Good day. Welcome to the Q2 2015 Stora Enso Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ulla Paajanen-Sainio, Head of Investor Relations. Please go ahead.
Thank you, Gillian. Good afternoon, everyone. Welcome to our traditional Q2 conference call. I will now hand it over to our CEO, Karl-Henrik Sundström. Karl, please go ahead.
Thank you very much, Ulla. Good morning, good afternoon, wherever you are in the world. We will start now with a short presentation. Then we'll go into the Q&A session. We just reported the second quarter of 2015. Sales were down 0.7%. However, in the case that you are lowering and taking out the declining paper as well as the divested businesses such as Uetersen and Corenso, sales actually went up 4.8%, almost 5%. 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 Montes del Plata of 50%. We had over 6% in packaging solution. We had 1.2% in consumer board. We had a bit negative sales in the wood product. We had flat volumes in paper.
If you look upon the operational margin, that remained unchanged at 8.1% versus the year ago period. That was despite operational challenges that we had in consumer board. What are these operational challenges? They are totaling an amount of EUR 12 million. 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 Skoghall, combined with a broken gearbox. Then we have had, for a period, investments in safety as well as increased mechanization in our plantation in China, in the Guangxi project. 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. Means that they have training of people either in Europe or in China, 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 mid-year 2016. We generated an extremely strong cash flow of almost EUR 500 million, and we ended up with an operational return on capital employed of 9.4%. If you take the next slide, Ulla. It's part of the operation. If you look at the Q2 2014, 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 EUR 10 million on a sale of EUR 7 million in increase.
The operational challenges, as I said, the Imatra, the Skoghall, and the harvesting issue that we are having in the Guangxi project is EUR 12 million or 0.5%. The Guangxi start-up costs, which will remain about this level until the mill is up and running, is EUR 10 million over 0.4. We have Packaging Solutions, including the Corenso basically at a flat. If you would take out the divested Corenso, it's actually an increase of 0.15 percentage points in the profitability. You have the strong performance of biomaterials, mainly driven by Montes del Plata. We have 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 10 quarters. We have managed to reduce working capital with around EUR 140 million in the quarter, which is very encouraging.
We also managed to get the net cash flow, which is after an investment of EUR 261, which is actually bigger than the EUR 236 we paid in dividend in the same quarter. Basically meant that the dividend that we paid out were coming back in the same quarter. Is the very strong signal of the underlying performance of our business. If you go to the next slide, I think it's important to remember what we have actually achieved. We have been able to get the Montes del Plata pulp mill up and running, which is one of the drivers of the increase in sales, but also profitability. That's a mill of an annual capacity of 1.3 million tons, of which the Stora Enso share is around 50%. In the month of June, it actually performed at the nominal capacity, which was very encouraging.
We are working hard to keep improving the performance of the mill. We also started, as previously announced, the Murów sawmill in Poland, 440,000 cubes per year, which we'll be ramping up now. We have the Sunila biorefinery with the lignin boost, where we will start to commercialize the products coming out of the mill in the second half of 2015. We have acquired, as you are well aware, the Virdia, which is the new technology where we can actually separate out cellulosic biomass into highly refined sugars and lignin. The project that we are having in the pipeline is the Consumer Board debottlenecking of Imatra, which will be ready by September 2015. We have the Varkaus conversion, which is going according to plan. We have the Consumer Board mill in Guangxi, going also according to plan.
We have the Varkaus Wood product building element, the second investment in Varkaus will be ready in Q2 2016. We have the biomaterials, the xylose demonstration and market development plan in the U.S., which will be ready early 2017. Taking in some photos of where we are in the Guangxi mill. The board machine plant, as you can see, is under construction. The roofs are getting on, and we have started to install the machinery. This is according to plan, and the plan is, as previously announced, to go live with this mill mid-2016. It is a high level of activity and it is a remarkable progress that have happened in quite a short period.
The transformation journey continues, 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. I would say the transformation is speeding up and I am very pleased to see that we have 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 Seppo.
