Good day and welcome to the STORA Enso Q1 twenty fourteen Earnings Conference Call. For your information, today's conference is being recorded. And at this time, I would like to turn the conference over to Ola Payanen, Head of Investor Relations. Please go ahead. Thank you, Bianca.
Welcome everybody to our Q1 twenty fourteen conference call and let's keep the start. We have an AGM today and rather busy day. So please go ahead, Joko.
Thank you, Ola. Hello, everybody and welcome to the first quarter twenty fourteen conference call. I thought to make sure we have sufficient time for the business, the quarter, the outlook all that good stuff that I would briefly comment. You have seen now the news that I've asked my Board that I would step down when the Board has selected a successor for me. It's on my own wish.
I expressed the wish late last year. And I will continue to be the CEO and a few other things to the last day, last minute with all the same energy and excitement. I think this is a great company. I believe I'm going to leave it with the team that will continue to do great things in the future. And that would be that story.
So if you don't mind, let's go back to business then. Quarter one, lower cost improved profit. It was not the market. It wasn't volumes obviously. It was cost, cost variable cost, also the reality that the $200,000,000 program meaning 200,000,000 target of second quarter twenty fourteen below 2012 essentially we have achieved those cost takeouts already in the first quarter.
Is also reflected by the fact that in Europe for example we had a little more than 1,700 people left. And if any of you doubt it maybe some of my own people doubt it a year ago, it still works. You can call it restructuring. I call it productivity. But I think it's very, very critical for the future that medication still seems to work very well.
Remember that cost takeout is not including capacity reductions that's extra. EBIT up to $182,000,000 and transparently obviously 20,000,000 of that EBIT is the or the improvement to be exact of the €64,000,000 €20,000,000 of that is the depreciation degree. But if you want to take that out, it's still I think a good achievement from the team. I said the cost improvement program has come in earlier than anticipated. The fact that the net debt to EBITDA decreased from 3,100,000,000.0 to 2,800,000,000.0 again good now that we are on this building the future investments and the return on capital employed 8.6%, nothing to write home about except if you remember that about 2.3 points of burden of non revenue generating strategic investments there.
And under the circumstances, I think it's fine. Moving on to slide on the portfolio. Paper sales is 40% European paper 33% and maybe slowly and surely if you take the printed media exposure in Europe that's obviously even slightly less because uncoated wood free is in this box. That's good. Even more important our growth engine, Renewable Packaging, a very strong quarter, solid market and a 15% return on operating capital again, I think that team has all the reasons to be very proud.
And obviously, it's a proof point of why do we want to invest in growth in that area. On slide five, the trend at least finally has turned to the right direction with Northeast. And yes, there's a long way to go, but there's always a long way to go and I'm convinced the team will continue to do that with me and after me. Slide six, fixed cost decrease. And now I have to be very clear, this is a fourth quarter rolling average and it's the fixed cost change.
So it's different metrics in the reshape program, but I'm sure you can read the trend just as well as I said. Slide seven, European paper demand continued to decline at a slower rate. Now, I'm convinced and we're convinced that's not some miracle where people have started to read more papers and magazines on paper. It's just that the European slow recovery in many markets is reducing the impact of the still existing and ongoing structural decline. It's still very welcome obviously and it helps us as it helps others.
Slide eight, a bit about the different segments. Briefing and reading, one of my heroes in making cost lower making fixed cost lower specifically also in that context, because in their world that's really, really important. The Vesilotel paper machine one was closed as planned. And then in Corpehen, which is still an open situation, production has been down since January 14. Moving on to biomaterials.
What can I say? We have a mill that's been commissioned every valve, every motor, every pump, every pipe has been ready and tested and cleaned. I'm sure one of our good people is standing there with the first pile of chips to the conveyor. Well, we can do that before Dinamo gives us the permit. So that's what is now between us and starting up this mill with a long delay, but still a conviction it is a good mill.
It's been built very well and it's in a great location. We have revised the expectation for this year's volume slightly down just because of the simple fact that when you ramp up a mill like this, it's even a small delay has a bit of an impact. Billing and Living, slide 10. One of the nicest graph in terms of the trend, but they joined the 15% club now with Renewable Packaging return on operating capital. Why?
