Good day, and welcome to the twenty sixteen Storo Enzo Quarterly Results Conference Call. Today's conference is being recorded. At this time, I would like to turn your conference over to Ula Payana, Head of Investor Relations. Please go ahead.
Thank you, Cecilia. Good afternoon, everyone, and welcome to Stora Answers first quarter results call. We will have first the presentations and then go to Q and A. And the presentation will be held by our CEO, Karl Henrik Sundstrom and our CFO, Stefa Parvi. So please go ahead, Karl.
Thank you, Ola, and good morning or good afternoon depending on where you are in the world. So I would like to start with making a short overview before we go into the details of this quarterly report. So sales came in slightly down, but we are growing in the areas that we want to grow in and can grow in. And if you exclude the structural decline in paper and divested Barcelona mill, the sales were up 2.4% versus the same period a year ago. Operational EBIT increased by almost 13% and we actually reached a record high EBIT margin of 10.1%, the highest margin in a very, very long period.
Cash flow both before and after investing improved versus the same period last year and we have continued to strengthen the balance sheet. We are now having a net debt to operational EBITDA of 2.3% versus 2.6 a year ago. The result is basically coming out of a number of things happening. And if you look see on the slide here, you see that Consumer Board are down €6,000,000 versus a year ago. But then you have to keep in mind that China is 11,000,000 worse, which means that the underlying performance of Consumer Board are actually up.
And the reason why China is down by 11,000,000 are twofold. We actually have costs earlier because we are ahead of the startup schedule for the Beihai mill, which I will cover on later on. And we're a bit delayed in the forest operation in Beihai due to delayed licenses. You can see here that Warkaus is causing a bit of a challenge when it comes to power and pulp. Of that CHF 19,000,000 for Packaging Solutions, 8,000,000 is coming out of Warkaus.
And that is to be expected. It takes some time to start up a 390,000 ton board machine. On top of that, we have had €11,000,000 coming out of impact in China, of which slightly more than half of that €11,000,000 is coming from inventory write offs in our impact operation. Biomaterials improved €11,000,000 and most of that is coming from a stronger performance of the Montes Del Plata mill. Wood Products, 1,000,000 better and a very strong performance in paper.
In Other, the improved result is coming mainly from logistic operations, but also from Forest Associates. If you look upon the operating margin since the 2013 to today, we have actually been running a compounded average growth rate of 21%, which I think is something that to reflect upon. We have stabilized our operations on a higher return on capital employed. So we have three consecutive quarters now running above 11% for the totality and three consecutive quarters running above 13% if you exclude our investments in Beihai that we're supposed to start up in the coming months. The transformation is proceeding.
And here is just a short presentation over the major project we are running. Right now, we are in the mood of starting up the Beihai mill. It's an investment of €800,000,000 We will start up in the month of June the wood products for Wirecast Wood and Building Elements. And we are also going into the last phase of the silos demonstration plant, which will be ready early twenty seventeen. We are getting to a situation now where we plan to start up in May for our big investment in Bayer.
That is ahead of previously announced plans. So we're starting up in the month of May. It will take eighteen to twenty four months from the start up to reach the full production expected. We have also added, as you've probably been aware of, additional coating capacity in the mill to be able to serve the demand of foodservice board that we for the Chinese market and Asian markets. The BCTMP, which is the mechanical pulp operations, will be ready during Q4 twenty sixteen.
And already today, we have started delivery of both hardwood pulp from Veracel and softwood from the market. Tomorrow, I with some other people who travel to Warkaus for the inauguration of the next generation Warkaus mill. And it's an inauguration of both the board machine as well as the wooden element production. Before handing over to Sepul, I just wanted to reflect on this slide who's been part of the presentation for a long time. It's showing that we are going into more and more of a growth company focusing on packaging, solution, consumer board, wood products and biomaterials.
We had as I told you earlier a very strong performance in paper in this quarter. The journey continues. And with those words, I hand over to Seppo.