Thank you, Kalle. First, couple words on the key figures and financials. Like Kalle already mentioned, net sales went down 0.7% compared to Q2 last year. Very important to note is that we grew 4.8% excluding structurally declining paper and divestments. Operating EBIT was flat at EUR 207 million compared to EUR 209 a year ago or 8.1%. Net profit for the period increased from EUR 1 million a year ago to EUR 173 million in Q2 this year, and EPS was EUR 0.17 a share. Cash flow from the operations increased by about EUR 200 million and was EUR 489 mill as well as operating EBITDA was EUR 2.7, slightly down compared to a year ago. 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 to the next slide on net foreign exchange impact and combination with the price development, sales prices. Once again, I want to remind everyone that we have to look at the FX in combination with the local sales prices. In paper, foreign exchange gains to a large extent compensated the price decline. In biomat, there was actually both price change and FX contributed positively this quarter. 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 EUR 59 million, down from EUR 64 million 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 EUR only. Commenting on different divisions and developments there, starting with Consumer Board, where sales increased by about one percentage point due to higher volumes. Operating EBIT decreased by EUR 13 million, driven by operational challenges at Imatra and Skoghall mills and Guangxi harvesting volumes that were lower compared to a year ago. Those three together had an effect of EUR 12 million on result. Like Kalle earlier mentioned, preparations ahead of the startup of the Guangxi mill in China increased fixed costs by EUR 10 million. 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. Operating return on capital employed for the division was 16.1%, but worth to note this operational return on capital was almost 31%, excluding Guangxi investment.
Maintenance in Q3 at Imatra and Inkeroinen mills. Packaging Solutions, we actually grew excluding Corenso by 6.1% due to higher volumes. The operational EBIT, excluding Corenso, increased by EUR 4 million 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 EUR 1 million. Operational return on capital at 11.7%, slightly up from a year ago. Just to confirm what Kalle earlier said, that conversion of the Varkaus paper machine to kraftliner will begin now in Q3. Biomaterials. There we saw sales increase of 50% due to Montes del Plata ramping up and positive foreign exchange movements. Operational EBIT increased by EUR 49 million thanks to Montes del Plata positive foreign exchange impact as well as higher hardwood pulp prices. Operational return on capital at 8.9%.
Here, you should remember when you look at the return on capital that Montes del Plata is still ramping up, even though it has now reached an important milestone when we reached nominal capacity in June. Maintenance in Q3 at Skutskär mill. Wood Products. Their sales declined by 10%, mainly due to lower deliveries to Middle East market. Operational EBIT decreased by EUR 14 million. 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. The operational return on capital at 17.9%. Capital expenditures for the division were at 3%, slightly up from the year before when we had 1%. Moving to Paper division, the reported sales declined by 6%, but important to note is actually volumes excluding Hyttösen disposal were flat.
Operational EBITDA decreased by EUR 31 million, and positive currency effect was not enough to offset low average prices in local currencies. Very good news, cash flow of the investment activities to sales improved from 3.7% to 5.1%, highlighting the fact and the role of the Paper division in our group being the cash flow generator. In Q3, we have maintenance planned in Oulu, a major maintenance shutdown, and smaller ones in Anjala, Langerbrugge, Maxau, and Veitsiluoto, Finland. Moving to next slide, capital expenditure forecast that remains unchanged. We forecast that for the full year to be between EUR 820 million and EUR 880 million. Also, depreciation range similar as earlier communicated, EUR 530 million to EUR 550 million. Just a reminder that capital expenditure forecast includes EUR 510 million for the biological assets and EUR 390 million for the project in Guangxi, China this year.
A summary of the strategic targets and where do we stand at the moment. As you remember, we published the strategic targets, some new, in some cases we confirmed the old strategic targets at the group level during the Capital Markets Day in London in May. 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. Also net debt to operational EBITDA is below the target of 3%, and debt to equity is below 80% at 70%. In the case of fixed cost to sales, we are at 25.5%.
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 way improve the ratio. Operational return on capital employed was at 9.4%. If we exclude the Guangxi project, we are 10.9%, but below 13%, our target. Look at the different divisions, where do we stand there? First of all, in 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. 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 target in 20%, Biomaterials at 9%, where Montes del Plata that is ramping up still is burdening the balance sheet. Wood Products about at the level of 18%, the targeted level, Paper at 5.1% cash flow of the investment activities to sales, slightly below 7% target, but going up during the quarter compared to year-ago. Back to you, Kalle.
