% and we came down a little bit or below 13% if you exclude it by EIMIL. And we have continued to strengthen the balance sheet.
So net debt to EBITDA is 2.3% versus 2.7% a year ago. And that is in the same quarter as you had the dividend. So 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. And if you look on the business like Biomaterials had basically flat results despite the 6% decline in sales.
We had a very strong performance in Wood Products and we had in other, we had a declining result of 11,000,000 That is coming from half of that is explained by lower energy costs. And the other part is because we have less profit coming from land sales in Tolnato and Baizik. But all in all, that's SEK 19,000,000 or slightly more than 9% increase. And if you look on some of the onetime items that we are having in the quarter, so we're having compared to the same period last year, we're having $3,000,000 higher EBIT impact in Beihai Mill. Due to the ramp up and the clean out of the issues that we had in impact announced in the first quarter, that's another $9,000,000 And then we had $7,000,000 EBIT impact in the Paper division, one coming from the incident that we had during the second quarter at the Weitzel Auto Mill and then $6,000,000 from the bad debt.
If you take that altogether, 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 point five years, we have managed to accomplish quite a lot. Everything from starting the Muro
sawmill, Sunilab biorefinery, the debottlenecked E Matra, we are building a Vivya 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 Utterson, the Arapotti, the Kabul Mill and the Soccio that has been announced. That is actually a reduction of one third of all the paper sites. Then 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.
Pulp production is expected in eighteen to twenty four months. The estimate, which is excluding the recently announced PE coating remains at €800,000,000 but 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 Storrenso. Coming to Rykaals, the transformation of Rykaals from a 280,000 ton paper mill to becoming a 390,000 crossliner mill plus an LVL is ongoing with the last part being ready in the month of June when we actually started to deliver from LVL machine, making wooden building element. And we are expecting full production in mid-twenty eighteen.
We have solved the problem, as I 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 $289,000,000 in cash consideration from the announced divestitures that we have announced during the second quarter. And this is an important part of the transformation, but also an important cash generator. Before handing over to Zepo, I would like just to remind you of this slide that I've been using for a number of quarters and that is showing the transformation from 2006 to year to date.
And as you can see, we are now having two thirds of our sales coming from the growth area compared to 30% in 02/2006. And over 80% of the profit coming from the growth area, while it was only 38% in 02/2006. With that, I hand over to Seppo.
Thank you, Karl. And I start with some key figures related to profitability and our balance sheet. First of all, sales for Q2 this year were at €2,526,000,000 so that is 1.4% down versus a year ago. But excluding structurally declining paper and divestments, actually sales increased 3.6% and 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.
And operational EBIT increased nine percent year on year for the fourth quarter in a row. Operational EBIT margin was 8.9%. EPS excluding items affecting comparability went down €06 driven by three main facts. One of them being higher financing costs due to the bond buybacks. We also had negative effect from revaluation of currency denominated loans in Poland and China and a lower result from Forest Associates that is Paretoix, Kug and Tornator.
EPS basic went down EUR 1. And operational return on capital employed excluding Beihai project was 12.5%, up from 10.9% a year ago. And cash flow from operations record high at €493,000,000 Net debt to EBITDA decreased from 2.7% a year ago to 2.3% and actually was flat against Q1 at 2.3 even though that we paid the dividend. That is again a good proof point of the cash flow generation capabilities of our company. Moving forward to divisions.
I started Consumer Board. The operational return on capital excluding payout 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 $2,000,000 but you have to notice that the effect of Beihai mill startup was $18,000,000 in the quarter.
And we have two important investments going on in the division relating to additional coating capacity both in Imatra mill in Finland and Dehai mill in China. And this is to meet the increase in demand for food service board mainly globally. Then moving to Packaging Solutions, where sales increased 14% year on year mainly due to ramp up of kraftliner business in Warkaus and higher sales in Ostroveka in Poland. Operational EBIT excluding Warkaus and impact in China increased by $2,000,000 and we are moving forward with the feasibility study as announced earlier in Ostroveika mill in Poland related to new potential containerboard machine. And we expect to finalize this study by end of the year and come back to this subject then 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 €57,000,000 due to lower pulp prices, offset by positive FX effects. Important step was taken at Sunila Mill, where we signed the first customer agreement for the Limiting business. In biomaterials, we have announced an investment at the Skutsar pulp mill to increase our blast capacity by 160,000 tons and that is on top of our current 250,000 tons capacity. Wood Products had a good quarter
and
excellent return on operating capital 25.6%. Sales went down 1.8%, mainly due to strategic reduction in external sawn goods trading. Important to notice, operator EBIT improved by €10,000,000 mainly due to higher deliveries, input 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 Varkas Mill started in June and full production is expected in mid-twenty eighteen. We have also announced a feasibility study in Sweden to build a COT production operation at Kruger Sawmill in Sweden.
