Good day and welcome to the Stora Enso Q3 twenty fourteen Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Ula Payenin Sayeno, Head of Investor Relations. Please go ahead ma'am. Thank you.
Good afternoon everyone and welcome to our Q3 results call. And I will now hand this over to our CEO, Kale Sundstrom. Please go ahead, Carlos.
Good morning, good afternoon, depending on where you are in the world. The Stora Enso team are in China on their way to Guangxi. So if there are disturbances on the line, it might be the reason. So I would like
to start the
presentation by going to slide number three. So we believe this was a solid quarter and it's another step in the right direction. We came in with Renewable Packaging for the third consecutive quarter with a strong performance. And quarter on quarter, the operational EBIT increased compared to the period a year ago by 30%. Biomaterials improved the performance despite the ramp up and what that means in Montes De Plata.
Building and Living came basically in on a similar performance at last year, and we had a stable performance in Printing and Reading. Importantly is that we now are actually having a return on capital employed of 13%, an increase of 2.8 percentage points compared to the same period last year excluding our strategic investments. That means that the 13% return on capital employed is achievable for Storebrands. And if we then go to the next slide, we came in with a total sales down by 1.5%. But if you exclude the structural decline in paper, it's actually an increase by 3%.
We have during this year had new production in our French mill called Berghem. We have closed down at the end of Q1 type of machine number one in Weizuruoto. And that means that the sale in printing and reading is down by some 8%, while we have had a growth in biomaterial biomaterial by 19% compared to a year ago, the same period. And we've had a growth of 3% in renewable packaging. If we then look on the next slide, you can see that we have improved the profitability on an EBIT level €26,000,000 compared to the same quarter last year and 175,000,000 compared to the year to date figures a year ago and where we now present.
And we have also improved EBITDA. The important part here is to understand that of the 20 six percent €26,000,000 improvement versus a year ago, basically everything or €30,000,000 is actually coming from Renewable Packaging. And if you look on the year to date figures, more than 50% are coming from the Renewable Packaging. And I'm pointing it out because basically this whole quarter and the previous quarter was explained by the very strong performance of Renewable Packaging. If you would now switch to the next slide.
I think it's important to take and spend some time on our investment in sustainable business. Monsters to Plata, we are ramping at the moment. We are announcing today that it's slightly less capacity this year, because we are facing like you always do when you ramp up these kinds of investments some challenges. But it doesn't change the message that we're going to be at breakeven in the month of December. That continues.
And right now we are on an average curve, while we before we're actually ahead of the average curve how you ramp a pulp mill. Very important area is Guangxi, which I'm actually on my way to go to tomorrow. And that I think it's important that you recognize that we do have IFC as a partner and in equity and also a loan supplier loans to the mill. It's the only FSC registered plantation and certified in China. And we have basically done all the site leveling work and we are sticking with the original time plan, which is that we are planning to get the board machine up and running early twenty sixteen.
The third area of investment is that we have now started and equipment are ordered and we've done some preparatory work is the conversion of the paper mill Warkaus to become a board mill. It's an investment of €110,000,000 where we will have start of production in late twenty fifteen. And we have also always and we maintain the same, it's an EBITDA generation above 15% for the investment. Last but not least is that we're continuing in our investments based on the Virdia platform, how you can extract highly refined sugar out of various forms of biomass. And we are now also going into demonstration that plant to in reality do this more impractical and that is located in The U.
S. If we then take the next slide, which is around our non core asset divestment and restructuring. And earlier this quarter, we announced the sale of Corenso, which means that we will get a cash consideration of SEK 75,000,000, which is expected to be closed in Q4 of this year. And then also remind you that we have had a similar sale of non core assets in the earlier part of this year. All these two are totaling some €130,000,000 in cash receipts that we will benefit during this year.
