Good day. Welcome to the 2016 Stora Enso quarterly results conference call. Today's conference is being recorded. At this time, I would like to turn your conference over to Ulla Paajanen-Sainio, Head of Investor Relations. Please go ahead.
Thank you, Cecilia. Good afternoon, everyone. Welcome to Stora Enso's first quarter result call. We will have first the presentations. Then go to the Q&A. The presentation will be held by our CEO, Karl-Henrik Sundström, and our CFO, Seppo Parvi. Please go ahead, Kalle.
Thank you, Ulla. Good morning or good afternoon, depending on where you are in the world. I would like to start with making a short overview before we go into the details of this quarterly report. Sales came in slightly down. We are growing in the areas that we want to grow in and can grow in. 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%. We actually reached a record high EBIT margin of 10.1%, the highest margin in a very long period. Cash flow, both before and after investing, improved versus the same period last year. We have continued to strengthen the balance sheet.
We are now having a net debt to operational EBITDA of 2.3 versus a 2.6 a year ago. The result is basically coming out of a number of things happening. If you see on the slide here, you see that Consumer Board are down EUR 6 million versus a year ago. You have to keep in mind that China is EUR 11 worse, which means that the underlying performance of Consumer Board are actually up. The reason why China is down by EUR 11 or twofold. We are actually at cost earlier because we are ahead of the startup schedule for the Beihai Mill, which I will cover on later on. We are a bit delayed in the forest operation in Beihai due to delayed licenses. You can see here that Varkaus is causing a bit of a challenge when it comes to power and pulp.
Of that EUR 19 million for Packaging Solutions, EUR 8 million is coming out of Varkaus, 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 EUR 11 million coming out of Inpac in China, of which slightly more than half of that EUR 11 million is coming from inventory write-offs in our Inpac operation. Biomaterials improved EUR 11 million, and most of that is coming from a stronger performance of the Montes del Plata Mill. Wood Products, EUR 1 million better, and a very strong performance in paper. In other, the improved result is coming mainly from logistic operations, but also from our forest associates. If you look upon the operating margin since the first quarter of 2013 to today, we have actually been running a compounded average growth rate of 21%, which I think is something to reflect upon.
We have stabilized our operations on a higher return on capital employed. We have three consecutive quarters now running above 11% for the totality and three consecutive quarters running about 13% if you exclude our investments in Beihai that we are supposed to start up in the coming months. The transformation is proceeding, here is just a short presentation of the major project we are running. Right now, we are in the mood of starting up the Beihai Mill. It's an investment of EUR 800 million. We will start up in the month of June, the Wood Products for Stora Enso Wood Products Varkaus, and we are also going into the last phase of the pilot demonstration plant, which will be ready early 2017. We are getting to a situation now where we plan to start up in May for our big investment in Beihai.
That is ahead of previous announced plans, we're starting up in the month of May. It will take 18 to 24 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 food service board for the Chinese market and Asian markets. The BCTMP, which is the mechanical pulp operations, will be ready during Q4 2016. Already today, we have started deliveries of both hardwood pulp from Veracel and softwood from the market. Tomorrow, I, with some other people, will travel to Varkaus for the inauguration of the next generation Varkaus Mill.
It's an inauguration of both the board machine as well as the wooden element production. Before handing over to Seppo, I just wanted to reflect on this slide that's been part of the presentations for a long time. It's showing that we are going into more and more of a growth company, focusing on Packaging Solutions, 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, with those words, I hand over to Seppo.
Thank you, Kalle. I start with some key figures on following slide. Like Kalle already mentioned, group sales as reported went down 1.8%, but excluding structurally declining paper and divestments, actually there's good underlying growth of 2.4% year-on-year. Operational EBITDA and EBIT both are record levels. EBITDA at 14.6%, one percentage point improvement compared to year ago. Operational EBIT 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. Cash flow from operations continued strong at EUR 289 million compared to EUR 171 million in Q1 last year. 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. Some comments on our divisions and their performance. First, Consumer Board.
The operational return on capital excluding Beihai project was 34%. Sales were up 4.6%, excluding last year divested Barcelona Mill. Operational EBIT decreased to EUR 73 million, but it's worth to notice that effect of Beihai Mill due to startup preparation and harvesting operations was negative by EUR 11 million. If you add that back, there was actually a slight improvement in operational performance of the Consumer Board division. Like Kalle already mentioned, Beihai Mill will be operational in May. Just to remind that the effect of Beihai Mill and an operation startup is about EUR 20 million negative in Q2, which is about the same as it was in Q1, and about EUR 30 million a quarter during the second half of this year. This EUR 30 million includes EUR 10 million quarterly depreciation.