Then moving to Paper, where EBITDA improved 42% year on year. Worth to notice that even though that the reported sales went down eight percent, sales for business excluding divestments and conversions went up 4%. So there is some underlying growth in the remaining Paper business. Operational EBIT improved by $4,031,000,000 euros due to better sales prices and lower costs. And please note that this includes in total €7,000,000 for bad debt in Sweden and incident at Weichelwater Mill.
Cash flow of the investment activities, the strategic target for Paper business was at 5.8%. But worth to note is that the target 7% was actually exceeded if we exclude one time restructuring cash costs coming from Carter and Susu meals 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. Then a couple of comments on the Eurobond refinancing we had in Q2.
We issued EUR300 million of Eurobond in June for 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 UK and the appetite for the bond was excellent. It was more than seven times oversubscribed. And the coupon for the issue was 2.125 or yield of 2.17%, which is actually we always keep on ever priced in our rating category for seven year bond, very successful transaction.
We also use the proceeds to repurchase bonds maturing 2018 and 2019 in total for €352,000,000 and on top of that, euros $350,000,000 of other bond maturing in 2018. So the main purpose of this transaction was not to increase our liquidity, but to restructure our portfolio. And thanks to this, we have now extended our debt maturity profile to four point four years. Then to summarize where we are with the strategic targets. I commented some of these already during the presentation.
But 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 EBITDA, clearly below the targeted 3%. The same for debt to equity standing at 58%, also clearly down from year ago 70% and target of 80%. Fixed cost of sales still above targeted 20%, but like I said earlier, we are confident that 20% target is reachable going forward. Our return on capital employed excluding PayHard was 12.5%, only a bit below the 13% targeted level.
Consumer Board, divisional target, 20% return on operative capital. Excluding payout, 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 WaraKal's operation and challenges in China in impact. Biomaterials 8.9%, which is the same level as a year ago, below the 15 level, but we have some maintenance works done at Montes De Platte having an effect on the profitability for the quarter also. And Wood Products like said excellent quarter, return on capital at 25.6%, clearly above 18% target level.
And Paper, excluding cash restructuring costs at Gartner and Social Meals at 7.9% or 5.8% including those, so at the targeted level there also. With that, I hand over back to you, Karl.
Yes. Thank you very much, Sappo. And let's look upon the guidance for the third quarter twenty sixteen. Sales are estimated to be similar or slightly lower than the amount of 2,526 million euros recorded in the second quarter twenty sixteen. Operational EBIT is expected to be in line with or somewhat lower than the €226,000,000 recorded in the 2016.
These estimates include the negative impact of the scheduled annual maintenance shutdown and day high mill startup, which are estimated to be approximately $30,000,000 and approximately $60,000,000 higher in the third quarter twenty sixteen than in the second quarter twenty sixteen, respectively. So before we go into the Q and A session, I think it's important to remember that Storanza offers an interesting and successful transformation journey, strong focus on customers and innovation, strong profitable growth, strong cash generation, strengthened balance sheet and sustainability in business focus. With that, hand over to Ula for the Q and A session.
Yes. Thank you, Carla. Yes, we are ready now for the Q and A session. Could we please get the instructions?
And we'll take our first question from Antti Kovkivuori of Danske Bank. Please go ahead.
Yes, thank you and good afternoon from my side. About the Beihoy startup, now you have few weeks and months behind you and then you probably have more insight than you had before. Could you little bit talk about the outlook and the contribution of that mill? Now you guess, you kept the guidance more or less same for the H2, but how should we view the 2017? And is there going to be gradual ramp up?
Or is there gradual improvement in EBIT contribution? Or is it more going to be like a step change at some point of the curve? Or how should we view that? And then also if you're willing to comment about your thoughts when the mill could reach EBIT breakeven that would be very helpful. Then 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 or if you could elaborate a bit about that? Thank you.