When it comes to the restructuring, I just want to remind everybody that we actually got a negative verdict and from the German competition authorities, which means that we will not fulfill the sale of the Ustersen mill. And now we are coming back internally to review what options we're having. It's too early to say what we're to do, but it is for everybody's benefit to know it's a loss making mill. So we need to do something. And then if we take the last slide, I would like just to remind you about the transformation journey.
In 02/2006, 70% of sales and almost and over 60% of the profit was coming from the paper business. Today, we do have slightly more than a third of sales in the paper business and we are now down to a level with improved profitability actually to a level of 16%. A quarter ago, that profit number was 18%. So the transformation is not growing because we are lowering the profitability. We have actually increased it or maintained it in the paper, but it's because the other profitable business is growing faster.
With that, I would like to hand over to Septi Pallavi for some to share some highlights of the financials.
Thank you, Karl. And I start with a summary of the financials. First of all, sales, like Karl already mentioned, were reduced 1.5% compared to a year ago. Operational EBITDA was over 13% for Q3 this year. That is a clear improvement compared to a year ago.
And operational EBIT was increased by 14%. Operational EBIT margin was 8.4%. I look at operational return on capital employed, excluding transformation that means Montes De Platte and Guangxi here in China, we reached already 13% level, which is matching to our strategic target. And net debt to EBITDA was reduced from 3,100,000.0 a year ago to €2,800,000 this year. A comment on net debt that was increased by €123,000,000 compared to a year ago, but it's worth to notice that that's mainly driven by stronger U.
S. Dollar. Then comments on our divisions and I start with Renewable Packaging on the following page, where our operational EBIT increased by 30% compared to a year ago. Sales were up by 2.7%, driven by higher volumes, especially in our Consumer Board business and higher wood sales in Guangxi, where we have started to sell wood from our plantations. Operational EBIT was €130,000,000 driven by higher volumes and prices, also lower variable costs and improved operational efficiency.
Operational return on operational capital increased from 16.9% a year ago to 20.2%. I'd like to note this that excluding 1C project, bigger would be 27%. Then on following page moving to Biomaterials, where our operational EBIT improved by 41%. Sales increased by 18.8 mainly due to Montes De Plata startup. As you remember, we started manufacturing in June and made the first deliveries to our customers in July.
Operational EBIT reached €24,000,000 driven by higher volumes, like said earlier, NDP especially. Activity in innovation increased our fixed costs. We are doing R and D work around Lingmin by working on our Wirtia acquisition that Karl just shortly explained more in detail. Softwood pulp prices a bit higher than earlier hardwood prices hardwood pulp prices going down. Operational return on operational capital increased from 3.3% to 4% level.
But here again, good to remember that excluding NDP, where we still have ramp up going on, our return on operational capital increased from 9% to 11% level. Then Building and Living on the following page, the operational EBIT reached €22,000,000 level this quarter. Pair sales decreased by 6.7% due to lower volumes in the Japanese market during the quarter compared to year before. And operational EBIT was driven down versus a bit due to lower volumes and slightly lower prices. Those were partly offset by lower fixed costs.
Operational return on operational capital decreased from 17.7% to 16%, but it's still clearly above our 13% group target. And more or so investment is proceeding and moving ahead as planned earlier and announced. Then Paper business, printing and reading, where our cash flow to sales improved from 5.4% level a year ago to 7.5% this year. Like Karl mentioned earlier, sales declined by almost 8%, 7.9% to be clear. And that's driven by the capacity closures, Corte M Mill and Weichelotter PM1 closures.
And structural paper demand continues to decline, as we have also talked earlier. Operational EBITDA improved by 3.7% and was €84,000,000 for the quarter. That is thanks to lower costs. But then we had lower sales prices in local currencies and lower volumes due to machine closures. Operational return on operational capital increased from 1.9% to 6.7% this quarter.
