Good day. Welcome to the Q2 2014 Stora Enso earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Ulla Paajanen-Sainio, Head of Investor Relations. Please go ahead, madam.
Thank you, Susanna. Good afternoon, everyone. Welcome to our Q2 conference call. I will hand it over now straight to Jouko for his final conference call with investors.
Thank you, Ulla. Hi, everybody. One more time, here I am. I have with me my successor, Kalle Sundström, and our CFO, Seppo Parvi. The way we will do this is I'll briefly talk through the essentials of the second quarter. Seppo will run through the financials. Logically, Kalle will talk about the future. If we go to page three, this is the summary of the second quarter. Sales down 5%. A big part of it still was the structural change in the printed media market. Having said that number that we all talked about for so many years, the 5% decline, the total decline was actually slightly less in the second quarter because the European economy recovery and so forth, the structural change, underlying change is still there. Earnings, operational earnings, both EBITDA level, but also EBIT level, significantly up 35% and almost 70%.
Two reasons. One, cost, both variable cost, also fixed cost program worked. It worked actually better than we thought. You remember in April, we said we hit the target in the first quarter. Well, now we beat the target in the second quarter by EUR 44 million on an annualized level versus 2002. I'll have a little more detail on that. I'm very pleased with that because it is a structural change. It's not just a squeeze. I think after the many years of trying to make the company lighter and more agile, I think it's good to see that it's still possible to improve that. Our balance sheet net debt to operational EBITDA from 3.2 a year ago to 2.8. Remember, this is after a quarter where we spent some money on Virdia, we spent some money on Batili, we paid the dividend.
I think it's a proof point of a solid balance sheet also. The return on capital employed, 9.8%, up from 5.4%. Because everybody remembers the famous 13% from, I don't know, 10 years ago. If we take the currently revenue-generating assets, i.e., exclude the large investments we're making that don't generate revenue yet, we actually had 12.7% growth. As I said in my cover note or the comment note today, many more things need to be done and will be done by Kalle and his team. At least I think the company is on its way. Already said that the savings program, the Reshape program, exceeded target by 22%. I think strategically, I'll talk a bit about Virdia, the acquisition, and then the conversion of Varkaus in a minute. We also announced a closure plan for Corbehem, a heavy loss-making site, unfortunately.
A very expensive program. As you well understand, this is essentially defined by the French legislation. If you move to page four, we have added now a new section to our quarterly release called Global Responsibility, which is in its formation. I'm sure with the new CEO in the coming quarters, it will change and improve further, but intentionally very transparent to very small specific points and so forth, reporting progress in different areas. Here, I picked a few points here. Health and safety, which has been a focus for the company for a couple of three years now. A clear improvement year-on-year on lost time accidents for a million hours from 5.7 to 4.3. The best of our divisions, Biomaterials, actually improved 70% year-on-year, and they are at half the accidents as the company is.
Point of the story is it works, and it's working not only in Europe but also in areas like Guangxi and so forth. Quite important, I think, for the future of the company. On human rights, one of the key events which actually happened at the quarter is that we have signed the first global collaboration agreement with Save the Children. That will be followed by project-specific other agreements and so forth. I think it is important for the credibility and the transparency of the company. I'm sure Save the Children can be very helpful in making sure we do the right things and do them right, too. The earlier announced groupwide human rights assessment is in progress. We train a lot of people. The work's being done and completed by the end of the year.
Pakistan, Bulleh Shah, the joint venture that was quite a bit in the media. Heavy auditing training of the supply chain happening. We have, and in the name of full transparency, in the old corrugated cardboard chain, in the audits, we have found seven individual child labor cases and five young worker cases. Half of them have been solved. What does it mean? It means that Bulleh Shah has agreed with the parents how to compensate the lost income and got those kids to school. The other six children and young workers, they're being worked on. We need to work that together with the parents. The one chain that we cut already in April, 55 kids got to school then. The next 150 will get to school in August. Again, independent whether they ever really had any involvement in collecting any material for Bulleh Shah.