Thank you, Karl. I'll start with some key figures on following slide. Like Karl already mentioned, group sales as reported went down 1.8%, but excluding structurally declining paper and divestments, actually, there is good underlying growth of 2.4% year on year. Operational EBITA and EBIT both on record levels. EBITA at 14.6%, one percentage point improvement compared to year ago.
And operational EBITA at 10.1% compared to 8.8% a year ago. Return on capital employed, excluding Beihai project reached 13.7%, which is clearly above our 13% strategic target. And cash flow from operations continued strong at €289,000,000 compared to €171,000,000 in Q1 last year. And this helped us despite the high investment levels in Q1 this year to bring down our net debt to operational EBITDA to 2.3% versus 2.6% a year ago. Then some comments on our divisions and paid performance.
And first, Consumer Board. The operational return on capital excluding payout project was 34%. Sales were up 4.6% excluding last year divested Parcel Ora mill. Operational EBIT decreased to 73%, but it's worth to notice that effect of Beihai mill due to start up preparation and harvesting operations was negative by EUR 11,000,000. So if you add that back, there was actually a slight improvement in the operational performance of the Consumer Board division.
And like Karl already mentioned, Beihai Mill will be operational in May. And just to remind that the effect of Beihai Mill and operation start up is about €20,000,000 negative in Q2. It is about the same as it was in Q1 and about €30,000,000 reported during the second half of this year. And this €30,000,000 includes €10,000,000 quarterly depreciation. Then moving to Packaging Solutions, where sales increased 11%, thanks to ramp up of kraftliner business at Warkaus Mill and higher sales in Poland at Australika Wir.
Operational EBIT decreased by €19,000,000 due to negative impact of challenges in pulp production in Warkaus relating to start up there that was 8,000,000 And impact in China had EUR11 million negative coming mainly from stock correction, but also from declining business with some key customers. If you add these more or less onetime type of effects back to result, actually EBIT operationally remained flat versus Q1 last year. Valtose kraftliner is ramping up nicely. If you look at the kraftliner production itself, market acceptance for the brown kraftliner is good and quality has been good since the beginning as we have said earlier. And we expect to reach full production early twenty seventeen.
And then just to remind that maintenance shutdown is planned at Rosso Vega Containerboard Mill during this quarter. Then moving to biomaterials, where positive profitability improvement continues and EBIT increased 15.1% year on year. Our sales decreased slightly. That's because of lower softwood pulp prices in local currencies, which were partly offset by higher volumes mainly from Montes Here, it's good to notice that during the first half last year, Montes De Plata was still ramping up when it comes to production volumes and only reached full production volume in mid last year. Operational EBIT, like mentioned earlier, went up €11,000,000 due to lower wood costs and higher sales volumes from Montes And we are planning maintenance shutdown at Montes De De Plata mill during the quarter two now.
Then Wood Products, the operational EBIT increased by 6.7% even though that sales were down 2.6%. And sales went down due to lower prices in local currencies and lower sales volumes in traditional sawn goods, which is part of our strategy in Wood Products division increasing sales in higher value added products like Building Systems and Components. And that is reflected positively on the EBIT line. Wood and Building Elements investment in Warkaus is proceeding according to plan, and we have already started raw material supply for the production there, which we plan to start in June. Then Paper, where EBIT improved by €33,000,000 to €51,000,000 in Q1 this year compared to Q1 last year.
So they had an excellent good quarter. Sales went down 6.6%. That's driven by disposal of Rytsev mill and conversion of Varkas paper mill to kraftliner. Excluding these structural impacts, actually sales remained stable. Operating EBITDA, like mentioned, increased 36% due to lower costs and good operational performance.
