Good day and welcome to the Q2 twenty fifteen STORA ENTO Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ula Pajene, Head of Investor Relations. Please go ahead.
Thank you, Julian. Good afternoon, everyone, and welcome to our traditional Q2 conference call. And I will now hand it over to our CEO, Karl Henrik Sundstrom and Karl, please go ahead.
Thank you very much, Jolla, and good morning, good afternoon wherever you are in the world. So we will start now with a short presentation and then we'll go into the Q and A session. So we just reported the second quarter twenty fifteen. Sales were down 0.7%. However, in in the case that you are lowering and taking out the declining paper as well as the divested businesses such as Utesyn and Correnso, sales actually went up 4.8% almost 5% and that we feel very proud of.
This is very important. This is part of our transformation. We had a sales increase in biomaterials mainly driven by Monte De Plata of 50%. We had over 6% in Packaging Solutions. We had 1.2% in Consumer Board.
We had a bit negative sales in the wood product and we had flat volumes in paper. If you look upon the operational margin that remained unchanged at 8.1% versus the year ago period. And that was despite operational challenges that we had in Consumer Board. And what are these operational challenges? They are totaling an amount of €12,000,000 and there are three parts.
One part was a power failure we had in our Consumer Board mill in Imatra. We had pulp production issues both with quality and quantity in Skogal combined with a broken gearbox. And then we have had a for a period investments in safety as well as increased mechanization in our plantation in China in the Guangxi project. And that one had lower harvesting volumes, which meant that the loss increased in the Chinese operation. We are now ramping up with increased mechanization.
At the same time, we have now built up basically the whole staff and they are in preparation for starting the mill, which means that we have training of people either in Europe or in China and basically sitting at the mill site training in computer programs and all what's around that to be ready for the launch in a year's time, which is midyear twenty sixteen. We generated an extremely strong cash flow of almost SEK 500,000,000 and we ended up with an operational return on capital employed of 9.4%. If we take the next slide Ula, it's part of the operation. So if you look at the Q2 twenty fourteen, Consumer Board, if you exclude the operational challenges as well as the Guangxi start up costs actually increased by 0.4 percentage points. That's basically NOK10 million on the sale of NOK7 million in increase.
The operational challenges as I said, the Imatra Des Kuhal and the harvesting issue that we're having in the Guangxi project is SEK12 million or 0.5%. The Guangxi start up costs, which will remain about this level until the mill is up and running is $10,000,000 or 400,000.0 We have Packaging Solutions including the Korenso basically at a flat. But if you would take out the divested Korenso, it's actually an increase of 0.15 percentage points in the profitability. And then you have the strong performance of biomaterials mainly driven on Montes De Plata. You had the Middle East effect on wood products and then paper which had a challenging quarter.
Cash flow is the strongest cash flow that we had in ten quarters. We have managed to reduce working capital with around SEK140 million in the quarter, which is very, very encouraging. We also managed to get the net cash flow, which is after investment of $261,000,000 which is actually bigger than the $236,000,000 we paid in dividend in the same quarter, which basically meant that the dividend that we paid out were coming back in the same quarter, which is the very strong signal of the underlying performance of our business. If you then go to the next slide, I think it's important to remember what we have actually achieved. We have been able to get Montes De Plata pulp mill up and running, which is one of the drivers of the increase in sales, but also in profitability.
And that's a mill of an annual capacity of 1,300,000 tonnes of which the Stora Enso share is around 50%. And in the month of June, it actually performed at the nominal capacity, was very encouraging. And we are working hard to keep improving the performance of the mill. We also started as previously announced the Murrow sawmill in Poland for 140,000 cubes per year, which we'll ramping up now. We have the Sunnila biorefinery with the Lingning Boost, where we will start to commercialize the products coming out of the mill in the 2015.
And we have acquired as you are well aware of the Verdia, which is the new technology where we can actually separate out cellulosic biomass. It's a highly refined sugars and lignin. The projects that we are having in the pipeline is the Consumer Board debottlenecking of Imatra, which will be ready by September 2015. We have the Varkas conversion, which is going according to plan. We have the Consumer Board mill in Guangxi going also according to plan.
We have the Warkas wooden building elements, the second investments in Warkas will be ready in Q2 twenty sixteen. And we have the biomaterials, the silos demonstration and market development plant in The U. S, which will be ready early twenty seventeen. Taking in some photos of where we are in the Guangxi mill. So the board machine plant as you can see is under construction.