Ananti, thank you very much. So regarding the Bayer, even though we are ahead of the curve right now, we only been running it slightly more than a month we two months actually, slightly more than two months And since we're running it right now it's going ahead. We are ahead. We are producing more prime grades than we expected. However, I don't 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 to give you a guidance quarter by quarter. I think that is better. And you saw it slightly different. Changed it slightly compared to what we said last time. And we came out a little bit shorter on the more positive side, 2018 versus guided 2020.
And now we increased it to an additional 16 for the third quarter. So 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. So it will be cost, it will be different ways because we have five divisions, four are growing and one is declining because the paper structure is declining.
And that means that we need to look upon how we work with it and how we set up certain things. Because I think it is important that we need to create structure for paper that is future proof. So this is an internal project to be able to go for this. Did that answer your question? And we will give you more information when we know more.
And 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 to you throughout this channel. 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 Michael Jas 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 on regarding what you will look out for except for the one that you already stated?
And the second question would be on Warkaus, 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? And then the third one would be around the dividends from Berrivik 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. And then on the dividends and how we account for that, give to the expert set book. 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 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.
And it's just started and it's an open, it might come up new things and we will keep you updated about it. And when it comes to Vallikau, if I remember right, I think we produced 67,000 tons in Q2 and we produced 60,000 tons in Q1 And full capacity will be reached during the 2017, which is a little bit of a delay because we need to change out some equipment in the first quarter of next year. So it's a one quarter delay versus the official plan. Did that answer your question?
Yes. Perfect. Thank you.
Then we take the dividend.
Okay. Relating to dividends from Fredericksburg and Tornado, first of all, during the quarter, we have received about €45,000,000 dividends from Fredericksburg and €12,000,000 from Tornado. But this has no profit and loss effect. Of course, it has an effect on our cash flow and net debt. And the reason why it has no effect on a profit and loss when we get dividends from these groups associated with the three them as associated companies and book the net result of those two on one line in our EBIT, operational EBIT line.
So it is already in our results, our share of the company result. But then when we get the dividend, it's of course cash flow loss, but no result effect in profit and loss.
Thank you so much.
Thank you. We'll take the next question from Linus Marcin of SEB. SEB. Please go ahead.
Thank you very much. Thank you very much and 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 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 potential ownership change of your paper division?
As I was quoted in that report from I think it was from direct, it's an internal project we're running.
Yes. That's very clear. That's very clear. And you gave some examples of what that might entail. On something completely different than FX, could you give us some idea of the sequential FX development Q3 on Q2?
And not least, taking into account the recent development of the Brazilian real and any thoughts on that maybe timing wise, maybe it's not even third quarter, maybe it's coming later, but it was a major positive last year. And how should we think about that in the next couple of quarters?
Yes, it's Zeppey. Maybe I take this FX related question. During the quarter, the positive FX was about €28 €29,000,000 It is less than last year and full year, we estimate some €75,000,000 roughly positive effect this year versus last year from FX. Earlier in the year, we have been talking about 100,000,000 that's a bit less, but 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 weaker, but at the same time, dollar has been getting stronger, Swedish kroner weaker. So net net, we are marginally better off in short term at least when it comes to currency. So no major effect from that side.
But the longer terms effect of Brexit is not because we can compensate, because we are selling goods and products that don't be produced inside UK. So we can adjust our prices, the longer is what's happening to The UK, but even more important what happened to the Europe economy with
the Brexit. And your question on Brazilian real, just to remind the 10% move is about EUR 13,000,000 on our results. It's not so significant if you compare to Tallap or Swedish ground for instance.
Great. That's very helpful. Thank you very much. And one last question, if I may. Impact has been a bit of a burden recently.
What was the EBIT contribution in Q2? And any guidance as to what you expect in the third quarter?
Well, we don't comment more in detail in the retail units. It's less than in Q1, but has not been performing as well as expected because of some customer losses mainly. And we are working on improving the customer product portfolio there going forward. But
the aim is to improve the performance of impact. So Q2 is better than Q1 and it's Yes, absolutely. Q2 is better than Q1, absolutely.
And it wouldn't be farfetched to think that Q3 would be even slightly better?
Everything we say is included in the guidance that we've given, but so we don't give any individual.
That's okay. Thank you very much.
Thank you.
Thank you. We'll take the next question from Lars Kjellberg of Credit Suisse. Please go ahead.
Thank you and good afternoon. Couple of questions, a bit curious on not so much on the guidance per se, but the maintenance cost you're talking about the €30,000,000 sequential increase that would imply almost €60,000,000 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 We are listed now in for your benefit in the interim report annual maintenance schedule. So compared to that, I cannot comment much more. But 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. So in that sense, if look at the full year figure, it's of course less than last year.