Cash flow remained strong and was stabilized after strong improvements earlier last year for instance due to strong improvement of working capital. And we are planning maintenance shutdown at Languedot Kemil during the Q2. Capital expenditure forecast for 2016 remains the same as earlier and that is between $680,000,000 to €720,000,000 Depreciation is estimated to be $510,000,000 to €530,000,000 that is down €10,000,000 compared to previous communication mainly due to changes on the data side for instance due to Arapotik divestment recently announced. And just to remind that capital expenditure, because mentioned, include approximately €100,000,000 for the group's biological assets that's sort of forestry CapEx. And we estimate to spend about €160,000,000 for the Beihai mill in China for the final investment.
Then to summarize where we are with the strategic targets. First of all, looking at the growth, growth of our divisions and business excluding paper and divested Paracel Anamil 2.4%, so positive development continues. Net net to operational EBITA at 2.3%, clearly below 3% level defined as maximum. The same with debt to equity where we are 58% level compared to target maximum targeted 80%. We are still behind the target on fixed cost of sales at 24.4%, but there we have to remember that we have the cost from Beihai mill without the sales yet and also Warkau's kraftliner project is still ramping up, which means that there are fixed costs, but relatively small amount of sales so far.
Operational return on capital employed at 13.7% excluding Telai mill, slightly above the 13% strategic target. The divisional targets, Gerhard mentioned earlier, Consumer Board excluding Beihai was at 34%, where the strategic target is 20%. Including Beihai project, return on capital was 14.3%. Packaging Solutions, clearly behind, targeted 20% at 3% level. But here, we have to remember the effect of both China impact and Warkau's pulp mill challenges when ramping it up now after the investment there.
Biomaterials, increasing return on capital, and they are 13%, a bit of short of 15% But there, we believe that once the plant is fully operational and we are able to optimize logistics, recipes and also improve further performance of our Nordic pulp mills at 15% is reachable. And Wood Products at 12.3% behind the targeted 18% level, but here we also have some seasonal effects. And as you might remember, they have been around and at 18% already in the past, and we expect that they can also perform going forward. Paper, cash flow after investing activities to sales at 5.3%, slightly behind the targeted 7% level.
And with that, I hand over back to you, Paolo.
Thank you, Seppo. So the guidance for the 2016 is that sales are estimated to be slightly higher than the amount of €2,445,000,000 recorded in the 2016. Operational EBIT is expected to be in line with or somewhat lower than the €248,000,000 recorded in the 2016. These estimates include a negative impact of the scheduled annual maintenance shutdown at Montes Del Plata pulp mill, Ostroleka containerboard mill and Langebugge paper mill. Maintenance impact is expected to be approximately 25,000,000 higher than in Q1 twenty sixteen.
And as a summary is that sales are growing if you exclude the Barcelona divestiture and the structural decline in paper by 2.4%, so the growth continues. EBIT grew by almost 13%. We reached a record high 10.1% EBIT margin. Strong cash flow from operations, strengthened balance sheet, net debt to EBITDA 2.3% versus 2.6% and we are constantly for the third consecutive quarter above 11% in operational return on capital employed. And excluding Beihai Mill, we are also above the 13% for three consecutive quarters.
Continued progress in transformation into renewable materials growth companies continues. And as a very last slide, I want to welcome you to Stoensho's Capital Market Day in London on November 17. And with that, I hand over to Ulla.
Okay. Thank you, Karl. We will now open the Q and A session. Cecilia, could you please give the instructions to the audience?
Thank We will now take our first question Your line is open. Please go ahead. Thank you. So this is Antti
Koskiwore Koskiwore from Danske. Firstly, the Beihai mill and the guidance that you are giving for Q2 and H2. Now you say it's going to be a negative contribution of €30,000,000 per quarter in H2 twenty sixteen. Could you talk a little bit about your assumptions here? What kind of delivery volumes you are expecting, for example, in Q4 from the mill?
And a little bit about the qualities, you plan to produce during those quarters? Thanks.