Well, it's a self made recovery. They started about six months earlier as you heard before the ReShape program. And yes, they got recovery markets too, but I must say quite happy with that. And the Renewable Packaging, where I'm also the lucky division head, very solid performance. Sales price is up, cost down another reason to invest in it.
I'm talking about investments in Guangxi, I was actually last week there. IFC has joined us both with equity and alone. I watched the two thirds of the leveling work of the mill side being completed. Equipment quite a bit of the key equipment has been selected. We will not promote the brand names here.
I'm sure the selected ones will. But I think the good news is that we are moving ahead. Harvesting has started to ramp up. Now it obviously will go to the market which is quite a significant market in Guangxi. And the timeline is early twenty sixteen as said before.
Q2 for packaging I need to mention has a bit of a maintenance burn. Ostoleka had a two week breakdown not because of us, but because of the electrical grid and then there is something in Imatra, but I think that change is nothing of the great story. Stefa, over to you.
Thank you and good afternoon everyone. This was a good quarter as Jocko already mentioned. All the financial figures improved with the exception of sales. Sales were similar level than a year ago. I would like to highlight some figures in the Q1 financials and the table on the page in front of us.
First of all, EBITDA margin improved by over two percentage points, 11.8%, thanks to lower costs. This is real improvement in the operations as EBITDA is not measured with depreciation. As Jorg already mentioned on group level our depreciation was somewhat lower about €20,000,000 due to the impairment charges that we took at the end of last year. Operational EBIT improved also compared to a weak comparison period a year ago. Improvement was €64,000,000 or 54%, which is a significant improvement.
Operational return on capital employed also increased to 8.6%, also significant move to right direction from the level a year ago. A year ago it was at 5.1%. It's worth to notice that Renewable Packaging and Building are leaving already. The Powder Group target of 13%. Biomaterials is of course still burdened by the Montes De Plata project, which will start in the coming weeks.
Printing and Reading as said earlier concentrates on the cash flow generation. Net debt to EBITDA decreased to 2.8 from 3.1 a year ago and it's excellent that we are improving debt ratios even during the heavy capital expenditure program that we are running and have been running. Also now that MTP is ready to start operating and capital expenditure will be soon over and it will be time to generate cash flow from there as well. Then I would hand it over back to you sorry not yet, sorry, too fast here for a slide on capital expenditure and equity injections on next page. So capital expenditure is forecasted to be at the level of $760,000,000 to €840,000,000 That is a reduction of some €60,000,000 compared to what we communicated in February earlier this year.
And it's mainly due to timing phasing of the capital expenditure in Q1 C. There's no change to budget as such or time table of the total project. Equity injections are estimated for this year to remain at the same level as earlier that is €30,000,000 And depreciation forecast is the same as earlier mentioned from $550,000,000 to €580,000,000 And now back to you, Jochen.
Thank you. We go straight to quarter two guidance. You might call it boring when we're saying more of the same. Sales expected to be similar operational even in line with the currently reported 182,000,000 And then we just mentioned the pharmaceuticals and renewable packaging maintenance impacts I think the important message here is that the company is and can improve and you should not think that we ever stop. And I'm quite convinced it's a good strong culture in the company.
If you move to the we'll find on slide 16, I believe the summary slide. Yes, the EBIT was 54 percent higher. We talked about the depreciation impact and so forth. But I think consistently, it was a true good improvement. And what I like about it is, it was driven by our own actions rather than some external tailwinds.
The cash flow was lower, but it's seasonally lower. So if you do the year on year, I cannot complain about that. And I am happy that what we promised we have delivered on the cost side. And yes, I'm also happy that we have a great mill that needs a permit to start. And then final one more time Guangxi critical that's what the consumer demand growth is.
That's a key part of our future. Let me thank you for that. And then I think we hand it over to questions and answers. We should be able to finish in the next three quarters hopefully and who wants to be first?
Thank you. And our first question comes from Lars Kjellberg of Credit Suisse. Please go ahead.
Good afternoon. Just a couple of questions. Your prior guidance for the previous two quarters has been as you put it more of the same. What was the biggest driver for that sequential meaningful improvement in the earnings? And also when you now come into position where your fixed cost program has delivered earlier than expected, how should we view earnings progress in the second half?