So looking at your schedule, so I was sort of under the impression there 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. But just to get the numbers right, so you're basically talking 30 plus the 28. That is the right
number That for would be great. The increase between Q1 and Q2 was €28,000,000 An increase from Q2 to Q3 is about $30,000,000 And we are not giving the absolute figures as such out. It's the difference between the two quarters. I understand. That's what we are guiding and telling all the time.
Okay. No, that's fair. When 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 and replacing those with lower cost. Average interest rate now is about 4% in our loan portfolio.
And that's what is the delta there, just to be clear?
We have to remember, 300,000,000 is only a fraction of the total loan portfolio. So we have talked about some basic margin 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. And I understand that's subject to potential decision regarding Australika. But can you provide any guidance excluding Australika and also the impact of the divestitures of Kabal and Zuzhou, 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 big projects, we expect our capital expenditure come down towards depreciation levels that we have given also plus EUR 100,000,000 for the forestry.
That would imply in the range of EUR 600,000,000?
About EUR 600,000,000 plus EUR $630,000,000, $650,000,000.
Okay. Just one final question for 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? And is that a meaningful sort of return on that investment versus continuing with paper pulp?
Lars, so this is Karl. 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.
So effectively what you're saying that customers would like to have someone else to do business with, that's essentially what Yes. You Makes
sense. That was the reason basically. First the proximity in Europe, Europe uses a lot of important stuff and suddenly it just become one seller and that's why one of the reasons why we increased capacity. And it is this investment for this 160,000 is a marginal increase of an existing NIM so within infrastructure. So it's a good deal.
Very good. Makes perfect sense. Thank you.
Thank you. We'll take the next question from Mikko Ervasti of DNB Markets. Please go ahead.
Thank you and 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? And then another question on the wood products business. So you had a strong result now in second quarter and this LVL line started in the end of the quarter.
So will there now be like a heavy cost burden without these volumes really going forward into Q3? And what kind of magnitude would there be? Just to help us understand the rest of the year for that unit. Thank you.
So 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 And then you have to remember that the cost of investments for some good reasons are not that high in to produce wood mechanically. If I remember right, investments in varicose for the LVL machine is some $40,000,000 and that's depreciated. I don't we haven't given, but it's
No, but in general, if you look at the wood products and LVL investments and the scale is totally different compared to for instance Day High. And there is of course some small FX, it's relatively small, small figures. And whatever it is included in our figures, but as it is in relative terms to size of the company and other figures, not significantly, I have not specified it separately.
Thank you.
Thank you. We'll take the next question from Harry Teitenen of Nordea. Please go ahead.
Yes. Good afternoon, Harry Teitenenen. 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 sort of potential seen there. But how do you see that in terms of kind of the acceptance for your products from Barkhouse?
Yes. For Barkhouse kraftliner, see so say, we see a slightly higher in the kraftliner in the next quarter. And SC fluting probably slightly lower. And then on container border based on recycled paper it's stable.
Okay. Okay. And then sort of just a question on the sort of 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 plusminus 10% and somewhat below is anything up to 20% lower. And this was the wording you used last quarter around and the clean EBIT ended up being about sort of 9% lower.
Was this three months ago, was this sort of an outcome pretty much in your mind or on your mind when you sort of gave the guidance after Q1? Was this Q2? Did it sort of like give surprises to you compared to what you thought of the world in April?
So what I would like to say you got it basically you got it right then how the interpretation should be. But we were cautious due to the Beihai and the Ryka startup. Because starting up everybody in this industry has been starting up machines on this side knows how challenging it is.
Of course. Yes. And would you say that is there well, you essentially repeat the same guidance now, but the reason is slightly different now. Refer to more concrete cost basis in it so or?
I think obviously we are more secure about mark outs because we have sold the pulp production program that we have there. But I'm probably as it's even not more cautious about Beihai because it is just two months of operation. And then we are having higher maintenance sequentially.
Absolutely. Okay. Thank you. Sort of the last question on the Wood Products, I mean, this was an impressive improvement in earnings. And you have done the same in the second quarter a few years ago and it then was fairly short term, I mean, improvement.
Is there kind of a how sustainable or as it's very you referred to the improved efficiencies and lower wood cost, which is kind of suggesting that the improvement is more sustainable?