Thank you very much, Seppo. Coming into the guidance. Q3 2015 sales are estimated to be similar to the amount of EUR 2,562 million in Q2 2015. Sales are estimated to be similar to the amount in Q2, in Q3. Operational EBIT is expected to be in line with the EUR 207 million recorded in Q2 2015. Negative maintenance impact is expected to be EUR 50 million more than in Q3 than in Q2 2015. The summary, the transformation is at full speed. Sales increased 4.8% year-over-year, excluding Paper and divested businesses. Operational EBIT stayed at a 8.1% despite some operational challenges, a strong cash flow. With that, I hand over to Ulla and the Q&A session.
Okay. Thank you, Karl. Yes. Operator, please, we are ready for the Q&A session.
Thank you. If you would like to ask a question, please press the star or asterisk key 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. Again, please press star 1 to ask a question. We will pause for just a moment to allow everyone to signal. We will now take our first question from Antti Koskivuori from Danske Bank. Please go ahead.
Yes. Thank you. This is Antti Koskivuori from Danske. My question is, or questions are related to the maintenance costs. You are guiding now EUR 15 million 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. Also would be very helpful if you could give us a number, how much your projects in Imatra and Varkaus 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 EUR 15 million, that is actually basically EUR two and a half million lower than it was the year before.
Okay.
We are not going up in maintenance costs by the end of third quarter. The other question that you're answering is a bit tricky.
Obviously it gets a bit mixed up when, because in Imatra right now, and when you start that up, because you do that, the bottlenecking, for example, in the maintenance window. It's a little bit tricky to say exactly what is what.
Mm. Okay. Do I get it right that 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.
That is the Montes del Plata, that was in Q1.
All right. Thanks. Second question, on the Guangxi harvesting issues, did I understood right that the negative impact from that in Q2 was EUR 6 million?
Yes, if you take the total that we on page number three, say 16, then we give the other.
Yeah.
That is 10, that is 16. That's correct.
Yeah.
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. We stopped it, and then we started to mechanize it. Now we are ramping up in Q3.
You will have some impact still in Q3 from the same issue?
Yes.
Okay. Could you quantify how much you expect that to be?
I can't say how much. I would say maybe EUR 2 million, hopefully less.
All right. Thank you. Very helpful. Thanks a lot.
We will now take our next question from Mikael Jåfs 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? You said something about pulp production at Skutskär. Could you please sort of repeat and elaborate on that?
Okay, the power failure in Imatra was that due to the way we operated, we actually got a blackout.
Okay.
That's not good in a process industry.
No, I can imagine that.
That's what I call challenges. In Skoghall, we have invested in a 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 which broke down. We got two things there.
Okay. The pulp issue, is that functioning satisfactory now?
We have a solution that we are working on right now.
Okay. The second thing would be around the Varkaus and this transformation and sort of the general paper-related question. As we can see on slide 30, if I read it correctly, you are currently curtailing 9% of your capacity. You also write that the Varkaus 280,000 fine paper machine will stop in August. Was that machine running during Q2? Or?
Yes, it was up and running.
Okay.
It will stop at the end of August.
Given those 9% sort of curtailments that you are making, how do you view the paper market? What should we expect?
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. News is challenged.
Okay. What do you think is sort of a good or a level of curtailment that you can keep over time?
That is a very hard question. I think the level of when it's getting close to two digits is not good, then you have to do something.
Yeah. 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's sake. What is your current operating rate in your paper operation? I know that you said that volumes excluding Uetersen, were flat year-on-year. Could you give us a figure for the aggregate or even better, for the various parts of your paper operation?
I will give you some indications of it. Are you talking about the Q3 or what we had in Q2?
One of those.
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. No, 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. Newsprint around the 90s, and we expect that to go up a little bit.
These are your own. Now you're referring to Stora Enso operating rates.
Yes, this is Stora Enso.
That's great. Thank you very much. That's very helpful. Could I also ask about FX? Do I understand this right that you did not see a tailwind if you look sequentially Q2 on Q1? If so, why is that given your hedges which presumably should give some delayed benefits?
As we write in the report, there were no sequential improvement. In reality, the way I think you should read it is that that's including the hedges. If you wouldn't have been hedged, it would have actually been a headwind. No tailwind any longer.
Where have you had that headwind actually? In which market or what is it going-
You can see it a bit in Seppo's slide number 12.
Here, Linus, it's Seppo here. You also have to remember that 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. Now the exchange rates have been rather stable or bouncing back a bit. That's also why you don't see such a big impact as you saw earlier. It's sort of stabilizing if I use that word, the effect.