Is that all going to be about Montes Del Plata? Or is there anything else that would drive earnings higher or costs lower?
The earnings, I think definitely on year on year comparison, let's be specific. It was the cost both variable and fixed cost that was the major driver of the group results improving in addition to the on the EBIT depreciated reduction then individual segments like Building and Living have some market recovery but also cost driven. That will be that.
I was more referencing relative to your prior guidance, which was kind of in line with or slightly better on a sequential basis in Q1.
Yes. Well, this was slightly better I think.
Well, it's I think we are still meeting the guidance, but of course, higher closer to the higher end of the range that we gave in the Q4 call. Like Joao said earlier, we have been able to get through the €200,000,000 cost improvement program faster than we originally expected. So good great progress there, variable costs down and also quite good performance on the beautiful packaging and filling a leading side supporting the result development at the same time. Very much cost control driven.
And looking forward then is driving the business or driving earnings higher in the next coming quarters beyond the second I suppose then. What is going to be the main driver of further profit improvement?
Well, first of all, Lars, we don't give guidance as you well know beyond following or the ongoing quarter. But you already highlighted, yes, it will be very helpful to start that pulp mill especially I mean in this ongoing quarter obviously very, very minor. But slowly and surely it will have an impact. And then the only other thing I can say is, yes, we've completed almost all the takeout. We'll finalize in the second quarter on the ReShape.
But without trying to give you any guidance, are we saying that's enough? No. We'll keep looking and so forth. And I promise we're going to guide you in July on how the third quarter looks like. So that's all I can say now.
And a final take. Do you have any visibility for Montes De Plateau start up? Is it going to be next week or a month from now? Do you have any other guidance you can give?
I think we said weeks because the point of the story is completed and commissioned with this very specific term. And we're now working with the Denama authority to get the operating permit. And I can assure you, we all wanted to start really soon. Yes.
I think
we will do. You very Thank you.
Take the next question of Johan Sjoberg of Carnegie. Please go ahead.
Thank you very much. If you could you give an update on the recovery boiler incident up in Skogal, how much of an impact that had on the first quarter results?
It was essentially €4,000,000 negative which is the what do you call the You have to pay when you got an insurance you have to pay a small piece first yourself of small €4,000,000 relatively to the damages of good solution to put in mind, but it's €4,000,000 negative.
Okay. So basically you can say that there was no real impact upon the first quarter result, because I remember that I have a vague memory that there was some uncertainty how you would book that how that would look in Q1. So basically that was fine.
Well, that's fine.
Okay. Also just to give a feeling for when Monte De Plata will come online here, what when will be the first quarter where you will see positive EBIT given today's market conditions as you see it?
Well, it's Jesper. Maybe I can comment on Jokic and then take it from there. Typically ramping up mill like that takes couple of quarters. So it will be towards the end of the year that we start to see the positive impact or picking up next year. Then of course, lot depends how prices there are to market etcetera.
But of course, assume that the market prices will but I think communicated in earlier, we'll be able to hold quite well with the additional capacity we have bring to market.
And the only thing I'd add is, if you visualize it every day and every week you delay a start up now. Obviously, you lose the last day of the year so to say. So that's why we gave you also the update on the volumes and so forth. Yeah.
Okay. And my final question upon Renewable Packaging, you highlighted that there were price increases in local currencies at the beginning of the year. Could you specify which grades there were price increases in?
Let me think about it. We'll get back to
you in a minute. I need to dig a few papers here. But I'll get back to you. If you we can go on with the next question and I'll get back to you.
That was all my questions actually. Thank you. Looking forward to your answer, Yuko. We
take the next question of Michael Jas of Kepler Cheuvreux. Please go ahead.
I have two questions. One on general packaging demand. Now given the situation we see in Eastern Europe and Ukraine, have you noticed anything sort of negative in terms of packaging volumes? Or how would you like picture that situation affecting your packaging business? And then could you give an update on the Warkaus conversion of the fine paper machine into containerboard?
Are there anything you want to say there?