We will produce different kind of test runs and second grades, because we believe it's not going to be more than it's going to take as we say eighteen to twenty four months to get to the full production with the qualities and the qualifications that we need to do, especially in the areas around liquid, CKB and foodservice board. But what exactly qualities, I don't really know. What do you want to add something?
Yes, can say, like we also mentioned earlier, of course, the beginning, we will produce very basic polyp boxboard grades. And difficult to say how fast we can reach sellable qualities, might take some weeks or months that first you need to repulp the production. But we are taking that into account and expect sort of normal ramp up growth for this kind of machines going forward.
But Antti, to be fair, we are starting the machine in May. So we haven't started it yet. Think this is a very good question for Q2 and Q3 because we will learn because I need that machine to start up.
Yes. But could you quantify a bit is it reasonable to believe that you will reach the EBIT breakeven level on those first eighteen to twenty four months?
Well, I think that like we said that to reach full production that takes eighteen to twenty four months. And assuming that we can reach the expected product mix, I think we can confidently say that we can reach positive EBIT by that time.
By that time. Okay. Okay. Thanks. Secondly, on biomaterials, could you give us an indication to what extent the lower pulp prices had an impact to your biomaterials result in Q1?
And also secondly on biomaterials, what do you expect your pulp balance to be during this year given the ramp up in Beihai, etcetera?
So first, on the we had some, but very minor price reductions in the first quarter, but some in local currencies. And that's like I would say it's about EUR 10,000,000. Then if you look upon the pulp pricing going forward into the next quarter, I would say that for softwood in Europe, it would probably be stable demand and stable prices. Hardwood for Europe, stable demand, but lower prices. Fluff Europe, demand slightly stronger and prices slightly lower.
Softwood China, we believe it's going to the demand is going to increase and prices have probably bottomed out. Hardwood China and it's also going to be quite strong and prices stable. And then when it comes to dissolving pulp, it's stronger demand, but stable prices. So it's going to come down a bit on the whole, but it's not going to drop too much.
Okay. But would you say that you have a kind of a one quarter lag with the pulp prices that we see on the market that when it hits to numbers?
I would say it's about that. And that's fair, because you see it on the screens and we are living on the contracts. That's about it. So all in all, we are this year going to be 2,000,000 tonnes long. And of that, we get it all in pulp.
And of that 800,000 tonnes softwood, 700,000 hardwood, two fifty fluff and 150 for dissolving.
All right. Very helpful. Thank you.
Thank you.
We will now take our next question from Lars Kjellberg from Credit Suisse. Your line is open. Please go ahead.
Yes, good morning or good afternoon, I should say. It's good to hear that you're on schedule for Beihai. I'm just a bit curious on when you're talking about the CHF 20,000,000 in the current quarter and CHF 30,000,000 in the second half per quarter. Is that a year on year comparison? I mean, you were running at about €11,000,000 you said it'd be high in Q1.
So it's in an incremental 9,000,000 Is that the way we should look at
No, it's absolutely because what the quarter mentioned.
Okay. So it's an incremental 9% versus what you actually had in costs in Okay. Good. Barkhouse, the issues there, you said they're related to the pulp mill.
I assume that's been fixed. But the impact portion where you said customer loss, how should you view that? Or that the comments you made on impact, what sort of quantum is going to be carried on into the second quarter, if any?
So with Wagaus, I will be very clear, we are working on it. It's not fixed yet, but it's on the right track, Okay? And it's not unusual when you have rebuilt and starting up that you need maybe changing the recipe in the pulp mill, where if it's too much of certain things you consume too much power, you have to rebalance everything back. So that's one thing. When it comes to the way I would look upon impact is that slightly more than half of the 11,000,000 is an inventory correction.
That will not come back. But then we have also we are ramping up with new customers in Q2 and Q3. So that's the way you should look upon it.
Understood. And then finally, just on the other plans revealed today about you considering to expand in Australia. Do we stand on that? And I mean, it's a significant amount of money in what now appears to be a quite oversupplied market. Of course, you're not going to start up tomorrow exactly.