And cash flow improved year on year and quarter And as you know, Paper business' main role is to generate cash flow that we can then invest in our growth businesses, where we have the major projects now going in Guangxi, for instance, and then going forward, Varkas conversion. Then on the following page, we have now added the slide on the sensitivity analysis. Some parts of the data is something that you are familiar with already, but we have added also some information to pulp sensitivity. And there 10% increase in the pulp prices would be positive by €95,000,000 assumed that that would be across the pulp grades.
However, just to remind you our sensitivity to hardwood pulp prices and softwood pulp prices that is in the case of 10% move €35,000,000 each. And the rest is coming from fluff and dissolving pulp. Then about the currencies, main exposure we have is in U. S. Dollar and also Swedish grown and British pound.
And on the currency side, 10 percent strengthening against the euro means in the case of U. S. Dollar positive impact of €103,000,000 in the case of Swedish krona that's negative by 74,000,000 and British pound positive by €46,000,000 I just want to remind when it comes to currencies that our policy is to hedge half of the net cash flows for the next coming twelve months. So, of course, if you look at the latest U. S.
Dollar move, you have to remember that the positive effect as well as always negative effect if any is smoothened by the hedging policy that we have. Then before handing over back to Karl, shortly on our capital expenditure forecast for 2014. Now we forecast that capital expenditure will be in the range of €790,000,000 to €840,000,000 That really had now narrowed compared to previous guidance where the lower end was €760,000,000 And just to put it into perspective, depreciation for this year is expected to be $550,000,005 €60,000,000 With that, I hand over back to you, Karl.
Thank you. And now I will cover our guidance for Q4 and the guidance is compared to Q3. So sales are estimated to be roughly similar to the €2,514,000,000 Operational EBIT is expected to be somewhat lower than the €210,000,000 that we showed in Q3. It is important to remind you all that we do have seasonal weakness in the renewable packaging in the fourth quarter and Building and Living division also having a seasonal. I just want to remind you with that.
And then I just want to conclude the call before I hand over the Q and A to you guys and that is that the transformation journey continues and it was a solid third quarter with an operational EBIT improvement by 14%, improved net debt to EBITDA and an improved return on capital employed by over one percentage point. With that, I would like to hand over to the operator for question and answers.
Thank We will now take our first question from Michael Japs from Kepler Cheuvreux. Please go ahead. Your line is open.
Thank you. Good afternoon, everybody. I have two questions. One is concerning the U. S.
Dollar euro move that you've highlighted there in the sensitivity analysis. Could you say a couple of words on what do you believe a change in U. S. Dollar versus the euro would mean in potential trade flow changes of material shifting into different areas? That's the first question.
Then the second question would be around hardwood pulp prices. Now according to data, we can see from FO exits since as if the short fiber pulp has made a bottom. What are your view on the ongoing development for the price of this pulp grade? Thank you.
So I asked Sapo to answer the question regarding the currency and I will speak about the pulp prices.
So like I said earlier, it's a positive move for us when dollar has now strengthened and euro has been getting weaker. And it's of course clear that that gives competitive edge in the Asian markets, especially for our port business and improves the general profitability of exports from the Europe. But of course, it doesn't change the general trend when it comes to declining structurally declining demand on the paper side. Then Karl, do you want to take that Yes. And if
we take the softwood part, the demand year on year is down by some 3%. We expect prices for this next quarter, which is a sequential movement into Q4 to be around zero to minus 1%. Then when it comes to hardwood pulp, we have seen a year over year increase by 2% and we expect prices to be between zero minus 1%, which means that on the hardwood side even though capacity is coming online, we don't see a huge price movement. Did that answer your question?
Caller please go ahead. Your line is open. Mr. Japs your line is open.
No. I already did my question. So it's time for the next one.
So I asked you a question, Michael, if that was okay there. Did our answer cover your question?
Yes, they did. Many thanks.
Okay. No problem. Thank you.
We will now take our next question from Antti Kosci buro from Danske Bank. Please go ahead. Your line is open.