Moving to Packaging Solutions, their sales increased 11% thanks to ramp-up of kraftliner business at Varkaus Mill and higher sales in Poland at Ostrołęka Mill. Operational EBIT decreased by EUR 19 million due to negative impact of challenges in pulp production in Varkaus relating to start up there. That was EUR 8 million. Inpac in China had EUR 11 million negative coming mainly from stock correction but also from decline in business with some key customers. If you add these more or less one-time type of effects back to result, actually EBIT operationally remained flat versus Q1 last year. Varkaus 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 has said earlier. We expect to reach full production early 2017.
Just to remind that maintenance shutdown is planned at Ostrołęka Containerboard Mill during this quarter. Moving to Biomaterials, their positive profitability improvement continues and EBIT increased 15.1% year-on-year. However, sales decreased slightly. That's because of lower softwood pulp prices in local currencies, which were partly offset by higher volumes, mainly from Montes del Plata. It's good to notice that during the first half last year, Montes del 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 EUR 11 million due to lower wood costs and higher sales volumes from Montes del Plata. We are planning the maintenance shutdown at Montes del Plata Mill during the quarter two now. Wood Products. The operational EBIT increased by 6.7% even though that sales were down 2.6%.
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. That is reflected positively on the EBIT line. Wooden building elements investment in Varkaus is proceeding according to plan. We have already started raw material supply for the production there, which we plan to start in June this year. Paper. Their EBIT improved by EUR 33 million to EUR 51 million in Q1 this year compared to Q1 last year. They had an excellent good quarter. Sales went down 6.6%. That's driven by disposal of Hyttösen Mill and conversion of Varkaus 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. We are planning maintenance shutdown at Langerbrugge Mill during the Q2. Capital expenditure for cash flow 2016 remains the same as earlier, that is between EUR 680 million to EUR 720 million. Depreciation is estimated to be EUR 510 million to EUR 530 million. That is down EUR 10 million compared to previous communication, mainly due to changes on the data side, for instance, due to Arapoti divestment recently announced. Just to remind that capital expenditure figures mentioned include approximately EUR 100 million for the group's biological assets. That's the forestry CapEx. We estimate to spend about EUR 160 million for the Beihai Mill in China for the final investment. To summarize where we are with the strategic targets.
Looking at the growth of our divisions and business excluding paper and divested Barcelona Mill 2.4%, positive development continues. Net debt to operating EBITDA at 2.3, clearly below 3.0 level defined as maximum. The same with debt to equity, where we are 58% level compared to maximum target is 80%. We are still behind the target on fixed cost to sales at 24.4%, there we have to remember that we have the cost from Beihai Mill without the sales yet, also Varkaus kraftliner project is still ramping up. There are fixed costs, relatively small amount of sales so far. Operational return on capital employed at 13.7% excluding Beihai Mill, slightly above the 13% strategic target. Divisional targets, there like 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 target is 20% at 3% level, here we have to remember the effect of both China Inpac and Varkaus pulp mill challenges when ramping it up now after the investment there. Biomaterials increasing return on capital, 13%, a bit of short of 15% level targeted, there we believe that once Montes del Plata is fully operational and we are able to optimize logistics, recipes, also improve further performance of our Nordic pulp mills that 15% is reachable. Wood Products at 12.3%, behind the targeted 18% level, here we also have some seasonal effects. As you might remember, they have been around at 18% already in the past, we expect that they can also perform going forward.
Paper cash flow from investing activities to sales at 5.3%, slightly behind the targeted 7% level. With that, I hand over back to you, Kalle.
Thank you, Seppo. The guidance for the second quarter of 2016 is that sales are estimated to be slightly higher than the amount of EUR 2,445,000,000 recorded in the first quarter of 2016. Operational EBIT is expected to be in line with or somewhat lower than the EUR 248 million recorded in the Q1 of 2016. These estimates include a negative impact of the scheduled annual maintenance shutdown at Montes del Plata pulp mill, Ostrołęka containerboard mill, and Langerbrugge paper mill. Maintenance impact is expected to be approximately EUR 25 million higher than in Q1 2016. As a summary is that sales are growing if you exclude the Barcelona divestiture and the structural decline in paper by 2.4%. The growth continues. EBIT grow by almost 13%. We reached a record high 10.1% EBIT margin. Strong cash flow from operations. Strengthened balance sheets.
