Good day and welcome to the Q2 twenty fourteen 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 Paianen Sainio, Head of Investor Relations. Please go ahead, madam.
Thank you, Susana. Good afternoon, everyone, and welcome to our Q2 conference call. I will hand it over now straight to Jocko for his final conference call with investors.
Thank you, Ola. Hi, everybody. One more time, here I am. I have with me my successor, Karl Sundstrom and our CFO, Sveto Papvi. The way we will do this is, I'll briefly talk through the essentials of the second quarter and Zepo will run through the financials.
And then logically, Karl will talk about the future. So if we go to page three, this is a summary of the second quarter. Sales down 5%, big part of it still was the structural change in the printed media market. Having said that, 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 but also fixed cost program work. It worked actually better than we thought. You remember the net we said we hit the target in the first quarter. Well, now we beat the target in the second quarter by $44,000,000 on an annualized level versus 02/2002. And I'll have a little
more detail on
that. So I'm very pleased with that because it is a structural change, it's not just a squeeze. And 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%. And remember, this is after a quarter where we spent some money on Birria, we spent some money on Barivi, we paid the dividend.
So I think it's a proof point of a solid balance sheet also. The return on capital employed, 9.8%, up from 5.4 And because everybody remembers the famous 13% from, I don't know, ten 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 Kao and his team. But at least I think the company is on its way.
Already said that the savings program, the reshape program exceeded target by 22%. And I think strategically, I'll talk a bit about Virlia, the acquisition and then the conversion of Varkaus in a minute. And then we also announced a closer plan for Gorepem, a heavy loss making site unfortunately, a very expensive program. But as you well understand, this is essentially defined by the French legislation. If we 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, clear improvement year on year on lost time accidents for 1,000,000 hours from 5,700,000 to 4,300,000. The best of our divisions, biomaterials actually improved 70% year on year and they are half the accidents as the company is. Point of 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 after 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 and I'm sure Save the Children can be very, very helpful in making sure we do the right things and do them right too. The early enough group wide human rights assessment is in progress. We train a lot of people and the work is being done and completed by the end of the year. Pakistan, 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 curtain 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 Fulhashar 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.
So we need to work that on the 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 collecting any material for Bulleyshaft. But 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 Bulleja with Stora Ensen wouldn't be there, those kids will never go to school.
On the wheat straw, which is the biomass chain, we have not identified any children in the orders that we've done so far. China then, working on those thousands of contracts, I believe 58% are complete, more work to do. Interesting projects on improving transport logistics, safety of forestry and water quality and purity in the communities. Point of the story why we call them shared value is that those things make us more competitive, but they also make the community better way beyond our own project. So that's what we call shared value.
And maybe an interesting detail that in a specific report that ranked all industries in China, Stora Enzo 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 the green or environmentally responsible supply chain. The rest you can well read, I think in the quarterly release which is quite detailed. Page five, well, the last three, four, five quarters at least the trend is up. I'm sure you well as I agree that there's still long ways to go. But for me, it's important that the actions we've taken on cost take up and so forth have worked.
Page six then, which I think is quite important. Many companies talk about cost take up this and cost take up that and then they qualify with inflation or inflation whatever. This is the exact picture of what happened in the two years that we define as the window Q2 twenty twelve to Q2 twenty fourteen. The program impact with the structural change without capacity reductions, $244,000,000 down. In addition to that, the capacity reducing actions that we've taken in the past couple of years reduced the fixed cost by 68,000,000 The plus SEK 44,000,000 is essentially the new manufacturing assets we have added that weren't there in 2012.
And then on the cost side, the exchange rate held us SEK 52,000,000. So the gross number or the actual cost down is €320,000,000 but we want to transparently say €244,000,000 was the structural change and so forth. And then 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, so 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, Verdia, 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 start up, it's not quite a start up, it's been there seven years. They have a specific process which is based 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 both the capital, but also yield point of view, it's very competitive versus any of the other alternatives. And essentially the business case is based on how do you replace a very large number of different chemical specialty chemicals and food stuff with non food based biomass, specifically non food based biomass. So 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 will be a great success in the years to come.
Page nine, a different action, the conversion of the Skarkas mill. Yes, a significant investment. But on the other side, if you'd compare that with the greenfield and when we look at the return on this, I think it's a very smart thing to do as a pure packaging investment or containerboard investment. But it's also quite interesting because it obviously takes office paper capacity out, makes these other assets more competitive because of that factor. And then maybe acute right now is it will reduce our dependence on Russian birch and replace that with domestic long fiber virgin fiber.
So I think that's another little step on the way to the future. Page 10, which is overly simplistic recap of my seven years in the quarter. 02/2006, just before I started, paper including North America and the merchant was two thirds of the revenue of the company. Compaction was a quarter. Obviously, company was bigger then.
Those days 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%.
So the dependence or the exposure to printing media has changed. Long way to go, but I think it's a perfect time to hand the button in this relay to you. The gentleman on Page 11, Kaue. I'm very happy and honored Kaue is taking the patents off to say for me. Kaue 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 we can do so much more.