The roofs are getting on and we have started to install the machinery. And this is according to plan and the plan is as previously announced to go live with this mill mid-twenty sixteen. There is a high level of activity and it is a remarkable progress that have happened in a quite a short period. The transformation journey continues. And as you can see now, we are getting basically two thirds of the sales coming from what we consider growth businesses and almost 95% of the profit coming from the growth businesses.
Paper is in this quarter 6% of the profit. It was 8% in Q1. And I would say the transformation is speeding up and I'm very pleased to see that we managed to grow in three out of the five divisions and that we were able to maintain despite operational issues the operating margin of 8.1%. With that, I
hand over to Petko. Thank you, Karl. First couple of words on the key figures and financials. Like Karl already mentioned, net sales went down 0.7% compared to Q2 last year. But very important to note is that we grew 4.8% excluding structurally declining paper and divestments.
Operational EBIT was flat at $2.00 €7,000,000 compared to $2.00 9,000,000 a year ago or 8.1%. Net profit for the period increased from €1,000,000 a year ago to €173,000,000 in Q2 this year and EPS was €0.17 per share. Cash flow from operations increased by about €200,000,000 and was $489,000,000 last twelve months. Operational EBITDA was 2.7%, slightly down compared to a year ago. And this is quite a good achievement taking into account that we have paid dividends in Q2 as well as taking care of our quite extensive investment program at the same time.
Moving then to next slide, on net foreign exchange impact and combination with price development, sales prices. Here, once again, I want to remind everyone that we have to look at the FX in combination with the local sales prices. And in paper foreign exchange gains to large extent compensated the price decline. In biomethane as reported price change and FX contributed positively this quarter. And in other divisions no major net effects.
On the next slide, we have opened a bit how the FX impact is split between the divisions. This quarter FX was €59,000,000 down from €64,000,000 in Q1 this year. As you can see in both quarters, biomaterials has been the biggest beneficiary of the FX changes slightly down in Q2 this year compared to Q1 and paper second largest. Other divisions are quite small in single millions only. Then commenting on different divisions and developments there and starting with Consumer Board, where sales increased by about one percentage point due to higher volumes.
Operational EBIT decreased by 13,000,000 driven by operational challenges at Imatran's Kokal mills and Guangxi harvesting volumes that were lower compared to a year ago. Those three together had an effect of €12,000,000 on result. And like Karl earlier mentioned, preparations ahead of the startup of the Guangxing mill in China increased fixed costs by €10,000,000 And this is something that we expect to continue at the same level going forward in the coming quarters. Operational issues of course should disappear and go away. Operational return on capital employed for the division was 16.1%, but worth to note that operational return on capital was 30 almost 31% excluding Guangxi investment and maintenance in Q3 at Imatran Inkeroinen.
In Packaging Solutions, we actually grew excluding Corenso by 6.1% due to higher volumes and the operational EBIT excluding increased by €4,000,000 due to higher volumes and lower variable costs. Reported figures decreased, if you look at the sales by 13% because of Corenso divestment and operational EBIT was increasing by €1,000,000 Operational return on capital at 11.7%, slightly up from the year ago. And just to confirm what Karl earlier said the conversion of the Warkhouse paper machine to kraftliner will begin now in Q3. Biomaterials, there we saw sales increase of 50% due to positive foreign exchange movements. Operational EBIT increased by €49,000,000 thanks to Monte St.
Plata positive foreign exchange impact as well as higher hardwood pulp prices. And operator return on capital at 8.9%. Here you should remember when you look at the return on capital that the Monticello plant is still ramping up, even though it has now reached an important milestone when we reach nominal capacity in June and maintenance in Q3 at Skutsar Mill. Wood Products, their sales declined by 10% mainly due to lower deliveries to Middle East market and operational EBIT decreased by €14,000,000 That was driven by lower prices in local currencies, somewhat increased fixed costs and higher transportation costs partly due to change in the market mix. And the operational return on capital at 17.9%.
Curtainments for the division were at 3%, slightly up from the year ago where we had 1%. Then moving to Paper division, where sales reported sales declined by 6%, but important to note is actually volumes excluding the percent disposal were flat. Operational EBITDA decreased by €31,000,000 and positive currency effect was not enough to offset lower average prices in local currencies. Very good news, cash flow after investing activities to sales improved from 3.7% to 5.1%, highlighting the fact that the role of the paper division in our group being the cash flow generator. And in Q3, we have maintenance planned in Aulu, a major maintenance shutdown and then a smaller one in Anjala, 110 Maxau and Beitzenlotter fields.