Net debt to EBITDA 2.3 versus 2.6. We are constantly, for the third consecutive quarter, above 11% in operational return on capital employed. Excluding Beihai Mill, we are also above the 13% for three consecutive quarters. Continued progress in transformation into renewable materials growth companies continues. As a very last slide, I want to welcome you to Stora Enso's Capital Market Day in London on November 17th. With that, I hand over to Ulla.
Okay. Thank you, Kalle. We will now open the Q&A session. Cecilia, could you please give the instructions to the audience?
Thank you. If you wish to ask a question at this time, please press the star followed by the digit 1 on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find your question has already been answered, you may remove yourself from the queue by pressing star 2. We will now take our first question. Antti Koskivuori from Danske Bank, your line is open. Please go ahead.
Thank you. This is Antti Koskivuori from Danske. Firstly, on the Beihai Mill and the guidance that you're giving for Q2 and H2. You say it's going to be a negative contribution of EUR 30 million per quarter in H2 2016. 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 then a little bit about the qualities, what 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, 18-24 months to get to the full production with the qualities and the qualifications that we need to do, especially in the areas around liquid, TKB, and food service board. What exactly qualities, I don't really know. Do you want to add something?
I can say, we also mentioned earlier, of course in the beginning we will produce very basic folding boxboard grades. Difficult to say how fast we can reach sellable qualities. Might take some weeks or months that first you need to ramp up the production. We have taken that into account and expect sort of normal ramp-up for these kind of machines going forward.
Antti, to be fair, we are starting the machine in May.
Yeah.
We haven't started it yet.
Yeah.
I think this is a very good questions for Q2 and Q3.
Yeah, absolutely.
We will learn because I need that machine to start up.
Yeah, could you quantify a bit? Is it reasonable to believe that you will reach the EBIT break-even level on those first 18-24 months?
Well, I think that, like we said, that to reach full production, that takes 18-24 months.
Yeah.
assume 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. 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? Also secondly, on Biomaterials, what do you expect your pulp balance to be during this year given the ramp-up in Beihai, et cetera?
First, on the pulp, we had some but very minor price reductions in the first quarter, but some in local currencies. That's, I would say it's about EUR 10 million. 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 the demand is going to increase prices have probably bottomed out.
Hardwood, China, it's also going to be quite strong, and prices stable. When it comes to dissolving pulp, it's stronger demand but stable prices. It's going to come down a bit on the whole, but it's not going to drop too much.
Okay. 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 your 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.
Yes.
That's about it. All in all, we are this year going to be 2 million tons long. Of that, we get it all in pulp.
Yeah.
Of that, 800,000 ton softwood, 700,000 hardwood, 250 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.
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 EUR 20 million in the current quarter and EUR 30 million in the second half per quarter, is that a year-on-year comparison? I mean, you were running at about EUR 11 million You said Beihai in Q1. It's an incremental nine. Is that the way we should look at it?
No, it is absolute figure for the quarter mentioned.
Okay. It's an incremental nine versus what you actually had in costs in Q1 then.
Yes.
Okay. Good. Varkaus, the issues there, you said they're related to the pulp mill. I assume that's been fixed. The Inpac portion where you said customer loss, how should we view that? That the comments you made on Inpac, what sort of quantum is going to be carried on into the second quarter, if any?
With Varkaus, I will be very clear, we are working on it. It's not fixed yet, but it's on the right track. Okay?
Yeah.
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. That's one thing. The way I would look upon Inpac is that slightly more than half of EUR 11 million is an inventory correction, that will not come back. We are ramping up with new customers in Q2 and Q3. That's the way you should look upon it.
Understood. Finally, just on the other plans revealed today about you considering to expand in Ostrołęka. Where do we stand on that? 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. What sort of timeline 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. We believe we sit in a sweet spot in that market to serving that corridor of former Eastern Europe. There we continue to see growth. That we're now taking the next step. 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. On the integration, maybe you want to take that, Seppo. Today we are supplying 30% to our corrugated units.
Yeah, they use about 60% of their own needs.
Yes.
Okay, just finally then, do you want to comment at all on, as you know, starting up Beihai, any thoughts about the pulp mill there? Is you going to talk about that early 2017 or?