Yes. Thank you. I have actually three questions. First two about Montes De Plata. Firstly, could you give us a number what was the EBIT impact from Montes Del Plata in Q3?
And secondly, if I look at your ROCE now you say excluding the project your ROCE was 13% in Q3. Now when Montes Plata will be in numbers, am I thinking correctly that your ROCE will decline somewhat due to the Montes Del Plata, but obviously during the ramp up it should improve. So when basically you are expecting to return to 13% ROCE level after the Mondes Del Plata ramp up? Maybe those two first then I can ask third one later on.
Okay. It's Zepf. Maybe I'll start on this and Alec and Phil in and add. First of all, as you know, we don't normally and also this some comment on individual units. But it's typical that during the ramp up period you make losses when you are ramping it up.
You have the fixed cost. You have the depreciation, but your income stream is not matching to that yet. We are talking about some millions. We are not talking about tens of millions just to put the perspective. Then of course, looking at the return on capital employed going forward once it's fully ramped up assuming that the current pulp prices remain at the levels typically if you look at the operations similar in the Latin America using plantation pulp, plantation based eucalyptus pulp, you see EBITDA levels of 40% plus.
And that of course should be return on capital employed enhancing going forward. Karl, do you have something to add?
Yes. And I think because the return on capital employed, excluding the transformation was 9.7%. The return including and excluding is 13%. And the ramp up of Montes De Plata will gradually improve. And we're also saying that we still believe we will make a breakeven in the month of December.
So with those numbers, think question is answered. Then you had the third question.
Yes. Third question will be on net working capital and quite big increase year over year there. Is it due to the Montes Del Plata? Or could you run us through that?
So maybe I can take this one. And it's up a bit. Part of it is that payables are down and that is because we are now starting to pay off some of the investments, the CapEx. So that's part of it. We have also increased inventories by about SEK 30,000,000.
Half of that is coming basically from the printing and reading, who were building inventory for the seasonally stronger quarter four versus quarter three. And where it is coming from,
so to
say, biomaterials because of the ramp up of Montes De Plata where you get working capital when you grew 18 like they did in sales. And then it's about basically about €10,000,000 which is receivables. So that's the explanation.
All right. Thank you very much. Those were my questions.
Thank you.
We will now take our next question from Lars Kjellberg from Credit Suisse. Please go ahead. Your line is open.
Thank you. I just had a couple of questions. Coming back to currency, I suppose then with your hedging you did not really see any meaningful contribution from currency in Q3. Is that correct? If we assume the current rates stand where they are today for the balance of the next well, I guess through 2015, what do you estimate the impact from currency would be on your operating profit?
And also when you can you give us any sense of CapEx in 2015? That's just my starting questions.
So it's simple to take the two first. I take the CapEx.
During the Q3, the FX from the FX was still relatively small. We are talking about something around €15,000,000 so nothing significant. But that has been the case also earlier. But like I said earlier in the presentation, 10% move in per dollar is higher than €3,000,000 And you can do then the math with the different assumptions on per dollar euro rate what does that mean then at the end of the day for us. But you should keep in mind, I said earlier that our policy is to hedge about 50% of the coming twelve months.
But of course, there's another relevant currency which is the Swedish crown to the euro and sterling and dollar as well. So there's a lot of there's more moving parts than that to the euro. But can you give us any sense how you view this currency tailwind in 2015 where we stand today? Or have you done that math?
Like I said, there are so many different parameters pulling to different directions. But if you look at the figures and count the net net out of the three, we are around €70,000,000 50,000,000 €80,000,000 level on net basis on different currencies if you take the euro moving one way or another.
And that is excluding hedging in Tyson? That would be sort of if you were negative?
Excluding then you need to smoothen it by taking into account our policy to hedge 60%. So then it's sort of €40,000,000
And just to be clear
And just
to be clear that the 15,000,000 you mentioned in the quarter there was a positive tailwind then as opposed to anything else?
