Good day, welcome to the Stora Enso Q3 2014 earnings conference call. Today's call 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, ma'am.
Thank you. Good afternoon, everyone, welcome to our Q3 results call. I will now hand it over to our CEO, Karl-Henrik Sundström. Please go ahead, Kalle.
Good morning, good afternoon, depending on where you are in the world. The Stora Enso team are in China on their way to Guangxi. If there are disturbances on the line, it might be the reason. I would like to start the presentation by going to slide number three. 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. 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 del Plata. Building and Living came basically in on a similar performance as last year, and we had a stable performance in Printing and Reading.
Important 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 investment. That means that the 13% return on capital employed is achievable for Stora Enso. If we then go to the next slide. We came in with the 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 no production in our French mill, Corbehem.
We have closed down at the end of Q1 the paper machine number 1 in Veitsiluoto, that means that the sale in Printing and Reading is down by some 8%, while we have had a growth in Biomaterials by 19% compared to a year ago, the same period, we've had a growth of 3% in Renewable Packaging. We then look on the next slide, you can see that we have improved the profitability on an EBIT level, EUR 26 million compared to the same quarter last year, EUR 175 million compared to the year-to-date figures a year ago and where we now present. We have also improved EBITDA. The important part here is to understand that of the EUR 26 million improvement versus a year ago, basically everything or EUR 30 million is actually coming from Renewable Packaging.
If you look on the year-to-date figures, more than 50% are coming from the Renewable Packaging. I'm pointing it out because basically this whole quarter and the previous quarter was explained by the very strong performance of Renewable Packaging. You will now switch to the next slide. I think it's important to take and spend some time on our investment in sustainable business. Montes del 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 kind of investments, some challenges. It doesn't change the message that we're going to be at break even in the month of December. That continues. Right now, we are on average curve, while 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. That I think is important that you recognize that we do have IFC as a partner and in equity, also a supplier of loans to the mill. It's the only FSC-registered plantation and certified in China, we have basically done all the site leveling work, we are sticking with the original time plan, which is that we are planning to get the board machine up and running early 2016. The third area of investment is that we have now started, equipment are ordered, we've done some preparatory work, is the conversion of the paper mill Varkaus to become a board mill. It's an investment of EUR 110 million, where we will have a start of production in late 2016.
We have also always, 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. We are now also going into a demonstration plant to, in reality, do this more in practical. That is located in the U.S. We then take the next slide, which is around our non-core asset divestment and restructuring. Earlier this quarter, we announced the sale of Corenso, which means that we will get a cash consideration of EUR 75 million, which is expected to be closed in Q4 of this year. 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 million EUR 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 from the German competition authorities, which means that we will not fulfill the sale of the Uetersen Mill, now we are coming back internally to review what options we have. It is too early to say what we are going to do, but it is for everybody's benefit to know it is a loss-making mill, we need to do something. If we take the last slide, I would like just to remind you about the transformation journey. In 2006, 70% of sales 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, we are now down to a level with improved profitability, actually to a level of 16%. A quarter ago, that profit number was 18%. The transformation is not going because we are lowering the profitability. We have actually increased it or maintained it in the paper, it is because the other profitable business has grown faster. With that, I would like to hand over to Seppo Parvi to share some light on the financials.
Thank you, Kalle. I start with the summary of the financials. First of all, sales, like Kalle 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. Operational EBIT was increased by 14%. Operational EBIT margin was 8.4%. A look at operational return on capital employed, excluding transformation investments, that means Montes del Plata and Guangxi here in China, we reached already 13% level, which is matching to our strategic target. Net debt to EBITDA was reduced from 3.1 a year ago to 2.8 this year. A comment on net debt that was increased by 123 million EUR compared to a year ago, but it is worth to notice that that is mainly driven by stronger US dollar.