And for the past year, been running I think it's done an outstanding job there. And therefore, I believe I leave the company in very good hands. I have given only one advice to Kaule and that is that he cannot and shall not take any advice from his predecessor namely me. He needs to take a fresh look.
So there we are. I believe it's time for me to hand it over to Sefo to go through the financials and then Carlos will talk about the future a bit and then we're already all three of
us for your Q and A. Sefo? Thank you, Jocko. So I'll start with the summary of the financials. As Jocko already mentioned, at 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 note is also despite this sales decline, our operational EBITDA increased by 27% and operational EBIT by 69%. And this improvement came both from variable and fixed cost improvements. During the quarter, we reported negative NRIs of €106,000,000 mostly due to the Corp M mill closure plan and interest and mill divestments. These actions are part of our Paper segment restructuring in order to maintain good cash flow generation, helping us to make transformation to renewable materials company, as Jocko just described also.
Operational return 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 not the level of our strategic target of 13%. This 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 twelve months of pressure on EBITDA, especially taking into account that this is the quarter when we have made the dividend payments. And also we have continued capital expenditure, quite extensive capital expenditure program also for this year.
Then moving to the business results and segments that we report. First of all, printing a reading, operational EBIT improved by €53,000,000 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 different divestments, which is now delayed due to regulatory approvals. We also recorded €24,000,000 NRIs for this action. We also announced fourth and mill closure plan today after the sole supply quarter mill was accepted by the Roman French labor unions and validated by the authorities on June. This cost us €81,000,000 The division will undergo significant maintenance during the Q3, including paid to load the unit, rate of pulp will be down for thirty days. Main tax impact for increasing our reading is about half of the group impact of €30,000,000 that we have also mentioned in interim report for Q3.
Then moving to biomaterials on the following page, where we reported operational EBIT of €10,000,000 for the quarter. This was reduced by Montesqueprata pulp mill start up close from Uruguay and increased activity on the biorefinery side. As said, Modesteka partner 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 roughly 50,000 tons less than the earlier estimate we have given. Also in biomaterials, there will be maintenance stoppage at Skutsar Mill during the quarter during the coming quarter Q3, impact prices slightly higher than in Q2.
Then moving to Building and Living, where we had highest quarterly operational EBIT in the last seven years since Q2 two thousand and seven. The operational EBIT was $37,000,000 an increase of 32% year on year. This was due to lower fixed cost with own actions that started earlier in this segment than in other parts of the group. Also worth noting that operational return on capital was record high at 27%. Maintenance impact in Q3 compared to Q2 is expected to be about €4,000,000 higher in filling a living compared to Q2 this year.
Then Renewable Packaging, where operator EBIT increased by almost 50%, 12 time high. The divisional performance was really strong due to improved operational efficiency and lower variable fixed cost and slightly higher sales prices. Operational return on capital employed was 18.3% despite the strategic investment. If we exclude Guanxi, our portmachine project in China, return on capital would be 23 percent. This is also highest operational return on capital of our Renewable Packaging during the ten quarters, exceeding the second best by 1.5 percentage points.
So strong performance has continued. And then on Q1C Consumer Board machine, investment is proceeding as planned. Over 90% of the leveling work has been completed, and we expect the mill to be operational in early twenty sixteen as earlier also communicated. Then look at the capital expenditure and equity injections in 2014. Our forecast is unchanged and we expect total sum to be between €790,000,000 and €870,000,000 This includes about €300,000,000 related to Guangxi project.
I just want remind that this figure does not include acquisition of Bergvik Skog and Birbia shares. So this is capital expenditure. I look at the depreciation, the guidance remains in the same range as earlier, so about $550,000,000 to €580,000,000 And now over to you, Paolo.
Thank you, Sefo, and thank you, Jocko. And I will basically focusing on the forward looking statements, the guidance for Q3 and some of the areas that I will focus in the when I take over as of the August 1. So sales are forecasted to be roughly similar to the Q2 level of EUR 2,579,000,000.000 of sales. Operational EBIT similar to or slightly lower than the strong EUR $2.00 9,000,000 in Q2. Here, it's important to listen.
The maintenance impact in the third quarter is expected to be approximately €30,000,000 higher than in the 2014. And as you heard, Seppo gave you bit of guidance of what segments the maintenance is going to be. If we then look on what will happen in the near future and as I have concluded before and we and Sue Ann, so we will continue the shift in path of driving towards renewable materials company. And the first thing I would need to do is to make sure that I've been a winning team and that I will start to do right after the August 1. We will put more resources to the corporate responsibility areas because we are expanding into markets where the infrastructure infrastructure and the culture and the knowledge is less than we have in the Northern Europe area.
And we will continue to focus on increased customer focus based on the strategic investments that the company has done recently, which is for and or doing, which is the Monte de Pata oatmeal in Uruguay. The Vizi acquisition gives us an enabling technology to go into new areas of biomaterials and renewable material. The Warkhouse 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. And then finally, but not least, getting the construction of the ready of the Guangxi board machine. With that, I would like to hand over to the operator and open up for Q and A.