On the Eastern Europe, I think what you referred to is the Ukraine crisis and so forth. We are very small first of in Ukraine. I think we've got six people in Ukraine that's in the sales office, whereas in Russia we have pre packaging units and a couple of So, yes, is worried to be honest. We have about 1,000 people there. But it's based on what we all read in the newspapers.
There is no business indication yet that that would have a deteriorating impact on our business to be honest. But at the same time, obviously, it paranoid me by that people to look at all alternatives including if there would be implications on EU putting some penalties in Russia and what would that impact on the wood side and so forth. So all those contingency plans are being put in place, but no bad news beyond what the newspapers write yet. No good to say that way.
Okay. And then the Varkaus conversion?
Varkaus, yes. I apologize. I haven't forgotten Varkaus. Like everything, we will announce the decision when we have made it. I can say that the study and the reviews and all that are being finalized and so forth.
But we'll announce the decision when we made it. Me just leave it at that because otherwise you're going try to guess what the decision No,
no. That's fine. And then actually a final question. I mean we saw this morning that Metza Group is about to build a new pulp mill in Finland. What's your view on the potential effects on wood prices etcetera and the raw material cost in Finland by 2017 when this new mill is supposed to be up and running?
I have to be careful with my colleague Karri Orna, because he doesn't want me to comment his news anymore than I want him to comment mine. So you probably call him up. But if I read the news correctly during this busy day, the decision they made is an environmental assessment study and that obviously has no impact on anything yet. Only The other comment without understanding because what they talked about the bio product factory mill is depends on what the fiber supply for that would be and so forth and so on. They talked about mostly domestic fiber.
I'm not well that's where I leave it because again I think it's been appropriate for me to start commenting Curry's investment. You need to ask him what he thinks to What's your Okay. Price
I'll have to call him. Many thanks for your answers. Thank you.
Good. There was a question on pricing improvements in packaging and I won't give you a total answer, but I think the major positive which is not a huge positive still is it is in the general packaging and cigarette board areas mostly that we've seen that positive development, okay? And if you need more specifics then you're going to I'm going have to ask you to call afterwards because I won't be able to give you a more data now. Anyway.
We take the next question now from Linus Larsson of SEB. Please go ahead.
Yes. Thank you very much and good afternoon to everyone. Just clarification, if I may, on Montesdal Platte, are you clearly saying here that the EBIT contribution will be negative for 2014?
We didn't say that. I think we answered the question when it is going to be positive. And I think Seb was said in a careful way that it's going to be the last quarter of the year kind of when it starts being a contributing. So if you take the one hundred and eighty day, which was the two quarters ramp up, you need to get that maybe to full speed and that's how you get into that situation. And we'll talk about it more in July and October when we I just want to get that mill started, okay?
Tired Talking about a brilliant mill that doesn't run.
That's all right. And also an update if possible situation in Korberheim? What's the status? When would fixed costs and capacity be removed? Is there any production going on?
What's the current situation and the outlook?
I'll be very direct there. The production is down since January 20 or something and it's because of the extremely tense situation in the mill unfortunately. And to the only thing I can also legally say is that there is still a dialogue about possibility to divest, whereas in Pearl we have launched a social plan early this year. And we're on it. We all want to find a solution.
I'm sure the authorities do too and so do the good people in Corporanella. But that's all that I can say also for legal reasons. I cannot give you any specific date yet. But I'm sure you understand that it's difficult for. Sure.
Sorry.
But just in that cost potential scenario that you did divest the mill, is that for the same type production or is that for conversion to other product?
If I understand your question Linus, it's Zeppey. If you divest the mill and you cannot of course limit what is done with that. But we don't see that even if the potential buyer, whether that is would continue similar type of production as a big threat to us because we see anyway that the market demand for those is going down and it's not the core of our portfolio.
Okay. And also another top topic here the non core asset divestment program you have finalized the Tilke Caroline divestment. What's in the let's say twelve month horizon on that program?
More, but don't ask me for the names of them. And it's a bit of a catch up puzzle. So it's not a linear curve. So we're working very hard on a few. But as you can guess, we'll talk about them when they're done.
Okay. And then just finally, a bit of a detail. You have provided a pretty clear guidance, but when it comes to maintenance specifically, would you care to give a guidance on what kind of delta in maintenance costs that you expect for the second versus the first quarter please?