Comments on our divisions, 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 million EUR, driven by higher volumes and prices, also lower variable costs and improved operational efficiency. Return on operational capital increased from 16.9% a year ago to 20.2%. I would like to notice that excluding Guangxi project, I think it would be 27%. On following page, moving to Biomaterials, where our operational EBIT improved by 41%. Sales increased by 18.8%, mainly due to Montes del Plata start-up. As you remember, we started manufacturing in June and made the first deliveries to our customers in July.
Operational EBIT reached EUR 24 million, driven by higher volumes, like I said earlier, MDP especially. Activity in innovation increased our fixed costs. We are doing R&D work around Lignin and working on our Virdia acquisition that Kalle just shortly explained more in detail. Softwood pulp price is a bit higher than earlier, hardwood pulp price is going down. Return on operational capital increased from 3.3% to 4% level. Here again, good to remember that excluding MDP, where we still have ramp-up going on, our return on operational capital increased from 9% to 11% level. Building and Living on the following page. The operational EBIT reached EUR 22 million level this quarter. There, sales decreased by 6.7% due to lower volumes in the Japanese market during the quarter compared to year before.
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. Murow sawmill investment is proceeding and moving ahead as planned earlier and announced. Paper Business, Building and Living. Their cash flow to sales improved from 5.4% level a year ago to 7.5% this year. Like Kalle mentioned earlier, sales declined by almost 8%, 7.9%, to be clear, and that's driven by the capacity closures. Corbehem mill and Veitsiluoto PM1 closures. As structural paper demand continues to decline, as we have also told earlier. Operational EBITDA improved by 3.7%. That was EUR 84 million for the quarter.
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. Cash flow improved year-over-year and quarter-over-quarter. 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, Varkaus conversion. 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. There are 10% increase in the pulp prices would be positive by EUR 95 million, assuming 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, EUR 35 million each. The rest is coming from fluff pulp and dissolving pulp. About the currencies. Main exposure we have is in U.S. dollar and also Swedish krona and British pound. Of the currency side, 10% strengthening against the EUR means in the case of U.S. dollar, a positive impact of EUR 103 million. In the case of Swedish krona, that's negative by EUR 74 and British pound positive by EUR 46 million. 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 12 months.
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. Before handing over back to Kalle, shortly on our capital expenditure forecast for 2014. We forecast that capital expenditure will be in the range of EUR 790 million-EUR 840 million. That we have now narrowed compared to previous guidance, where the low end was EUR 760 million. Just to put it into perspective, depreciation for this year is expected to be EUR 550 million-EUR 560 million. With that, I hand over back to you, Kalle.
Thank you. Now I will cover our guidance for Q4, and the guidance is compared to Q3. Sales are estimated to be roughly similar to EUR 2,514 million.
Operationally, EBIT is expected to be somewhat lower than EUR 210 million 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 it seasonal. I just want to remind you with that. I just want to conclude the call before I hand over the Q&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 EBITDA, and an improved return on capital employed by over a percentage point. With that, I would like to hand over to the operator for question and answers.
Thank you. If you would like to ask a question at this time, please press the star key followed by the digit one on your telephone. Please ensure that the mute function on your phone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We will pause for a moment to allow everyone to signal. We will now take our first question from Mikael Jafs 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 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. The second question would be around hardwood pulp prices. According to data we can see from FOEX, it seems 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.
I ask Seppo to answer the question regarding the currency, and I will speak about the pulp prices.
Like I said earlier, it's a positive move for us when U.S. dollar has now strengthened, and EUR has been getting weaker. It's of course clear that gives competitive edge in the Asian markets, especially for our pulp business, and improves the general profitability of exports from Europe. Of course, it doesn't change the general trend when it comes to structurally declining demand on the paper side. Kalle, do you want to take that?
If we take the softwood pulp, 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 0% to -1%. When it comes to hardwood pulp, we have seen a year-over-year increase by 2%, and we expect prices to be between 0% to -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. Jafs, your line is open.
No, I already did my question, so it's time for the next one.
I asked you a question, Mike, if that was okay there. Did our answer cover your question?