Then moving to next slide and capital expenditure forecast that remains unchanged. And we forecast that for the full year to be between €820,000,000 and €880,000,000 Positive depreciation range similar as earlier communicated $530,000,000 to €550,000,000 And just a reminder that capital expenditure forecast includes €510,000,000 for the biological assets and €390,000,000 for the project in Guangxi, China this year. Then a summary of the strategic targets and where do we stand at the moment. As you remember, we published the strategic targets some news some in some case we confirmed the old strategic targets at the group level during the Capital Markets Day in London in May. And we plan to give a status summary every quarter from now on.
If you first look at the group targets, in the case of growth excluding paper, we are reaching the target at the moment. And also net debt to operational EBITA is below the target of 3% and debt to equity is below 80% at 70%. In the case of fixed cost of sales, we are at 25.5%. And as we also told during the Capital Markets Day, this is a ratio where we need to work on the cost structure as well as to continue to grow the company and that they improve the ratio. And operational return on capital employed was at 9.4%.
If we exclude the Guangxi project, have 10.9%, but below 30% our target. Then look at the different divisions, where do we stand there? First of all, Consumer Board, if we exclude Guangxi project, we have reached the target of 20%. However, we are at 16.1%, including the Guangxi investment in the balance sheet, but that is of course not generating any cash flow or profitability yet as the ramp up will take place in the middle of next year. Packaging Solutions at about 12% level below the targeted 20% and biomaterials at 9%, where Montes de Platte that is ramping up still is burning the balance sheet.
Food products about at the level of 18%, the targeted level and paper at 5.1% cash flow after investment activities to sales, slightly below 7% target, but going up during the quarter compared to year ago. Then back to you, Karl.
Thank you very much, Sefko. So coming into the guidance. So Q3 twenty fifteen sales are estimated to be similar to the amount of 2,562,000,000 in Q2 twenty fifteen. So the sales are estimated to be similar to the amount in Q2 and Q3. Operational EBIT is expected to be in line with the $2.00 €7,000,000 recorded in Q2 twenty fifteen.
Negative maintenance impact is expected to be €50,000,000 more than in Q3 than in Q2 twenty fifteen. With the summary then, the transformation is at full speed. Sales increased 4.8% year over year excluding paper and divested businesses. Operational EBIT stayed at 8.1% despite some operational challenges and a strong cash flow. With that, I hand over to Ula and the Q and A session.
Okay. Thank you, Kare. Yes, operator please we are ready for the Q and A session.
Thank We will now take our first question from Antti Koshovy from Danske Bank. Please go ahead.
Yes. Thank you. This is Antti Koshovy from Danske. My question is or questions related to the maintenance costs you are guiding now €15,000,000 higher in Q3 than in Q2. Could you quantify how much this is above last year Q3?
Because that seems a bit high number for me. And as I understood already in Q2 your maintenance cost was significantly higher than last year. And also would be very helpful if you could give us a number how much your projects in Imatra and Vargas are impacting the maintenance costs you are having this year? Thank you.
The first question is that, if you take year over year all the maintenance costs until the end of Q3 including the $15,000,000 That is actually basically $2,500,000 lower than it was the year before. Okay. So we are not going up in maintenance costs by the end of the third quarter. And The other question that you're answering is a bit tricky, because obviously it gets a bit mixed up when because in EMATRA right now and when you start that up it's because you do that debottlenecking for example in the maintenance window. So it's a little bit tricky to see exactly what is what.
Okay.
But do I get it right that your actually your maintenance cost in Q3 will be lower than last year Q3?
Yes. The only thing that you have to think about is that this year we have one additional maintenance and that is the Montes De Plata, but that was in Q1.
All right. Then thanks. Then second question on the Guangxi harvesting issues. Did I understood right that the negative impact from that in Q2 was €6,000,000
Yes. Because if you take the total that we on page number three say €16,000,000 and then we give the other one that is 10 that is 16. That's correct. And the reason for it is that the year before we harvested a lot more. But due to the volumes and the safety and the low mechanization level, we actually started to work on the safety.
So we stopped it and then we started to mechanize it. So now we are ramping up in Q3.
So you will have some impact still in from the same issue? Yes. Okay. Could you quantify how much you expect that to be?