Point of the story is, we believe that taking care of those kids in cooperation with their parents is the right thing to do. And the other way around, if Bulleh Shah with Stora Enso wouldn't be there, those kids would never go to school. On the wheat straw, which is the biomass chain, we have not identified any children in the audits that we've done so far. China. Working on those thousands of contracts, I believe 58% now complete. More work to do. Interesting projects on improving transport logistics, safety of forestry, and water quality and purity in the community. Point of the story, why we call them shared value, is that those things make us more competitive, they also make the community better way beyond our own project. That's what we call shared value.
Maybe an interesting detail that in a specific report that ranked all industries in China, Stora Enso not only did quite well on the overall ranking, but was clearly identified as number one of any local or international paper company in terms of a green or environmentally responsible supply chain. The rest you can well read, I think, in the quality release, which is quite detailed. Page five. Well, the last three, four, five quarters, at least the trend is up. Obviously for me, it's important that the actions we've taken on cost takeout and so forth have worked. Page six then, which I think is quite important. Many companies talk about cost takeout this and cost takeout that, and then they qualify it with inflation or inflation whatever.
This is the exact picture of what happened in the two years that we define as the window Q2 2012 to Q2 2014. The program impact, which is structural change without capacity reductions, EUR 244 million down. In addition to that, the capacity-reducing actions that we've taken in the past couple of years reduced the fixed cost by EUR 68 million. The plus 44 is essentially the new manufacturing assets we have added that weren't there in 2012. And on the cost side, the exchange rate helped us EUR 52 million. So the gross number or the actual cost down is EUR 320 million. But we want to transparently say EUR 244 million was the structural change and so forth. I happen to think that was very well done by many people and all the divisions, whereas obviously the burden was more on some than others. Page seven.
You see the four-quarter rolling average. The trend is right, not that it's ever good enough. And obviously, the other number we look at is then the relative fixed cost to sales and so forth. Moving on to page eight. Virdia. A small acquisition paid kind of half now and half when you see the technical and scientific and commercial success in the future. A very interesting startup. It's not quite a startup. It's been there 7 years. They have a specific process, which is acid hydrolysis. Don't ask me what it really means. But essentially, it produces very high purity sugars extraction at very high yields. So it's from both a capital but also yield point of view, it's very competitive versus any of the other alternatives.
Essentially, the business case is based on how do you replace a very large number of different chemicals, specialty chemicals, and foodstuff with non-food-based biomass, specifically non-food-based biomass. We're essentially replacing fossil materials, but we're also working to replace them with non-food-based biomass because the competition for food and food mass is there. This I will leave with a happy smile to my successor. It's a small bet, but I hope it'll be a great success in the years to come. Page nine. A different action, the conversion of the Varkaus mill. Yes, a significant investment. On the other side, if you compare that with the greenfield, and when we looked at the return on this, I think it's a very smart thing to do as a pure packaging investment or containerboard investment.
It's also quite interesting because it obviously takes office paper capacity out, makes other assets more competitive because of that factor, then maybe acute right now is it will reduce our dependence on Russian birch and replace that with domestic long fiber, virgin fiber. I think that's another little step on the way to the future. Page 10, which is an overly simplistic recap of my seven years and a quarter. 2006, just before I started. Paper, including North America and the merchant, was two-thirds of the revenue of the company, and packaging was a quarter. Obviously, the company was bigger then. To this date, are gone now. Paper is 38%, packaging a third, and obviously, if you take the European publication papers, it's also maybe 34% or something like that. Earnings-wise, 2006, paper was about a little more than half of the company result.
This quarter it was less than 20%. The dependence or the exposure to printing media has changed. Long way to go, I think it's a perfect time to hand the baton in this relay to the gentleman on page 11, Kalle. I am very happy and honored Kalle is taking the baton, so to say, from me. Kalle joined us two years ago, a little less than two years ago, on August 1 as the Chief Financial Officer. It took me a year to figure out that he can do so much more. Now for the past year, he's been running essentially half the company. I think he's done an outstanding job there. Therefore, I believe I leave the company in very good hands.
I have given only one advice to Kalle, that is that he cannot and shall not take any advice from his predecessor, namely me. He needs to take a fresh look. There we are. I believe it's time for me to hand it over to Seppo to go through the financials, then Kalle will talk about the future a bit, then we are all ready, all three of us, for your Q&A. Seppo.