We have no board decision for doing a pulp mill.
Okay.
We have said that we will only consider that once the board machine is up and running, and that's going to ramp between 18 to 24 months. 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 Ostrołęka then. If you go ahead with the project, and you give it a go in early 2017, how long will it take before you're fully up and running?
It will be a build process of about two to two and a half years.
Yeah.
It is another 18 to 24 months to ramp it up.
Okay. Also, in this same press release, you say that your long-term investment criteria is to keep the CapEx at the same level of depreciation. Obviously this Ostrołęka now fits into that frame. Wouldn't it be fair to say that if that's your criteria, then a 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.
Yeah.
That's what I said. I just want to, it's depreciation plus around EUR 100 million in investments in biological assets.
Yeah. Okay. That's clear.
We don't go wrong, and that's the target. Within that, all this fits.
Yeah. Okay. 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 million a quarter.
Yeah. Okay. This year it's going to be about EUR 100 in total then?
EUR 20 million a quarter first half and EUR 30 million a quarter second half of the year.
Yeah. Okay. Good. Then just finally on the paper pricing in Europe, prices have been moving up a bit. 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.
Yeah. Okay, just a final one. In terms of FX hedging losses. 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 2015 due to this?
Yes. In Q1 year-on-year, FX was positive EUR 28 million. For full year, we expect it's the same amount, about roughly as we committed early, around EUR 100 million for full year. This is mainly coming from positive effect from foreign exchange hedges that are rolling over from last year. This is all, of course, assuming that rates remain where they were end of Q1.
Yeah. That there will be a more pronounced impact, I guess, from this then in Q2 and Q3.
If you think that it's about EUR 100 million for a full year, and it was EUR 28 million for Q1, I think it's roughly around the same figure for each quarter as it was. Maybe a bit less towards the end of the year, just remembering where rates have been during the past year.
Okay. That's clear. Thank you very much.
We will now take our next question from Mikael Jafs from Kepler Cheuvreux. Your line is open. Please go ahead.
Yes, hello. Good afternoon, everybody. I would like to continue a little bit on Ostrołęka. 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, et cetera?
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. If things turn out not to be that good, but we see the balance, our location, our corrugated units, and also bringing it basically as a copy of PM5, the most modern machine in Europe. I think we'll have an attractive case. Let's see when we're ready with the feasibility study.
Okay, many thanks.
As a reminder to ask a question, please press star one on your telephone keypad. We will now take our next question from Linus Larsson from SEB. Please go ahead.
Yes, thank you very much. Good afternoon. Just coming back to Beihai and your guidance for the next few quarters. Just to be perfectly clear, the figures that you provide us with totaling some EUR 100 million 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. I would assume that you have some sales increasingly towards the end of the year.
Like Kalle 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 this kind of questions in Q2 call when we have a bit more experience on how the startup is moving ahead.
You have some-
We, of course, Linus, try to be realistic as always when we talk about the future.
Absolutely, I appreciate that. I don't know if you can comment upon that at all, how much of sales do you expect then in 2016?
It is quite limited.
Let us wait with that, Linus. The reason for it is that let us now inaugurate, get this start up, I come back later on because it's very hypothetical.
Yeah.
I don't want to look like an idiot.
I fully understand. I just want to double-check that we're not only seeing the one side of the P&L here, that's clear. Thank you very much.
Linus, 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. That's clear. Thank you very much. Just on Ostrołęka, also a follow-up question just for clarity's sake. Is this 500,000 tons a testliner machine that you're considering? That's the first question. The second question, could you update us as to your group net long position after such an investment?
It is RCP-based containerboard that we're going to make there.
Okay.
Your second question, I missed it.
Yeah. On a group level, update us, please. Today you're long how much? 500,000 tons?
Yes. We will then add another 500.
Yeah. Great. Good stuff. Then a third follow-up, if I may, just on Varkaus. It sounds as we should expect some sequential improvement at the Varkaus operation, but not a full restoration of the Inpac in Q1.
Yeah. Linus, we used to say that towards the end of Q2, we would be EBITDA breakeven. That has moved into Q3.
Right. Okay. Excellent. Thank you very much.
Thank you.
As a reminder to ask a question, please press star one on your telephone keypad. 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 the big players in that market has announced a price increase today, obviously of EUR 40 per ton. 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 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 changing or might change in that market?
We are still ramping up the machine, that you have to remember. We see the