I can't say how much, but I would say maybe €2,000,000 hopefully less.
All right. Thank you. Very helpful. Thanks a lot.
We will now take our next question from Michael Jap from Kepler Cheuvreux. Please go ahead.
Yes. Hello. Good afternoon, everybody. Two questions. The first one is a bit of a repetition where you talk about the operational challenges at your carton board division.
I didn't quite catch the first thing. Was it a power fail that you talked about? And then you said something about pulp production at Skopal. Could you please sort of repeat and elaborate?
Okay. So the power failure in E Matya was that due to the way we operated, we actually got the blackout. Okay. And that's not good in the process industry.
No. I imagine can that.
And that's why I call it challenges. And in Skogal, we have invested in the pulp improvement and we have had problems with the quality and getting the pulp boiling at the right level. At the same time, we have a gearbox who broke down. So we got two things there.
Okay. And the pulp issue is that functioning satisfactory now?
We have a solution that we are working on right now.
Okay. And then the second thing would be around the Warkaus and this transformation and sort of the general paper related question. I mean, as we can see on slide 30, if I read it correctly, you're currently curtailing 9% of your capacity. And then you also write that the Varkaus 280,000 fine paper machine stopped in August. Was that machine running during Q2 or Yes.
It was up and running. Okay. And it will stop at the August.
All right. And but then given those 9% sort of curtailments that you are making, how do you view sort of the paper market? What should we expect?
So the paper market is fairly tough right now. And especially in the newsprint prices, they are still somewhat under pressure on certain markets. When you look at the publication prices, we expect them to stay relatively stable and we expect wood free or fine paper to have an increase in prices. But that news is challenged.
Okay. So I mean for what do you think is sort of a good or a level of curtailments that you can keep over time?
That is a very hard question. I think the level of when it's getting close to two digit is not good. Then you have to do something.
Yes. Okay. Many thanks for that.
We will now take our next question from Linus Larsson from SEB. Please go ahead.
Yes. Thank you very much and good afternoon to everyone. Maybe if I may just follow-up on that prior question, just for clarification sake. What is your current operating rate in your paper operation? I know you said that volumes excluding Itur Sand were flat year on year.
Could you give us a figure for the aggregate or even better for the various parts of your paper operations?
I will give you some indications of it. That are you talking about the Q3 or what we think in Q4 Q3 or what we had in Q2?
One of those.
So I would say when you look upon Coated Magazine in the high 80s, SC in Q2 I'm talking Q2 and we expect coated to go up a bit into Q3. When you take SC, it was in the mid-80s and we expect that to increase. Coated Fine Paper around the 90s and we it's over 90 actually. It's 90 plus and we expect that to remain the same. Uncoated fine, high 90s will remain the same.
New strength around the 90s and we expect that to go up a little bit.
And these are your own now you're referring to Storenza operating rate?
Yes, this is Storenza.
That's great.
That's great.
Thank you very much. That's very helpful. Could I also ask about FX? Do I understand it right that you did not see a tailwind if you look sequentially Q2 on Q1? And if so, why is that given your hedges which presumably should give some delayed benefits?
So as we write in the report, there were no sequential improvement. So in reality, the way I think you should read it is that that's including the hedges. So if you wouldn't have been hedged, it would have actually been a tailwind headwind, no tailwind any longer.
And what where have you had that headwind actually in which market or what is it? You
can see it a bit in Zepo's slide number
the 12. Here Lino, it's Zepo. You also have to remember that when in the Q1 report there was a big drop and change in the exchange rates and you get the original benefits through balance sheet items like receivables. And now the exchange rates have been rather stable or positive back a bit. And that's also why you don't see such a big impact as you saw earlier.
So it's sort of stabilizing if you use that word, the effect. Got
you. And given your given today's exchange rates, is it pretty flattish as we look into Q3 as well? Would you dare to comment on that?
Yes. It's rather flattish, but depends of course how the exchange rates develop now after the Greece situation is solvency to some extent.
Sure, sure.
That's good. Thank you very much.
We will now take our next question from Harry Tasman from Nordea. Please go ahead.
Yes. Good afternoon. On the you referred on this to the positive sort of a trend in the pulp side overall combining the currency and what happened in the sort of dollar prices. But if break it down to the various pulp grades or the four main grades you are selling. I mean, how did that sort of develop?
Were you negatively or positively affected in the long fiber side? And how did fluff and dissolving pulp behave and contribute to the profits in this quarter?