Got you. Given today's exchange rates, is it pretty flattish as we look into Q3 as well? Would you dare to comment on that?
Yeah, it's rather flattish, but depends, of course, how the exchange rates develop now after the Greece situation is solved, let's say to some extent.
Sure. That's good. Thank you very much.
We will now take our next question from Harri Taittonen from Nordea. Please go ahead.
Hi. Yes, good afternoon. 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. If you break it down to the various pulp grades or the four main grades you are selling, how did that sort of develop? Were you negatively or positively affected in the long fiber side? How did fluff and dissolving pulp behave and contribute to the profits in this quarter?
If you take the softwood pulp Europe.
Yeah.
If I remember right now, the pulp, and I should say it looking forward, I think the prices in EUR is going to be positive, I believe, with the current exchange rates.
Yep.
The biggest positive will probably come from hardwood pulp.
Sure
for China as well as for Europe. Then you asked about fluff. To some extent, yes, positive.
Okay.
I check for you, of course, if you look at the past quarter, the biggest benefit I think getting is hardwood pulp.
Yes.
That is, of course, also at the same time when our hardwood pulp volumes have been increasing significantly, thanks to Montes del Plata ramping up as we talk.
Exactly. Are you seeing, there has been some comments on the Chinese market overall sort of slowing down in the last few weeks, particularly in the long fiber side. 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.
Yeah.
In China.
Yeah. Of course, 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. Just one more question on the sort of maintenance side, if I may. Is it too early to ask about the Q4 sort of plans overall?
Yes. I would like to guide one quarter in advance.
Yes
Given the volatility with all the stuff that we've been having. I can come back in Q3 about the maintenance in Q4, if that is okay.
Understand. That is of course, okay. On a broader level, is there sort of similarity or sort of annual patterns?
Yeah.
Is your sort of asset base so complex that each year is going to be different in terms of how-
No. I have to think now, but the annual. There are certain mills where you have the 18 months shutdown on the recovery boilers, and I don't have that in my head. Sorry about that. It should be the same pattern.
Yeah. Like Kalle said earlier, the only additional thing this year is Montes del Plata relating maintenance we had in March this 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? I guess you did curtail some more production in Q2, as you said in the release, to improve working capital. That's one question. I just wanted to come back to Varkaus, 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? If so, does that mean your fixed cost ratio goes up? When you cease production of uncoated, will you continue temporarily to produce pulp and sell pulp?
How does that going to work?
Okay, if I take the working capital part first, then Kalle can take the second. With the working capital part, you have to remember that typically Q1 is the quarter where working capital is increasing after Q4 and year end. There is certain seasonality. 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. What we say, and I've said earlier, that we can see that we should be able to bring it down by 2-3 percentage points versus net sales compared to where we have been. There is still more potential to go.
Okay.
When it comes to the people will stay because they will be trained to run the new board machine. We really want to do certain adjustments to the pulp mill, so I do not expect any significant pulp to be sold externally. You are right, we will have less sales, but we are also running certain of the paper qualities to a stock. We were selling out of the inventory as well. In reality, you are 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. Here, Lars, same 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. Just from a reporting line, will this mill be transferred into the packaging solution at some stage? I guess it will, but will that happen now in Q4 or will that happen in Q1 next year?
It will. In Q3, the transfer. When we stopped the paper production end of August, then it gets transferred to packaging solution.
Understood. The final point then, I guess, on the FX component. You are now effectively out of the less favorable hedges. Is that so you are more live now? Is that the way to look at things?
Yeah. Like I said earlier, now we hedge 50% of the next 12 months bulk. That's true. It's rolling. Like I said earlier, of course, you have to remember that when there are big moves up or down, there is also bigger effects, more sort of one-time effects from currency items and those that are not rolling forward. That is, of course, a reflection here in the results.
I'm sorry. Just one final one. Can you please remind me what you're doing in Imatra again? I lost that. In terms of debottlenecking, what is the outcome when Imatra is done?
It is a investment to increase the cost obviously, but also the output of the Imatra mill by debottlenecking it. It's improving internal logistics. Yes, intermill.
Okay, what should we expect in terms of potential increased output when it's done?
20,000 tons, I think we announced when we went out with investment. That was in Q4 last year.
Very good. Thank you.