Thank you, Jouko. I start with the summary of the financials. As Jouko already mentioned in the beginning, our top line declined 5% due to the structural changes in the paper segment and market. If we exclude that impact, it's worth to notice that sales would have remained stable. Important to notice also, despite this sales decline, our operational EBITDA increased by 27% and operational EBIT by 69%. This improvement came both from variable and fixed costs improvements. During the quarter, we reported negative NRIs of EUR 106 million, mostly due to the Corbehem mill closure plan and Uetersen mill divestments. These actions are part of our paper segment restructuring in order to maintain good cash flow generation, enabling us to make transformation to renewable materials company, as Jouko just described also. Operational return on capital employed improved to 9.8% from 6.7 year-on-year.
If we look at the return on capital employed without the strategic growth projects, the return on capital employed is 12.7%, which is actually on the level of our strategic target of 13%, which is a good proof point that this target we have set to us is totally realistic. We are also comfortable with the 2.8 ratio of net debt to last 12 months operational EBITDA, especially taking into account that this is the quarter that we have made the dividend payments and also we have continued capital expenditure, quite extensive capital expenditure program also this year. Moving to the business results and segment that we report. First of all, Printing and Reading operational EBIT improved by EUR 53 million in Q2 compared to a year ago. This was driven by lower costs and also lower depreciation. Also, the volumes were lower due to machine closures.
Cash flow improved sequentially as it usually does from Q1 to Q2. During the quarter, we announced Uetersen divestment, which is now delayed due to regulatory approvals. We also recorded EUR 24 million NRIs for this action. We also announced Corbehem mill closure plan today after the social plan for the mill was accepted by the relevant French labor unions and validated by the authorities on 10th of June. This cost us EUR 81 million. The division will undergo significant maintenance during the Q3, including a base load dryer unit that apparently will be down for 30 days. Maintenance impact for increasing our reading is about half of the group impact of EUR 30 million that we have also mentioned in the interim report for Q3. Moving to Biomaterials on the following page, where we reported operational EBIT of EUR 10 million for the quarter.
This output was reduced by Montes del Plata pulp mill startup costs from Uruguay and increased activity on the biorefinery side. As said, Montes del Plata pulp mill started up early June with first deliveries mid-July, and our share of the production is expected now to be from 300,000 to 350,000 tons in this year. This is roughly 50,000 tons less than the earlier estimate we have given. Also, in Biomaterials, there will be maintenance stoppage at Skutskär mill during the coming quarter Q3, impact by it slightly higher than in Q2. Moving to Building and Living, where we had highest quarterly operational EBIT in the last seven years since Q2 2007. The operational EBIT was EUR 37 million, an increase of 32% year-on-year. This was due to lower fixed costs with own actions that started early in this segment than in other parts of the group.
Worth to notice that operational return on capital was record high at 27%. Maintenance impact in Q3 compared to Q2 is expected to be about EUR 4 million higher in Building and Living compared to Q2 this year. Renewable Packaging, where operational EBIT increased by almost 50%, all-time high. The divisional performance was really strong due to improved operational efficiency and lower year-over-year fixed costs and slightly higher sales prices. Operational return on capital employed was 18.3% despite the strategic investment. If we exclude Guangxi, our board machine project in China, return on capital would be 23%. This is also highest operational return on capital of our Renewable Packaging during the 10 quarters, exceeding the second best by 1.5 percentage point. Strong performance has continued. On Guangxi consumer board machine, investment is proceeding as planned.
Over 90% of the leveling work has been completed, we expect the mill to be operational in early 2016 as earlier also communicated. Look at the capital expenditure and equity injections in 2014. Our forecast is unchanged, we expect total sum to be between EUR 790 million-EUR 870 million. This includes about EUR 300 million relating to Guangxi project. I'd like to remind that this figure does not include acquisition of BillerudKorsnäs shares. This is capital expenditure. Look at the depreciation charge, the guidance remains in the same range as earlier, about EUR 550 million-EUR 580 million. Now over to you, Kalle.