But what sort of time line do you have on this? And how should we think about your view on containerboard and the integration into your own system?
If I take the mill to start with the new additional board machine, this is serving the Polish market. It travels about 1,000 kilometers. And we believe we sit in a sweet spot in that market to serving that corridor of former Eastern Europe and that there we continue to see growth. And that we're now taking the next step. So if we come out with a positive feasibility study at the end of this year, a decision will be early next year, if we decide.
And then on the integration, maybe you want to take that, Seppo. Today, we are using basically 30% of we are supplying 30% to our corrugated units.
Yes. And they use about 60% of Yes. Their own
Okay. And just finally then, if you do you want to comment at all on as you know starting up behind any thoughts about the pulp mill there assist? You're going to talk about So that early twenty seventeen
we have no Board decision for doing a pulp mill. We have said that we will only consider that once the board machine is up and running and that's going to ramp between eighteen to twenty four months. So we will not planning to invest at least in the next two years in Beihai.
Very good. Thank you.
We will now take our next question from Mikael Doepel from Handelsbanken. Your line is open. Please go ahead.
Thank you. I could just continue on Ostroleka then. If you go ahead with the project and you give it a go in early twenty seventeen, how long will it take before you're fully up and running?
It will be a build process of about two to two point five years. And then it is another eighteen to twenty four months to ramp it up.
Okay. And also in this same press release you said that your long term investment criteria is to keep the CapEx at the same level of depreciation. And obviously, this Ostroleka now fits into that frame. But wouldn't be fair to say that if that's your criteria, then possible China Pulp Mill wouldn't really fit there anymore?
That's what I said in my previous is that we will not consider it for at least the next coming two years. That's what I said. And I just want to it's depreciation plus around $100,000,000 in investments in biological assets.
Yes. Okay. That's clear.
So we don't go wrong. And that's the target. And within that, all this fits.
Okay. And then just in terms of the Consumer Board or the Beihai ramp up and the costs relating to that, could you just remind us what were the total costs for that in 2015, just to get a feel for the delta going into 2016?
In 2015, it was about EUR 10,000,000 a quarter.
Yeah. Okay. And this year, it's going to be about EUR 100,000,000 in total then?
SEK 20,000,000 of quarter first half and SEK 30,000,000 of quarter second half of the year.
Yes. Okay. Good. And then just finally on the paper pricing in Europe, prices have been moving Would you care to quantify by how much are all the deals closed and so on and so forth?
It's basically publication paper who has moved up a little bit, low single digits.
Yes. Okay. And then just a final one. In terms of FX hedging losses, now you had quite big hedging losses back in 2015, and you have previously said that this will roll over in Q2 and Q3. Do you still expect to get a meaningful delta on earnings for 2016 compared to twenty fifteen Jantiris?
Yes. In Q1 year on year, FX was positive EUR28 million. For full year, we expect like in the same amount about rough as we commented earlier around EUR100 million for full year. And this is mainly coming from positive effect from foreign exchange hedges that are rolling over from last year. This is of course, assuming that rates remain where they were end of Q1.
Yeah, yeah, yeah. And that there will be a more pronounced impact, I guess, from this than in Q2 and Q3?
Fairly, if you think that it's about €100,000,000 for full year and it was €28,000,000 for Q1, I think it's roughly around the same pickup for each quarter as it was now, maybe a bit less towards the end of the year, just remembering where rates have been during last year.
Okay. That's clear. Thank you very much.
We will now take our next question from Mikael Jaf from Kepler Cheuvreux. Your line is open. Please go ahead.
Yes. Hello. Good afternoon, everybody. I would like to continue a little bit on Australerka. I mean, now during the past few months, we've seen quite a number of decisions to build testliner or containerboard machinery in Europe.
When you do your feasibility study, how will you think about such things as market balance, etcetera?