We will now take our next question from Oskar Lindström from Danske Bank. Please go ahead.
Yes, hi. Thanks for taking my question. In regards the wood costs, which of course is a key component for your operations. In the Nordic region, we have quite a few reference points for how costs are developing. We know much less about the wood cost in Uruguay and for your Guangxi operation. 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 wood cost in those two operations, and how that develops something that we need to be aware of?
If I answer the Uruguay first, I believe the wood cost is in the right ballpark. 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. All in all, it's more expensive than what we are having in Brazil in their joint venture. When it comes to China, the wood cost, since the plantation is under built-up, and there is another thing with this plantation, it's one of the very few FSC plantations at all in China of this size. The prices are quite good. It's also a question of what they use for it.
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 veneer companies. I'm giving you a little bit of a wishy-wash because we don't really have ramped up the harvesting yet. Towards the end of the year, we 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 harvested a lot.
Right. Do you see any reasons why, you said in Uruguay that the wood cost is in the right ballpark, 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?
We are working quite a lot on making sure that we get the transportation costs down. We are increasing the barges by taking it down the river instead of driving it on trucks. We are working on it.
In case of Veracel, you have to remember that Veracel mill is in the middle of the plantations.
The plantation runs right into the end of the mill.
All right. In Guangxi, 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 the cost level that you have in there now be good enough for you to feel confident of putting a pulp in?
I don't want to go there. The thing I can tell you is, though, that the harvesting cycle is competitive.
This is obviously one of the big questions where we're going 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.
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. Yeah.
Thank you.
We will now take our next question from Henri Parkkinen from Pohjola Bank. Please go ahead.
Yes. Hi. I have two questions. My first question is related to these issues you had in Imatra and Skutskär. I wonder if you have calculated how much production you lost because of these issues. Second question is related to Montes del Plata. You mentioned that this mill reached 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 1.33 million tons on an annual level? Do you see chances to, let's say, increase and find a little bit more output from this mill? Thank you very much.
In the case of Imatra and Skutskär, the number that we have given you is the effect of lost production, extra cost and everything. I don't want to open it up. That's the cost we have given you. I don't want to share that because we haven't done that previously. When it comes to the yield management of a pulp mill, you can probably, over time, increase the capacity, yes. More importantly is actually to manage the cost and the recipes to get the margin up. That takes usually around 18 months before you get it into the right ballpark of yield management of a pulp mill. We have now been up and running almost a year. I tell you, usually you don't reach nominal capacity this fast.
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 very much. Very helpful. Thank you.
Thank you.
We will now take our next question from Barry Dixon from Davy. Please go ahead.
Yes, good afternoon, gentlemen. Three questions if I could. First, on the consumer board. Can 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? It looks like you've seen an acceleration in demand or 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. Thirdly, the Varkaus conversion. The time to convert the mill seems to be very quick.
Maybe just to 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. The prices are stable and there is a growth demand for that product. It's a product that travels worldwide. 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 a 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. Our footprint of our corrugated units are actually very close to where a lot of important customers are.
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. Ostrołęka is ramping up quite well, and they are doing what we consider yield management. Into the former Eastern European market where they are very competitive. That's one of the reasons. It is corrugated boxes, they are increasing a bit, but also the output of Ostrołęka mill. When it comes to Varkaus. 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. A lot of the infrastructure is done. Now it is actually to lift in the equipment which happens in the month of September, they start.
When we start up and running, that means that you start to produce towards the end of Q4. You need to trim that in for a while until you get the right quality, and that's a process of about 18 months as well, before you get it in, like in Ostrołęka. Unfortunately, we don't get from day number 1 the yield management and the margins that we need. 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 Rodell from Handelsbanken. Please go ahead.
Yes. Hi, this is Mikael Rodell from Handelsbanken. A couple of questions. Starting off or continuing on the Varkaus, could you quantify what the costs will be for that conversion?
Yes. We have said the conversion, if I remember right, is EUR 110 million.
In terms of cost through the P&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 Varkaus conversion itself as such. Nothing significant.
Okay. Turning to the pulp market, you discussed the volumes or the demand outlook previously in China and what you expect there. 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. 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 you think about that business area, do you see yourself maintaining your market positioning or is there anything changing there?