So if you look on the if you take the softwood pulp Europe. Yes. So it has been if I remember right now the pulp and I should say it looking forward, I think it's the prices in euro is going to be positive I believe with the current exchange rates. And that is and the biggest positive will probably come from hardwood pulp and for China as well as for Europe. Then you asked about fluff to some extent yes positive.
Okay.
I Of course, if you look at the past quarter, the biggest benefit we have been getting is hardwood pulp. Yes. And that is, of course, also at the same time when our hardwood pulp volumes have been increasing significantly thanks to Montes De Plata wrapping up as we talk.
Exactly, exactly. And are you seeing I mean, there's been some comments on the Chinese markets overall sort of slowing down in the last sort of few weeks, particularly in the long fiber side. But I mean, are you kind of seeing something like that happening in the market currently? Or what's the feel for the pulp cycle near term?
We see a sequential slight decline in volumes in China.
But you have to remember, it's summer season now and typically pulp market is a bit soft during the summer months. It's difficult to say how the trend itself will be when people come back from the summer holidays and are back to business.
Exactly. Okay. And just one more question on the sort of the maintenance side, if I may. I mean, is it too early to ask about the Q4 sort of plans overall?
I would like to guide one quarter in advance. And given the volatility with all the stuff that we have been having. So I can come back in Q3 about the maintenance in Q4, if that is okay.
I understand. And that is of course okay. But on a broader level, mean is there sort of similarity or sort of annual patterns sort of or is your sort of asset base so complex that it sort of each year is going to be different
No. I have to think now, the annual but there are certain mills where you have the eighteen months shutdown on the recovery boilers. And I don't have that in my head. Sorry about that. But maybe but it should be the same pattern.
Yes. And like Karl said earlier, only traditional thing this year is Montes De Plata ramp related maintenance we had in March year.
Yes. Okay. Fantastic. Thank you.
We will
now take our next question from Lars Kjellberg from Credit Suisse. Please go ahead.
Thank you. A couple of questions. Working capital as you said was a good inflow in the quarter in question. If I recall correctly, you had a big outflow in Q1. How should we view this normalized going forward?
Was that a sort of swing between the two quarters that was unusual? And I guess you did curtail some more production in Q2 as you said in the release to improve working capital. So that's one question. And I just wanted to come back to Varkas because I'm slightly unclear. As you stop production of uncoated fine at the mill, how would that impact your fixed cost?
Do you keep the people until you restart again? And if so, does that mean your fixed cost ratio goes up? And when you cease production Airline Coated, will you continue temporarily to produce pulp and sell pulp? Or how does that going to work?
Okay. If I take the working capital part first and then Karl can take the second. On the working capital plus, you have to remember that typically Q1 is the quarter where working capital is increasing after Q4 and year end. So there is certain seasonality. And when it comes to normalized levels of working capital, I don't think that we are there yet.
As we have said earlier and also discussed in the Capital Markets Day, we are working on working capital and expect that we can continue to decrease working capital levels going forward. And we what we say and have said earlier that we can see that we should be able to bring it down by two to three percentage points versus net sales compared to where we have been. So there is still more potential to grow. Okay.
So when it comes to the the people will stay, because they will be trained to run the new board machine. And we really want to do certain adjustments to the pulp mill. So I don't expect any significant pulp to be sold externally. So you're right. We will have less sales, but we are also running certain of the paper qualities to a stock.
So we were selling out of the inventory as well. But in reality you're right. We will have less sales and we will have higher fixed cost on that until we got the board machine up and running by the
end of the Q4. And here last I said for you, you have to remember in case of pulp we are moving from hardwood pulp to softwood pulp as part of the conversion.
Okay.
And just out of from a reporting line, will this mill be transferred into packaging solution at some stage? Guess it will. But will that happen now in Q4? Or will that happen in Q1 next year? Will
in Q3 the transfer when we stop the paper production August then it gets transferred to Packaging Solutions.
Understood. And the final point then I guess on the FX component. So you are now effectively out of the less favorable hedges. Is that so you're kind of more live now? Is that the way to look at things?
Yes, yes. Like we have said earlier now we have 50% of the next twelve months Well, so that's true. So it's rolling. But like I said earlier, of course, you have to remember that there are big moves up or down. There is also bigger effect, most of the onetime effects from balance sheet items and those that are not rolling forward.
So that is of course a reflection here in the results.