Thank you, Seppo, thank you, Jouko. I will basically focusing on the forward-looking statement, the guidance for Q3 and some of the areas that I will focus when I take over as of the 1st of August. Sales are forecasted to be roughly similar to the Q2 level of EUR 2,579,000 million of sales. Operational EBIT similar to or slightly lower than the strong EUR 209 million in Q2. Here it's important to listen. The maintenance impact in the third quarter is expected to be approximately EUR 30 million higher than in the second quarter of 2014. As you heard, Seppo gave you a bit of guidance on in what segment the maintenance is going to be.
If you look upon what will happen in the near future, as I have concluded before and we in Stora Enso, we will continue the shift in path of driving towards a renewable materials company. The first thing I would need to do is to make sure that I build a winning team, that I will start to do right after the 1st of August. We will put more resources to corporate responsibility areas because we are expanding into markets where the infrastructure and the culture and the knowledge is less than we have in the Northern Europe area. We will continue to focus on increased customer focus based on the strategic investments that the company has done recently and are doing, which is the Montes del Plata pulp mill in Uruguay.
The Billerud acquisition gives us an enabling technology to go into new areas of Biomaterials and renewable material. The Whitehouse Machine conversion to packaging materials from being a paper mill, which I'm very happy to have because it is challenging with the structural decline that continues, even though at a lower level right now in the paper business. Finally, but not least, getting the construction
They're ready of the Guangxi board machine. With that, I would like to hand over to the operator and open up for Q&A.
Operator, please open the Q&A session.
Thank you. If you would like to ask a question at this time, please press star key followed by the digit 1 on your telephone. Please ensure the mute function on your telephone 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 2. Again, please press star 1 to ask a question. We will pause for just a moment to allow everyone to do so. We will now take our first question from Michael Jautz from Kepler Cheuvreux. Please go ahead, sir.
Yes. First one is regarding the conversion of the Varkaus mill into liners. What can you say about potential risk of oversupply in these markets? That's the first question. The second question would be on the pulp market. Now that Montes del Plata is up and running, how would you describe the current market for short fiber pulp? Do you see a risk of an oversupply in that area? Thank you.
Okay. It's a bit difficult to say whether this is an outlook or whatever. On the Varkaus conversion, I think the overall situation, we always look at the total balance also of our own use versus market, because whether it's pulp or the containerboard and the linerboard and so forth. We happen to think that there is actually space for the Varkaus conversion. You always have to take that with a caveat, which depends what other people might do in the future and so forth. We also believe based on the visibility study, that the location and the combination, and to be very frank, the perfect width of the machine, for example, will make it very competitive. You saw on the slide even the return expectation there. I would leave that at a fairly calmed mind to the team, so to say.
On pulp, again, I don't think I should. We all read the same stories in the long term forecast on pulp pricing. Yes, there is probably some pressure now on short term on the short fiber pulp capacity. Having said that, longer term, I believe the Renewable Packaging and tissue will provide a growth demand for it. Then the specific case of Stora Enso, if you still look at the total pulp balance of Stora Enso, we tend to be, on the market pulp side, a long fiber company more. If the short fiber pulp is a little worrisome, the long fiber is actually quite good because the fact that there's no new capacity really coming anytime soon. Some people have announced some environmental studies, but that doesn't produce any pulp yet. That would be my answer.
Thank you.
Thank you.
We will now take our next question from Lars Kjellberg from Credit Suisse. Please go ahead.
Just coming back to the Varkaus rebuild first. Will you sell much of this internally at all in your own system? The second question relates to the Guangxi investment. Of course, you are starting to put money into that. There are other projects targeting the liquid packaging board market in China. Are you in any way trying to scale back this project, or will you continue also to build a pulp mill, given, again, what you just commented about some hardwood pulp pressure at this moment? Any changes to the CapEx for the total project as opposed to the first leg of it?
If I take the second one, at that point I can think about the first one because I don't have the number in my mind right now on that one. On the China project, it's no news. We, I believe about a year ago, made an intentional decision to build it, I even call it reverse. Build the market entry board machine first, because that gives us almost a year ahead start on the liquid and high liquid, but also other high quality boards in China. That's a benefit. Obviously, the CapEx is cut in half. Whereas the scope of the total project still is including the integrate pulp mill, I can tell you that the decision, the formal investment decision happens when the board machine is up and running in due time.