No, I think we are getting actually stronger. First of all, we are getting some additional 20,000 tons out of Imatra when we are ready at the end of September. We have the Guangxi mill, 450,000 tons. Obviously, we 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. I see us becoming stronger in the consumer board area in general. There are a number of really interesting grades. You have the CUK, you have some FBB grades, you have liquid grades and so forth. I feel that there is a number of interesting, so say, niches to go after in that market because 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 EUR 21 million positive. Could you please explain what that is? The second question is related also to the cash flow bridge. In the text below, you write that receivables and inventories decreased by EUR 14 million and EUR 19 million respectively, and payables increased by EUR 10 million. That gives EUR 140 million inflow in working capital. However, you show EUR 126 in the bridge. What is the difference? Could you clarify, please? Thank you.
Yeah, exactly. I take the second one first. That is the fact that in the comment we have cleaned FX effects.
Provision payments.
Provision payments compared to what we have in the table.
Okay.
Looking at the adjustments, they are non-cash items, the pound EBITDA, that are corrected there.
Such as, 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&L that needs to be reversed out in the cash flow?
It's normal. Nothing extraordinary.
For future quarters, should this be also modeled positively or?
No, I think you can use that as a good guesstimate going forward.
Okay, thanks.
Thank you.
We will now take our next question from Rebecca Clements from BlueMountain Capital. Please go ahead.
Hi. Thanks for taking my question, guys. Just going back to the paper division. Given the capacity utilization that you mentioned earlier in the call on the Q&A, what was the major contributor then to all that margin decline? Because that was one of the worst margins you've had in that division for about two years. It seems that your utilization, it didn't look that bad. Was this all pricing related or was it mix related? What was the contributor to that?
It is pricing. Since we are strong in both supercalendered and in news where we have been having, so to say, the biggest price declines, that hit us pretty badly.
And-
Those grades are basically just under 50% of what we totally sell in those paper grades.
Is there an expectation, I know that probably some of the closures didn't help very much on pricing for the first quarter and the second quarter. When do you expect to have some progress on improving prices in those grades?
As I said before, newsprint are going into the Q3 is going to be under challenge, under pressure. When you come to publication paper, they will be a bit stable. wood-free, which is fine paper, we expect prices to increase. Obviously, if this continues and hopefully something will happen, if it continues a long time, we will close down paper machines like we've done before. Every paper machine we know when they are getting cash negative, then we close them down.
Is that a decision you make relatively quickly?
You bet.
Obviously conditions change, right? If things continue as they are, for example, in newsprint, would there be something before the end of the year?
I can't talk about that because then I'm breaking a law, I can only tell you we act fast on these things.
Also whatever happens depends also what competition is doing. It's difficult to know what people have in their minds.
Okay. Thank you for that. On the biomaterials margin, looking at it from an EBITDA perspective, I guess I was expecting, given that you had a bit more ramp up in Montes del 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. What's the reconciliation there?
Yeah, 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 that it is as we expect. There was, of course, the maintenance works in MdP, [Voitto said], and especially Veracel, sorry, in Q2.
Q2 had Veracel.
Veracel, of course, you know, it's a well-established operation. When that is down, it has a more significant effect than [Voitto's] MdP maintenance in Q1.
Okay. All right. Would you say the majority of that difference then is Forex related with some contribution from maintenance?
More or less. Some from the FX, like I said.
Okay. Just regarding your liability management, you did proactively pay down the 2016 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 were at about EUR 1 billion, some EUR 300 million down compared to previous liquidity levels. What we have said is that we are targeting liquidity of EUR 700 million-EUR 800 million, which means that we, as a main activity, continue to pay down debt. Of course, there is an issue of managing your portfolio and, let's say, looking at the market window. We might do some restructuring of the loan portfolio, but nothing concrete in the plans at the moment. It's more going forward, we follow the market development, of course.
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, but there is nothing concrete in the plan.
We feel a bit uncomfortable talking about it because some of you guys are also debt investors.
Yeah. Okay. No, just a general question since you were proactive about it this quarter. Okay. Thanks, guys.
As a reminder to ask a question today, please press star one. As there are no further questions in the queue, that will conclude today's questions and answer session. I would now like to turn you back to the host for any additional or closing remarks.
Thank you all for sharing this hour with us and for the very good questions. I just want to remind you all, we 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 Imatra, in Skoghall and in Guangxi when it comes to lower harvesting volume. 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.