Like we listed there is maintenance going on Q2 in biomaterials renewable packaging and it will mean that there will be higher maintenance cost in Q2 than Q1. We haven't talked about tens of millions say 10 ish million more maintenance cost in the quarter Q1. There was a bigger difference between Q4 and Q1, like we indicated earlier.
What was the if you just repeat that, what was the difference Q1 on Q4?
Q1 Q4 versus Q1, The difference was in the region of €35,000,000.40000000 between the two quarters, Q4 and Q1.
Very good.
Thank you very much.
We take the next question of Karri Rinta of SHB. Please go ahead.
Yes. Thank you. Karri Rinta, Handelsbanken. Firstly, just to confirm the Guangxi project or the China project, how advanced are you there? So I guess my fear is that if you would if the new CEO would be a hardcore paper guy and would decide to focus on news print for example.
Could he still pull the plug on this project? Or are you so far advanced that this will be done almost no matter what? That's my first
question. Well, I'm not going to select my successor anyway. So I don't know what hardcore this or that. But I do want to communicate that obviously the strategy of renewable packaging growth, biomaterials growth and using the more stable market as the cash engines feeding the investments. That's not a Joko invention.
That's very strongly supported by the Board of Directors, by the group management team. And so we'll stay on that path. Then second, think to give you peace of mind, we have now put the equity in as of our partner and ISC to we have bought the first critical equipment. So we're in for the good so can ask for the next thirty years, we're going be there and we're going to do great work there and so forth. So I haven't been worried that somebody would try to turn a top class consumer board machine into a newsprint machine.
That's not my worry. We'll be there.
That's good. That's good. Just to confirm, there is sort of disagreement between you and the Board in any of the strategically important matters that would have led to the decision announced today?
Absolutely not. It was my own wish. And I say very sincerely, it's been the most difficult job in my life the past seven years and it's been the most exciting and challenging and interesting job including all kinds of dimensions. But I did say second half of last year to my Chairman and my Board that I think for the next phase of the journey, it's good to get somebody else to rethink everything again. Because I think I've said it in some of the past years that I always worry that after so many years, the worst thing that any CEO can do is you can start believing your own story.
So I think it's good for the company and that's why I made the suggestion with a personal note that I was lucky enough to take a P and L very early in my life. And I think it's a quarter of a century with the P and L. So although some other fun things in the future, there's no disagreement of strategy. There is full support and you're welcome to call our Chairman also on the difficult things I've done in the past few weeks in terms of making right transparency, delivering the organization. And if you'd be at the AGM, you'd hear some great progress in some of these difficult things.
So that's the story both for me and my Board.
All right. Thank you and good luck in the future.
Yes. Thank you.
And we now take our final question for today from Martin Melba of ABG. Please go Yes.
Short question. On the paper segment into the second quarter or the mid of the year, what price changes do you see? I've noted that on RISI that these list prices have started to slide down and that new spin prices maybe didn't increase as much as people thought. What is your story there?
If you don't mind, I won't go segment by segment. The situation is quite different. And first of all, because it's always demand supply driven and so forth through the actions we've taken in the past fifteen, sixteen months of Synovial Spring has been better balanced. Now we took a copy machine out in Wetsiloto and then one is down in France. But still overall, I'd say the positive vibrations and the positives are more in the newsprint side.
And let me put it this way. Price increases will have never and will also in this outlook not save or so to say dramatically improve our results with our own actions and cost improvements and so forth. But on the other side of the coin, partially driven by this slow recovery from in the European economy, The demand slight having slowed down should make sure that all the own efforts don't kind of disappear into the space, but we can generate both profits and cash from them. Sorry, I'm a bit late, but I don't want to go on a second price forecast either.
Okay. Thank you.
Thank you. All right. All right. I think we are maybe a little confused who's going say what next meeting. I wasn't sure whether the operator is going to come in.
Thanks for your interest today. We believe we had a rock solid quarter. We're working hard very much to have many more to come. And maybe I finish with what I thought it's been great to work with you guys. And the good news is for me I can still work with you guys for quite some time until my success is nominated.
So thanks for all your interest and support. Bye bye.
That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen,
you
may disconnect.