That insurance, so to say, is still there, I'm sure the company and its board will look at the returns with fresh data then based on what the market pulp availability is and the cost and so forth and so on. Finally, which is maybe a detail, but I think it's quite important that we are ramping up now the wood sales. We learn how to harvest and so forth, then we'll get some revenue and earnings from that. In that sense, it's there. That's a very long way, Lars, to say that the decision to build the pulp mill is happening when the decision is made in a couple of years, I'm sure the company uses the best data.
Yeah, remind us, what is the first-stage investment again, the CapEx associated with the board machine?
I think it's about EUR 760 million.
Thank you.
That's the board machine and the CTMP.
Right.
Plantation, sorry. Yeah, the plantation number is there too, that's why it's okay.
Lars, when it comes to the Varkaus, about between 10%-20% of the output will be used internally, which is replacing others. Another thing is this is a virgin fiber liner, which has certain advantages in the market. Thirdly, it is also having a quite good logistic position to some very close big markets nearby.
Understood. Just two further questions, if I may. Could you share any thoughts about CapEx 2015, 2016 as you pursue Guangxi and your other strategic investments? Also if you can share some views on why you acquired more Stora Enso assets, considering the low-yielding nature of that asset, and some would argue there's plenty wood available in Sweden.
The questions you have is, I don't want to give any long-term guidance on CapEx, because we guide yearly in advance on CapEx. That I don't like to do. When it comes to the Stora Enso , I think we write it in the report here that it's to ensure that we keep, because Stora Enso is becoming more and more important to us as a percentage of forest.
Okay.
Supply in Sweden. Thank you.
As a reminder, if you would like to ask a question, please press star one. We will now take our next question from Linus Larsson from SEB. Please go ahead, sir.
Thank you very much, a very good afternoon to everyone. I wonder if we could maybe spend a minute on your guidance statement. In connection with that, you also say that there will be some EUR 30 million of higher maintenance costs in Q3 versus Q2, which would imply that there are certain sequential positives in the EBIT development Q3 on Q2. Could you please explain a bit which those positives are in your view?
What your question is that the underlying performance is improving going into Q3 versus Q2 if you take away the impact of maintenance. Is that your question, Linus?
No, you're guiding for a third quarter to be similar compared to Q2, while at the same time you expect higher maintenance costs, which would imply that there must be some positive offsetting factors in Q3 as well. My question is really, which are those?
The guidance is similar or slightly lower.
Yes.
Right? You also know, if you go back historically, there's seasonality involved in this as well.
Yes. Okay.
We've got MDP, we say.
Yeah. I guess it's a matter of what slightly means here. Are there any positives apart from seasonality in Q3 versus Q2 that you see?
No, I don't have any specific on that.
Okay. If you look at the likes of Corbehem, Uetersen and Montes del Plata, could you maybe spend some time explaining the sequential development in those three operations into third quarter?
Uetersen is as a total for sale, which means that we need to get to the approval before we get the benefits.
Okay. In Corbehem, we will hand out the notice what is planned right now, the 1st of September. There will be some positive effects of Corbehem in the third quarter.
What was the loss on an EBIT level in the second quarter for the Corbehem mill?
We don't disclose that. The only thing we disclose, it is EUR 34 since we started the sales process on EBITDA. Obviously, it's a bigger impact in this year because we stopped manufacturing in the end of January.
Right. What's the depreciation charge per annum in Corbehem?
I don't have a clue.
I can come back to you, but I don't want to go into these details.
Okay. Just finally on Montes del Plata, do you expect a sequential improvement there? What's the situation?
Yes.
Okay. Very well. Thank you.
Thank you, Linus.
Again, please press star one for more questions. There are no further questions at this time.
Okay, we end the call now, and I will still hand it over for Jouko for the final word here.
When Ulla now says final, she means it serious. This will be my final word. I actually want to thank you all for, I think, 29 quarterly calls during the company. I ask you to continue to challenge and push Kalle and his team as much as you have done me. That's very helpful, and I really hope that you keep the interest in the company. Thank you very much. It's been quite a ride. Very challenging, but very rewarding. I wish you a very nice summer break, too. Thank you very much.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.