Yes. That is correct.
Okay. Thank you.
CapEx? If you look upon the CapEx for 2015 and you have to keep in mind that this is the period when you do the budgeting and we do budgeting here. But I think it's important to shed light around the CapEx. So I think it is to start with the maintenance CapEx is around 2% of sales, which is 200,000,000 to €250,000,000 right? That's some sort of a baseload that we usually are having.
Then we know right now that the Guangxi project would be around €350,000,000 for next year. We have the Valkaus kraftliner conversion, which is about 100,000,000 for next year and of the total 110,000,000 Then we have the Virbia around 30 So for me without having giving you the full load, I expect a CapEx level of around the same level as this year.
Understood.
Did that answer your question? Did that because we are still in budgeting because we are doing all the project back and forth, right?
No. Perfectly clear. Thank you. Just a couple of small questions. You mentioned Itersen of course that is somewhat disappointing from again I don't understand competition authority issues, but clearly there is one here.
Could you say what sort of options do you have? And how do you see that impacting your operations in terms of commodity coated paper going forward? And what else if you take that one oh yes material changes in maintenance cost. Is there any such change in Q4 versus Q3?
So if I take the Duchenne, which is a tragedy and it comes down to the German cartel authorities that did not agree upon our view that the Weststraints label can also be changed into plastics. They were only looking on the Weststraints paper base. And obviously, as I mentioned in the call, it's a loss making operation. So the options we are having is basically around finding a new buyer or go into some sort of restructuring, because we will not continue with loss making. And it's a tragedy also for our customers, because if we are restructuring, we might take away capacity, which means that there will be even less competition.
But it is what it is and we fought very hard. We talked to customers. We talked to the highest level of the cartels or the competition authorities. It's a real tragedy, because we thought we have found a new home for a mill that we have. So we are actually right now going through all the options.
Lars, did that answer your question?
Just coming back to the coated paper that you do produce. There used to be coated paper mill and now it's a specialty paper mill. But does that impact at all the way you do this now? Would you have you sort of taken away this commodity coated paper production already?
Yes. In a way we have. It's very, very high gramages. Did you also ask about the maintenance?
Yes. If there's any meaningful change between the I fourth quarter and
think it's important and this is part of you to have in mind is that the Q4 maintenance expense is lower than what we had in the third quarter. But it's important but it do include Skogal, which is important. It's a big liquid packaging board mill. And the other thing is that we are taking some 46,000 tonnes of market curtailments in the renewable packaging. On top of that, due to somewhat little bit weaker order intake in the European construction market, we are also reducing some of the shifts in Finland and having market curtailments in the Austrian sawmills.
That is more a little bit for you to understand the dynamics.
And just if I may just come back to what you just said market related downtime renewable packaging. Is that where you saw somewhat weaker order on a sequential basis?
And it is the seasonal because we usually do.
Yes. That makes sense. One final question for me if I may. We discussed the weirdness of the Cartel Amp. Is that something that has to do with your comment today as well about talking you're not really that involved in consolidation of European paper.
Is that a consideration in your view on paper consolidation?
No. What my view is on paper consolidation is the following. I think for us paper is an important cash generator. However, my future and most of my profits 86% in this quarter is coming from others. And if somebody is willing to come with a very good offer and give something that is very, very cashy, because today I have a very well working paper machine business, which is generating a substantial amount of cash.
I don't want to change that. And then if somebody wants to do something with paper, it has to be an offer to me, because I'm not going to be a consolidator. It has to be something that gives me and my shareholders a lot of value, because of the lack of cash flow that I'm leaving.
Makes perfect sense. That makes perfect sense. Thank you.
We will now take our next question from Linus Larsson from SEB. Please go ahead. Your line is open.
Yes. Thank you very much and congratulation on a good quarter. Most of my questions have been answered, but maybe one remaining question. We've seen a lot of macro related turmoil recently. Could you in any way describe any signs of macro weakening that you are seeing in your various businesses order books or elsewhere please?