Yes, it did. Many thanks.
Okay, no problem. Thank you.
We will now take our next question from Antti Koskivuori of Danske Bank. Please go ahead, your line is open.
Yes, thank you. I have actually three questions. First two about Montes del Plata. Firstly, could you give us a number, what was the EBIT impact from Montes del Plata in Q3? Secondly, if I look at your ROCE now, you say excluding the project, your ROCE was 13% in Q3. When Montes del 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. When basically you are expecting to return to 13% ROCE level after the Montes del Plata ramp-up? Maybe those two first, I can ask the third one later on.
Okay. It's Seppo here. I start on this, Kalle can fill in and add. First of all, as you know, we don't normally and also this time 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 EUR millions. We are not talking about tens of EUR millions, just to put it into perspective. Of course, look 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-based eucalyptus pulp, you see EBITDA levels of 40% plus.
That of course should be return on capital employed enhancing going forward. Kalle, do you have something to add?
Yes. I think because the return on capital employed excluding the transformation was 9.7%. The return including and excluding is 13. The ramp-up of Montes del Plata will gradually improve, we are also saying that we still believe we will make a break even in the month of December. With those numbers, I think the question is answered. Then you had a third question.
Third question will be on net working capital and the quite big increase year-over-year there. Is it due to Montes del Plata, or could you run us through that?
Maybe I can take this one, it is up a bit. Part of it is that payables are down, that is because we are now starting to pay off some of the investments, the CapEx. That is part of it. We are also increased inventories by about EUR 30 million. Half of that is coming basically from the Printing and Reading, who were building inventory for the seasonally stronger quarter four versus quarter three. Where it is coming from, so to say, Biomaterials because of the ramp-up of Montes del Plata where you get working capital when you grew 18% like they did in sales.
It is about basically about EUR 10 million, which is receivables. That is 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?
Yes.
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? Also, can you give us any sense of CapEx in 2015? That's just my starting questions.
If Seppo will take the two first, I take the CapEx.
Yeah.
During the Q3, the effect from the FX was still relatively small. We are talking about something around EUR 15 million, so nothing significant. That has been the case also earlier. Like said earlier in the presentation, the move in the dollar is higher than EUR 3 million. You can do then the math with the different assumptions on the dollar-euro rate, what does that mean then at the end of the day for us? You should keep in mind, like I said earlier, that our policy is to hedge about 50% of the coming 12 months.
Of course, there's another relevant currency, which is the Swedish krona to the euro and sterling and dollar as well. There's more moving parts than that to the euro. 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. If you look at the figures and count the net out of the 3, we are around EUR 70 million, EUR 50, EUR 80 million level on net basis on different currencies, if you take the EUR moving one way or another.
That is excluding hedging impacts, and that would be sort of if you were naked.
Excluding, then you need to smoothen it by taking into account our policy to hedge 50%, so then it's sort of EUR 40-ish million roughly.
Understood. Just to be clear.
million by four.
Right. Just to be clear that the 15 you mentioned in the quarter, that 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. I think it's important to shed light around the CapEx. I think it is, to start with, the maintenance CapEx is around 2% of sales, which is EUR 200 million to EUR 250 million. Right? That's some sort of a base load that we usually are having. We know right now that the Guangxi project would be around EUR 350 million for next year. We have the Varkaus kraftliner conversion, which is about EUR 100 million for next year, and of the total, EUR 110 million. We have the Virkkala around EUR 30 million. For me, without giving you the full load, I expect a CapEx level of around the same level as this year.
Understood.
Did that answer your question? Because we are still in budgeting, because we are doing all the project backs and back and forth, right?
No, perfectly clear. Thank you. Just a couple of small questions. You mentioned Uetersen, 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? What else? If you take that one. Oh, yes. Material change of the maintenance cost. Is there any such change in Q4 versus Q3?
If I take Uetersen, which is a tragedy.