I'm sorry. One just one final one. Can you please remind me what you're doing in Nematra again? Because I lost that in terms of debottlenecking. What is the outcome when Imatra is done?
So it is an investment to increase the cost obviously, but also the output of the Matra mill by debottlenecking it.
It's very important internal logistics yes in terms of Europe.
Okay. And what should we expect in terms of potential increased output when it's done? Yes. I agree.
Thousand tonnes I think we announced when we went out with investment and that was in Q4 last year.
Very good. Thank you.
We will now take our next question from Oskar Lindstrom from Danske Bank. Please go ahead.
Yes. Hi. Thanks for taking my question. In regards to the wood costs, which of course is a key component for your operations. Now in the Nordic region, have quite a few reference points for how costs are developing.
However, we know much less about the wood cost in Uruguay and in your Guangxi operation. So could you perhaps tell us a little bit about the cost level for those two operations for wood, if you're happy with that cost level and how you foresee or expect it to develop going forward? Is this is wood cost in those two operations and how that develops something that we need to be aware of?
So if I look if I answer the Uruguay first, I believe the wood cost is in the right ballpark. It's a little bit it's a big difference in transportation costs versus if you compare it to Veracel, because it's a lot longer. It's in the Northern part of Uruguay. So all in all, it's more expensive than what we are having in Brazil in the joint venture. When it comes to China, the wood cost since the plantation is under buildup and there is another thing with this plantation is one of the very few FSC plantations at all in China of this size.
So the prices are quite good. But it's also a question of what they use for it. So if there are good brand owners that actually is wanting to have certified chain of custody wood. They are paying a little bit more. But still a lot of that wood is going into local funnier companies.
So I'm giving you a little bit of a wishy wash, because we don't really have ramped up the harvesting yet. And during towards the end of the year, will have a better understanding of the rotation as well as the total cost of the wood. It's still a little bit because we haven't really harvest a lot.
Right. And do you see any reasons why you said in Uruguay that the wood cost is in the right ballpark, but my interpretation was that it's perhaps on the higher end of that ballpark. Is that a wood cost that you can see that you could take initiatives to take that down?
So we are working quite a lot on making sure that we get the transportation costs down. So we are increasing the barges by taking it down the river instead of driving it on trucks. So we are working on it.
In the case of Veracel, you have to remember that Veracel Mill is the middle of the plantations. The plantation runs right into the end of the mill.
All right. And in Guangxi, I mean I realize you haven't made a decision on the pulp mill yet and that might be some time. But would the plantation as it stands now and then sort of the cost level that you have in there now be good enough for you to feel confident of putting a pulp?
I don't want to go there. The thing I can tell you is though that the harvesting cycle is competitive. So this is obviously one of the big questions where we're to have a look when we start to look at the decision if we're going to take the decision of the pulp mill to the Board.
And also like I said earlier, we
are increasing mechanized harvesting at the moment, because of cost efficiency and safety for the people. That's why we are actually behind what we logged a year ago.
Right. Thank you very much. You.
We will now take our next question question from Henri Parikhunen from Pajola Bank. Please go ahead.
Yes. Hi. I have two questions. My first question is related to these issues you had in Imatra and Skokal. I wonder if you have calculated how much production you lost because of these issues?
And second question is related to Montes Del Plata. You mentioned that this mill reads nominal capacity in June and your aim is of course to improve the efficiency and operational issues. Based on your experience so far, is it possible that in the long run this capacity is something else than 1,300,000 tonnes on an annual level. So do you see chances to let's say increase and find a little bit more output from this mill? Thank you very much.
So in the case of Imatra and Skogal, the number that we have given you is the effect of lost production and extra costs and everything. And I don't want to open it up. But that's the cost we have given you. And I don't want to share that because we haven't done that previously. So when it comes to the yield management of pulp mill, you can probably over time increase the capacity, yes.
But more importantly is actually to manage the costs and the recipes to get the margin up. And that takes usually around eighteen months before you get it into the right ballpark of yield management of the pulp mill. And we have now been up and running almost a year. So we are so the tell you usually you don't read nominal capacity this fast. But for me it's more important that they work with the yield management and how much wood they need in and making sure that the quality is top notch so you get the best prices.
Okay. Thank you, everyone. It's very helpful. Thank you.
Thank you.