It is obviously coming into that, and that's why we need to do a study and go through all that. Right now, it looks like a very attractive investment and that's why we're doing it. And if things turn out not to be that much, not that good. But we feel the balance, our location, our corrugated units and also bringing it basic as a copy of TM5, the most modern machine in Europe, I think we'll have an attractive case. But let's see and when we're ready with the feasibility study.
Okay. Many thanks.
We will now take our next question from Linus Larsson from SEB. Please go ahead.
Yes. Thank you very much and good afternoon. Just coming back to Beihai and your guidance for the next few quarters, just to be perfectly clear, is the figures that you provide us with totaling some EUR 100,000,000 as an absolute number for 2016. Is that your best guess for the EBIT contribution? Or is this just the cost side of things?
This is our estimated effect on EBIT.
Exactly. Because I would assume that you have some sales increasingly towards the end of the year.
Like Karl mentioned earlier, you have to remember we are ramping up a brand new machine, and it's not running yet. We are, of course, confident that we can successfully ramp it up. But it's easier to comment these kind of questions in Q2 call when we have a bit more experience on how the startup is moving ahead. But you have some We, of course, we must try to be realistic as always when we talk Absolutely. About
Absolutely. And I appreciate that. But how much of I don't know if you can comment upon that at all, but how much of sales do you expect in 2016?
It is quite limited. Let us wait for that, Linus. And the reason for it is that let us now inaugurate, get the start up and I'll come back later on, because it's very hypothetical. And I don't want to look like an idiot.
No, no, no. I fully understand. I just want to double check that we're not only seeing the one side of the P and L here, but that's clear. Thank you very much.
But I'll leave it just to be clear, like I said, it's EBIT effect we are talking about here. It's not cost only, it's assuming some sales as well and whatever positive is coming from those.
Exactly, exactly. That's clear. And then just on Australia, also a follow-up question just for clarity's sake. Is this 500,000 tonnes a testliner machine that you're considering? That's the first question.
And the second question, could you update us as to your group net long position after such an investment?
So it is RCP based containerboard that we're going to make there. Okay. And your second question, I missed it. Yes.
I mean on the group level update us please. Today you're long how much 500,000 tonnes?
Yes. And we will then add another 500,000
Yes.
Great. Good stuff. And then a third follow-up, if I may, just on Valkyrs. It sounds as we should expect some sequential improvement at the Varkas operation, but not a full restoration of the impact in Q1.
Yes. So Linus, we used to say that towards the end of Q2 we would be EBITDA breakeven. That has moved into Q3.
Great. Okay. Excellent. Thank you very much.
Thank you.
We will now take our next question from Tom Burton from Bank of America. Your line is open. Please go ahead.
Good afternoon, guys. Thanks for taking the question. I just wanted to ask on Varkaus and on the kraftliner market, please. One of your one of the big players in that market has announced a price increase today, obviously, of €40 per tonne. I just wondered how you view pricing in that market.
I know you said in the past you're not competing on price. But obviously, if the other players are raising prices and you're not, you will be default be competing on price. I wonder whether you see that as an opportunity for you to gain market share or how your strategy is sort of changing or might change in that market?
We are still ramping up the machine and that you have to remember. And we see the Maun being very stable in the global kraftliner market and prices fairly stable. And that is for me an area where we need to build up, because we are now getting more and more qualifications coming in from the big customers. And we're doing the qualification basically by going on quality and late weight saving tons for the customers. I think this question will be excellent if we talk in like six to nine months because then we have everything more qualified and we can be more in the area of being leaving the qualification areas.
Okay. Fair enough. Thanks very much.
There are no further questions in the queue.
Okay. Thank you, everyone, for this call and good questions and discussions. We will be reporting our Q2 July 21 and hope to speak with you then. And I will then hand this over now for final words from Gale.
So first of all, thank you all and it was very good questions. We are moving in the right direction. We had some issues in impact and the underlying earning capabilities are clearly demonstrated in our report. So thank you and I wish you all a very nice day.
Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.