And it's a little bit what I said what I saw in the European construction, because it seems like it's growth rate of building starts is holding back a bit. And that's for me an early indicator that the macro might be affected. And that's also the reason why the seasonal impact might be as I talked about that we're taking down ships in some of the sawmills. But I think it's too early to see yet if it is something really happening or it's just a temporary thing due to all the tension it's been around the Ukraine Russia EU sanctions happening. I think it's too early to see it.
But so I'm actually in a wait and see mode. And you're apart from Building and Living in the other three divisions, have you had any changes to your I mean Printing and Reading obviously is somewhat different because of the restructuring that you are doing there. But for instance in Renewable Packaging what kind of order inflow observations do you make now compared to a year ago or for what one can expect for this time of year? So most of the renewable packaging, which is Consumer Board, those mills are sold out. So there we see nothing.
And actually we are in need for more capacity. That's why we are doing this new Consumer Board mill in China. And then so that's so the only way we are seeing it. And paper in reality, if you look on the demand on the total area of paper year on year, it's actually a demand decline of about 3%, which is lower than we have seen historically. I'm having good utilization of my paper machines compared to a year ago.
So I haven't seen anything yet. And when it comes to pricing, it seems to be fairly stable for the next quarter. We don't know yet because the big newsprint negotiation hasn't started yet. That's great. Thank you very We
will now take our next question from Fabio Lopez from Bank of America Merrill Lynch. Please go ahead. Your line is open.
Hi. Good afternoon and thanks for taking the questions. I have two questions. One on the could you comment on the order book for the Packaging division? You already said you're sold out in Consumer Board.
But what is the visibility in there? And what is the order book across the Packaging division? And the second question would be how was the price discovery, the price negotiation in China with the ramp up of Montes Del Plata? We've had a little bit less capacity coming now. Does it mean that we're going to have more in Q4 and therefore you see prices more at risk?
I would just like to have some color on the price negotiation at the moment. Thank you very much.
So when I look upon the pulp business, we see maybe stable to down 1% for both pulp grades in the coming quarter. And when I say we are sold out that's usually on a yearly basis. But in the fourth quarter now when it came we are taking market curtailments within Renewable Packaging of 46,000 tonnes. And that's the seasonal pattern that you see in mainly the consumer business, which is like 70% of renewable packaging.
Okay. But in terms of the underlying demand, I'm thinking about like macro implications. It seems remains healthy or
If I go on the demand and I take I take consumer to the underlying demand for the whole renewable packaging is that year on year we have a demand increase by 2% and a positive price view. And where you see on the consumer board, it is fairly stable prices and year on year an increase of about 1%. Containerboards are up year on year 2%. And the price view on the next quarter is that we are trying to work up a price increase by €20 Okay.
And the sorry, on the containerboard the 2% up is it year to date or is it Q3?
Q3 versus Q3 last year.
Okay. Perfect. Very clear. And what about the pulp part?
That's what I said. So the same if I take the same softwood pulp year on year is down 3% in the third quarter. And we expect in the fourth quarter to be somewhere between zero and minus 1% in Europe. And when you take the hardwood, it's in the third quarter versus the last year's third quarter is up 2% and somewhere we see it's somewhere stable to down minus 1% in the fourth quarter versus the third quarter. Was I clear?
Yes. Okay. That includes obviously the negotiations of Montes Del Plata ramping up in Q4.
And the reflection I do here is that despite a lot of volume coming online prices are holding up quite well.
Okay. Okay. Perfect. Thank you.
There are no further questions in the queue at this time. Okay. Thank you. And thank you everybody for attending this call and for the good questions. And we will then speak latest in connection our full year results in early February twenty fifteen.
Thank you very much for attending. Thank you for your participation, ladies and gentlemen. You may now disconnect.