Operator, please open the Q and A session.
Thank session. We will now take our first question from Michael Toss from Kepler Cheuvreux. Please go ahead sir.
First one is regarding the conversion of the Warkaus mill into liners. How 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 lot of customers and 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. So we happen to think that there is actually space for the Varkas conversion and you always have to take that with the caveat, which depends what other people might do in the future and so forth. We also believe based on the feasibility 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 and you saw the on the slide even the return expectation there.
So I would leave that at a fairly calm mind to the team so to say. On pulp, the again, I don't think I should make we all read the same stories in the long term forecast on pulp pricing. Yes, there's probably some pressure now on short term on the short fiberglass capacity. Having said that, longer term I believe the renewable packaging and tissue will provide a growth demand for it. And 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 and if the short fiber pulp is a little worrisome, the long fiber is actually quite good because the fact that there is no new capacity really coming anytime soon.
Some people have announced some environmental studies, but that doesn't produce any positive.
That will be my answer.
Thank you.
Thank you.
We will now take our next question from Lars Kjellberg from Credit Suisse. Please go ahead.
Just going back to the Varkascan rebuild first. Would you sell much of this internally at all in your own system? And 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 the 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?
Well, if I take the second one, Stefan, I can think about the first one today. I don't have the number in my mind right now on that one. But 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. So build the market entering board machine first and 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 the benefit. Obviously, the CapEx is cut in half. And then whereas the scope of the total project still is including the indigrette pulp mill, I can tell you that the deficient the formal investment deficient happens when the board machine is up and running in due time. So that insurance, so to say, is built there and I'm sure the company and its board will look at the returns, we track data then based on what the market pulp availability is and the cost and so forth and so on. And then finally, which is maybe a detail, but I think it's quite important that we are ramping up now the wood sales.
So we learn how to harvest and so forth and we'll get some revenue and earnings from that. So in that sense, it's there. So that's a very long way to say that the decision to build the power mill is happening when the decision is made in couple of years. And I'm sure the company uses
the best data.
Yes. Remind us what is the first stage investment again the CapEx associated with the board machine?
I think it's 700,000,000 about €760,000,000
Thank you.
That's the board machine and the CTMP And plantation, sorry. Yes, the plantation number is there too.
So that's why it's talking.
Okay. So Lars, when it comes to the write downs about between 10% to 20% of the output will be used internally, which is replacing others. And then another thing is this is a virgin fiber liner, which has certain advantages in the market. And thirdly, it is also having a quite a 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 twenty fifteen, sixteen as you pursue Guangxi and your other strategic investments? And also if you can share some views on why you required more Bergvik Skog assets considering the low yielding nature of that asset? And some would argue there's plenty of wood available in Sweden.
So 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. So that don't like to do. And when it comes to the Dalvik School, I think we write in the report here that is to ensure that we keep because value scope is becoming more and more important to us as a percentage of ForEx. Thank you.
We will now take our next question from Linus Larsson from SEB. Please go ahead sir.
Thank you very much and very good afternoon to everyone. I wonder if we could maybe spend a minute on your your guidance statement. In connection with that you also say that there will be some €30,000,000 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?
So what your question is that the underlying performance is improving going Q3 versus Q2 if you take away the impact of maintenance. Is that your question, isn't it?
No. I mean 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. So my question is really which are those?
So the guidance is similar or slightly lower, And you also know if you go back historically the seasonality involved in this as well.
Yes. Okay.
And then we've got the NDC.
I guess it's a matter of what slightly means here. But are there any positives apart from seasonality in Q3 versus Q2 that you see?
No, I don't have any specific on that.
And if you look at the likes of Corbehem, Petersen and Montes de Plastics, could you maybe spend some time explaining the sequential development in those three operations in the third quarter?
So Uttersheim is at the total per se, which means that we need to get to the approval before we get the benefits, okay? And Uteshire in Kolbeheim, we will hand out the notice what is planned right now the September 1. So it will be some positive effect of Cobre Hem in the third quarter. What
the loss
on an EBIT level in the second quarter for the Cobre Hem mill?
We don't disclose that. The only thing we disclose it is 34% since the beginning of since we started the sales process on EBITDA. And obviously, it's a bigger impact in this year because we stopped manufacturing in the January.
Right. And what's the depreciation charge per annum in Corbijn?
I don't have a clue. I can come back to you. But I don't want to go into these details. Okay.
But then just finally on Montes Del Plata, do you expect a sequential improvement there? What's the
situation?
Yes.
Very well. Thank you.
Thank you,
There are no further questions at this time.
Okay. So we end the call now and I will still hand it over for Yoko for the final words here.
When Ola now said final, she needs to be serious. This should be my final word. I actually want to thank you all for I think 29 quarterly calls during the company. And I ask you to continue to challenge and push Karl 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. And then 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.