It is seasonable driven partly, but it's also lower work cost. But I would like to repeat that the when it comes to return on capital employed for the last eight quarters, I think compared to historical and so anybody else in this industry in Europe, we have outshone an investor on return on capital employed. It is a bit volatile, but it's volatile on a higher level now.
It's less volatile coming to pass if you look at the history of both products.
Okay, excellent. Many thanks.
Thank you.
Thank you. We'll 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 and I do appreciate that. What you're saying is it's an internal project right now. But 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 And you see now, we have improved two quarters in a row, strong cash generation. And if you exclude the onetime payment Sutcu and for Coral Bell, it's actually yielding very, very well above the target. So if somebody I'm willing to discuss. I'm not willing to be bigger and longer in paper. But if somebody I go back to my old statement.
Is that No, no. I yes,
that's 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. And that might perhaps change your view on things.
But that's not the reason why we're doing this. This is an internal to make sure they can generate cash. If it would be something like you're discussing the value is even higher.
I think the emphasis is on how to manage paper business. Yes.
Okay. That's clear. Thank you very much.
Thank you. The next question is from Oscar Lindstrom of Danske Bank. Please go ahead.
Hi, good afternoon. I'd like to follow-up on Harry'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 sort of your liquid packaging board business and are we see I mean, I realize you have longer contracts there. Are some of these or how many of these contracts are coming for up for renegotiation ahead of next year? That's my first question.
And then 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?
So we 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, our nearest competitor in size. With AI, we will be 1.7x bigger than our nearest competitor, which is giving us a huge strength. And those contracts, there are no 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. But I'm not 100% sure, but that's stable. When it comes to recycled paper, in the second quarter, there were some price pressure in it, but for our Ostroleka mill which we have increased output of we compensated by more volumes. We don't notice it, but there is always a risk that there are other people building and that you have to be careful about. And that's also why we announced the feasibility study ahead of time to make sure people understand that we are looking at it.
But that's a very important part of the feasibility study if we think somebody is building at the same time. But also, I think you can convert a lot of paper machines to recycled board mills. But we need to be aware of that they will not be as efficient as the machines you're having in like PM5 in Austria, and they don't have the same technical feature.
If I may have a follow-up question on that last. I mean do you think the it might be a bit difficult to answer, 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 there is always good to have so we don't create what we created in paper, too much structural overcapacity. And 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 and corrugators, your own or external, because a recycled containerboard it only travels about 1,000 kilometers. And a corrugated box travel 20 to 30 kilometers. So you need to know exactly where you're building it and how you have the rest of the setup around. So it's important where you are and you have to be cautious.
This is always true. But
you're not overly concerned about overcapacity in the sort of medium term a couple of years out?
I'm not over concerned about the area where we operate which is in the Austroleca area and Eastern Europe. That I'm not concerned. Might be more concerned when it comes to Central Europe.
All right. Thank you.
Thank you. We'll take the next question from Kevin Helgaard 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? And then in terms of paper contracts, how are recent contract negotiation 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. So I think it's fair to say that Pepek is more or less in the figures already.
And when it comes to paper, it is right now impossible to say where they're going because we are in negotiation. So I'd rather not answer that because I might be wrong or I might be right. But we are right now negotiating the half year contract in publication paper.
Okay. Thank you. Thank
you. And we'll take the next question from Tom Berlton 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 seem 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.
Yes. It's Zeppelin. Maybe I'll take this one. We know that it's challenging for you, this segment, Arthur, because there are many different titles driving it. If you look at the result development during the Q2, there were, I would say, two main drivers.
One being lower energy prices and second one being the results from the forest associates, Barnabasburg and Paradis Kug, where we have 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, but I think it's not far away far fetched if you take sort of an average from what you have seen with the past three, four quarters. Fine. 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 onetime items you have now specified, I just quickly brush through the other presentations from the past. And this time around, you really seem to like to highlight these onetime items. Can you now confirm that these are truly of onetime 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.
So 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. And 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 Varekaus and that's 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. And 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 2016. And so this will be the but to show the underlying And they are ramping up during the next eighteen to twenty four months.
Okay. So this is
a ramp Yes. And that's why we will guide now going forward the impact of Day High continuously. That's why we also give you guidance on when we will be EBITDA or EBIT breakeven for workout, helping you getting your models right.
All right. Thank you.
Thank you. That will conclude the Q and 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 Nordic. I think it's important to remember that we are in a transformation and 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 and we are ramping up two mills at the same time. And we continue to generate a lot of cash and 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 You may now disconnect.