We will now take our next question from Barry Dixon from Davy. Please
Yes. Good afternoon gentlemen. Three questions if I could. First on the Consumer Board. Could you give us some sense in terms of the pricing environment on Consumer Board particularly in terms of liquid packaging given that you've seen a sort of a 1.2% growth in the sales number and a slightly higher growth in volumes?
Second question just in terms of seems to be a very strong performance on your corrugated division. Could you maybe just talk about that? And it looks like you've seen an acceleration in demand volume trends in Q2 over Q1 with 5.5% growth in Q2 versus 4% in Q1. Maybe just kind of confirm and maybe some dynamics around that. And then thirdly, the Varkaus conversion, time to convert the mill seems to be very quick.
And maybe just give us some sense as to physically what has to happen within that plant and why you are confident that the plant can be up and running and producing kraftliner by the end of the year? Thank you.
Okay. Let me start with the consumer board and having that as an answer. So the prices are stable and there is a growth demand for that product. And it's a product that travels worldwide. So that is part of the reason why volumes are going up and sales as well.
When it comes to the packaging, the corrugated, there is an area where we are having our presence that is growing faster than the European average. We are in the corridor, which is basically we are taking the Nordic, Sweden and Finland, but then we go to the Baltic States, Poland and that corridor and that is growing faster. And our footprint of our corrugated units are actually very close to where a lot of important customers are. But you have to remember also that in what is packaging solution which you call the corrugated unit there are two mills to be three mills. So, Ostroleka is ramping up quite well and they are doing what they what we consider yield management, so into the former Eastern European market where they are very competitive.
So that's one of the reasons. So it is corrugated boxes that they are increasing a bit, but also the output of Ostralik I mean. And then when you come to Varkaus. So the Varkaus conversion started actually basically at the end of the year. The mill has been producing paper and preparing for the conversion.
And a lot is done. Lot of the infrastructure is done. Now it is actually the lift in the equipment which will happen in the month of September they start and going into. And then when we start up and running that means that you start to produce in towards the end of Q4. And then you need to trim that in for a while until you get the right quality and that's a process of about eighteen months as well before you get it in like in Australia.
So unfortunately, we don't get from day number one the yield management and the margins that we need. But it is looking very favorable and they've done a lot of homework.
Okay. Thank you very much.
We will now take our next question from Mikael Rodel from Handelsbanken. Please go ahead.
Yes. Hi. This is Mikael Doeppe from Handelsbanken. A couple of questions. Starting off or continuing on the water cost, could you quantify what the costs will be for that conversion?
Yes. We have said the conversion, if I remember right, is €110,000,000
Yes, that's the investment. In terms of cost through the P and L, which you are indicating now also there will be some in Q3. I was just wondering if you could quantify those.
I don't have those. No, not really for the Warkaus conversion itself as such nothing significant.
Okay. Then turning to the pulp market, you discussed the volumes or the demand outlook previously in China and what you expect there. But if you think about the pricing, especially for the hardwood and softwood grades, what would you expect for the rest of 2015 globally on average?
On average stable.
Okay. And then finally on the Consumer Board business, how do you see your market positioning developing in that area? I know that you have a lot of various grades and various sub segments, but overall if think about that business area, you see yourself maintaining your market positioning or is there anything changing there?
No. I think we are getting actually stronger from first of all, are getting some additional 20,000 tons out of Imatra when we are ready at the September. Then we have the Guangxi mill 450,000 tonnes. Obviously, are going to aim at the end game to get as much as possible a liquid packaging board, but it will be other grades as well. During the start up we will probably have to train on lower grades.
But I see us becoming stronger in the consumer board area in general. And there are a number of really interesting grades. You have the CUK. You have some FSCB grades. You have liquid grades and so forth.
So I feel that there is a number of interesting, so say, niches to go after in that market, because a consumer board is a collection of niches. Okay.
That's clear. Thank you very much.
We will now take our next question from Christian Schlim from Allianz Global Investors. Please go ahead.
Yes, good afternoon. I have two questions. The first one is on Page five of the report where you show the bridge from operating EBITDA to cash flow from operations. You have a line showing other adjustments, which is a €21,000,000 positive. Could you please explain what that is?
And the second question is related also to the cash flow bridge. In the text below, write that receivables and inventories decreased by €40,000,000 and €90,000,000 respectively and payables increased by €10,000,000 that gives €140,000,000 inflow on working capital. However, you show 126,000,000 in the bridge. What is the difference? Could you clarify please?
Thank you.