Yes
It comes down to the German cartel authorities that did not agree upon our view that the wet-strength label can also be changed into plastics. They were only looking on the wet strength, the paper-based.
Obviously, as I mentioned in the call, it's a loss-making operation. The options we are having is basically around finding a new buyer.
Yeah
Or go into some sort of restructuring, because we will not continue with loss-making. It's a tragedy also for our customers, because if we are restructuring, we might take away capacity.
Sure.
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 have talked to the highest level of the cartel or the competition authorities. It's a real tragedy because we thought we have found a new home for a mill that we have. 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, but now it's a specialty paper mill. Does that impact at all the way you do this mill with you? Have you taken away this commodity coated paper production already?
Yes. In a way we have. It's very high damages. Did you want to ask about the maintenance?
If there's any meaningful change between the fourth quarter and-
I 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. It do include Skoghall, which is important. It's a big liquid packaging board mill. The other thing is that we are taking some 46,000 tons of market curtailment 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.
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?
It is seasonal because we usually.
Yeah, that makes sense. One final question from me. We discussed the weirdness of the cartel hunt. 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. If somebody is willing to come with a very good offer and give something that is 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. 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.
That makes perfect sense.
Did that explain it to you, Lars?
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 congratulations on a good quarter. Most of my questions have been answered. 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?
It's a little bit what I said, what I saw in the European construction, because it seems like the growth rate of building starts is holding back a bit. That's for me an early indicator that the macro might be affected. That's also the reason why the seasonal impact might be, as I talked about, that we're taking down shifts in some of the sawmills. I think it's too early to say yet if it is something really happening or it's just a temporary thing due to all the tension that's been around the Ukraine-Russia EU sanctions happening. I think it's too early to see it. I'm actually in a wait-and-see mode.
Apart from Building and Living in the other three divisions, have you had any changes to your-- Printing and Reading obviously is somewhat different because of the restructuring that you are doing there. 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?
Most of the Renewable Packaging, which is consumer board, those mills are sold out. There we see nothing.
Actually, we are in need for more capacity. That's why we are doing this new consumer board mill in China. The only way I'm seeing it, and paper, in reality, if you look on the demand on the total area of paper year-over-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, I haven't seen anything yet. 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 much.
Thank you.
As a reminder, to ask a question, please press star one. We will now take our next question from Fabio Lopes 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, could you comment on the order book for the packaging division? You already said you're sold out in consumer board. What is the visibility in there, and what is the order book across the packaging division? 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.
When I look upon the pulp business, we see maybe stable to down 1% for both pulp grades in the coming quarter. When I say we are sold out, that's usually on a yearly basis. In the fourth quarter now, we are taking market curtailments mainly within Renewable Packaging of 46,000 tons. That's the seasonal pattern that you see in mainly the consumer business, which is 70% of Renewable Packaging.
Okay. In terms of the underlying demand, I'm thinking about macro implications. It seems, remains healthy or?
If I go on the demand and if I take consumer, so 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. Where you see on the consumer board, it is fairly stable prices and year-on-year, an increase of about 1%. Container boards 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 about EUR 20.
Okay. 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. What about the pulp part?
That's what I said. If I take the same softwood pulp, year-on-year, it's down 3% in the third quarter, and we expect in the fourth quarter to be somewhere between 0 and -1% in Europe. When you take the hardwood, in the third quarter versus last year's third quarter, it's up 2%, and we see it somewhere stable to down -1% in the fourth quarter versus the third quarter. Was I clear?
Yeah. Okay. That includes obviously the negotiations of Montes del Plata ramping up in Q4.
The reflection I do here is that despite the lot of volume coming online, prices are holding up quite well.
Okay. Perfect. Thank you.
As a reminder, to ask a question, please press star one. There are no further questions in the queue at this time.
Thank you. Thank you, everybody, for attending this call and for the good questions. We will then speak latest in connection to our full year results early February 2015. Thank you very much for attending.
Thank you for your participation, ladies and gentlemen. You may now disconnect.