I take the second one first. And that is the fact that in the comment we have cleaned FX, FX. Provision payments. Provision payments from the compared to what we have in the table. And then looking at adjustments, they are non cash items above EBITDA that are corrected there.
Is this normal provision cycle establishing and releasing in the year? Or is there anything specific in there that you had a non cash charge in the P and L that needs to be reversed out in the cash flow?
No, no, nothing extraordinary.
And for future quarters, should this be also modeled positively or
No. Think you can use that as a good estimate going forward.
Okay. Thanks.
Thank you.
We will now take our next question from Rebecca Clemens from Blue Mountain. Please go ahead.
Hi. Thanks for my question guys. Just going back to the Paper division. Given the capacity utilization that you mentioned earlier in the call on the Q and A, what was the major contributor then to your all that margin decline? Because that was one of the worst margins you've had in that division for about two years.
And it seems that your utilization, it didn't look that bad. So was this all pricing related? Or was it mix related? What was the contributor to that?
It is pricing. And since we are strong in both supercalendar and in news where we have been having, so to say, the biggest price declines that hit us pretty badly. Because those grades are basically just under 50% of what we totally say in those type of grades.
Okay. And is there an expectation I know that probably some of the closures didn't help very much on pricing for like the first quarter and the second quarter, but when do you expect to have some I guess some progress on improving prices in those grades?
So as I said before, newsprints are going into the Q3 is going to be under challenge under pressure. And when you come to publication paper, they will be a bit stable. And wood free, which is fine paper, we expect prices to increase. And obviously, if this continues and hopefully something will happen, if it continues a long time, we will close down paper machine like we've done before. Every paper machine we know when they are getting cash negative then we close them down.
And is that something is that a decision you make relatively quickly?
You bet.
Because obviously conditions change, right? So I mean if things continue as they are for example in newsprint, mean would there be something before the end of the year?
I can't talk about that because they're not breaking a law. But I can only tell you we act fast on these things.
And also whatever happens depends also what competition is doing. It's difficult to know what people are in their minds.
Okay. Thank you for that. And then on the biomaterials margin from an looking at it from an EBITDA perspective, I guess, I was expecting given that you had a bit more ramp up in Montes De Plata, I was expecting the margin actually to be perhaps better this quarter than it was in the first quarter and actually it was lower. So what's the reconciliation there?
I think it's what I mentioned already a couple of times that in Q1 there was this extraordinary benefit from stronger move in the currencies that was boosting the result a bit. Otherwise, I would say expect. And then there was of course the maintenance works in MDP for instance and especially Veracel sorry in Q2. Q2 had Veracel. Veracel of course you know is a well established operation.
And that is now it has a more significant effect than what is NVP maintenance in Q1.
Okay. All right. So would you say the majority of that difference then is ForEx related with some contribution from maintenance?
More or less and some from the FX like I said.
Okay. And then just regarding your liability management, you did proactively pay down the twenty sixteen bonds during the quarter. Is that something we should expect to continue to see from you guys? Or will you be looking to perhaps tap the market again at some point?
Well, like I said earlier, we are actively working to reduce our excess liquidity. We will add about 1,000,000,000 some $203,100,000,000 euros down compared to previous liquidity levels. What we have said is that we are targeting liquidity of 7 to €800,000,000 which means that we as a main activity continue to pay down debt. But of course, there is an issue of managing your portfolio and let's say looking at the market window. So we might do some restructuring of the loan portfolio, but nothing concrete in the plans at the moment.
It's more than going forward. We will follow the market development of course.
And is there a preference for I guess sort of fixed rate bonds versus perhaps bank debt? Or is it just dependent on where the best price is?
We have no preference. Like I said, we are looking at the market windows and before we decide what to There is nothing concrete in the price.
And we feel a bit uncomfortable talking about it because some of you guys are also debt investors.
Yes. Okay. No, just a general question since you were proactive about it this quarter. Okay. Thanks guys.
As there are no further questions in the queue that will conclude today's question and answer session. I would now like to turn you back to the host for any additional or closing remarks.
So thank you all for sharing this hour with us and for the very good questions. I just want to remind you all, did actually grow. If you take away the declining paper and the sold businesses, we managed to keep the 8.1% despite operational challenges in E Matra, in Skogal and in Guangxi when it comes to lower harvesting volume. And we did deliver a strong cash flow. Thank you very much.
Thank you.
Okay. Thank you.
That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.