Good day. Welcome to the Stora Enso Q1 2014 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 Ulla Paajanen, Head of Investor Relations. Please go ahead.
Thank you, Bianca. Welcome everybody to our Q1 2014 conference call. Let's quickly start. We have an AGM today and rather a busy day. Please go ahead, Jouko.
Thank you, Ulla. Hello, everybody. Welcome to the first quarter 2014 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. 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. That would be that story. If you don't mind, let's go back to business.
Quarter one, lower cost improves profit. It was not the market, it wasn't volumes, obviously, it was cost, both variable cost, but also the reality that the EUR 200 million program, meaning EUR 200 million target of second quarter 2014 below 2012, essentially, we have achieved those cost takeouts already in the first quarter. It's also reflected by the fact that in Europe, for example, we had a little more than 1,700 people less. 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. I think it's very critical for the future that that medication still seems to work very well. Remember, that cost takeout is not including capacity reductions, that's extra.
EBIT up to EUR 182, transparently, obviously, EUR 20 of that EBIT or the improvement, to be exact, of the EUR 64 million, EUR 20 million of that is the depreciation decrease. 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 3.1 to 2.8, again, good now that we are on this building the future investments. 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 investment is there. Under the circumstances, I think it's fine. Moving on to slide on the portfolio.
Paper sales is 40%, European paper 33%. Maybe slowly and surely, if you take the printed media exposure in Europe, that's obviously even slightly less because uncoated book paper creation is false. That's good. Even more important, our growth engine, Renewable Packaging, a very strong quarter, solid market, and a 15% return on operating capital. I think that team has all the reasons to be very proud. Obviously, it's a proof point on why do we want to invest in growth in that arena. On slide five, the trend at least finally has turned to the right direction with Northeast. 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.
Now I have to be very clear, this is the four-quarter rolling average, and it's the fixed cost change, so it's a different metric than the Reshape program, but I'm sure you can read the trend just as well as I can. Slide seven, European paper demand continues to decline at the slower rate. 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 this, 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. Printing 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 important.
The baseload of paper machine 1 was closed as planned, and then in Corbehem, which is still an open situation, production has been down since January 14th. Moving on to Biomaterials. What can I say? We have a mill that's been commissioned. Every valve, every motor, every pump, every pipe's been readied 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't do that before DINAMA gives us the permit. 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, even a small delay has a bit of an impact. Building and Living, slide 10. One of the nicest graphs 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 last year before the Reshape program. Yes, they got recovery markets, too. I must say, quite happy with that. In 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 investment in Guangxi. I was actually last week there. IFC has joined us both with equity and a loan.
I watched the two-thirds of the leveling work of the mill site 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. 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. The timeline is early 2016, as said before. Q2 for Packaging, I need to mention, has a bit of a maintenance burn. Ostrołęka has a two-week breakdown, not because of us, but because of the electrical grid. Then there is something in Imatra, but I think that changes nothing of the great story. Seppo, over to you.
Thank you. Good afternoon, everyone. This was a good quarter, as Jouko 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 to 11.8%, thanks to lower costs. This is real improvement in the operations as EBITDA is not measured with depreciation. As Jouko already mentioned, on group level, our depreciation was somewhat lower, about EUR 20 million 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 EUR 64 million or 54%, which is a significant improvement.
Operational return on capital employed also increased to 8.6%, also significant move the 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 and Living are already about the group ROCE target of 13%. Biomaterials is, of course, still burdened by the Montes del Plata project, which will start in the coming weeks. Printing and Reading, I said earlier, concentrates on the cash flow generation. Net debt to EBITDA decreased to 2.8 from 3.1 a year ago. It's excellent that we are improving debt ratios even during the heavy capital expenditure program that we are running and have been running. Now that MdP is ready to start operating and capital expenditure will be soon over, it will be time to generate cash flow from there as well.
I would hand it over back to you. Sorry, not yet. Sorry, jumping too fast here. There was still a slide on capital expenditure and equity injections on next page. Capital expenditure is forecasted to be at the level of EUR 760 million-EUR 840 million. That is a reduction of some EUR 60 million compared to what we communicated in February earlier this year, which is mainly due to timing, phasing of the capital expenditure in Guangxi. There is no change to budget as such or timetable of the total project. Equity injections are estimated for this year to remain at the same level as earlier, that is EUR 30 million. Depreciation forecast is the same as earlier mentioned, from EUR 550 million-EUR 580 million. Now back to you, Jouko.
Thank you. We go straight to quarter two Guidance. You might call it boring when we're saying more of the same. Sales is expected to be similar, operational, even in line with the currently reported EUR 182. We just mentioned the Varkaus and Renewable Packaging maintenance impacts there. I think the important message here is that the company is and can improve, and you should not think that we ever stop. I'm quite convinced it's a good, strong culture in the company. If you go to the final slide 16, I believe, the summary slide. Yes, the EBIT was 54% higher. We talked about the depreciation impact and so forth, 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, it's seasonally lower, if you do the year-on-year, I cannot complain about that. I am happy that what we promised, we have delivered on the cost side. I'm also happy that we have a great mill that meets the permits to start. Final, one more time, Guangxi, critical. That's what the consumer demand growth is. That's the key part of our future. Let me thank you for that. I think we hand it over to questions and answers. We should be able to finish in the next three quarters, hopefully. Who wants to be first?
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 telephone is switched off to allow your signal to reach our equipment. Once again, it is star one to ask a question. Our first question comes from Lars Kjellberg of Credit Suisse. Please go ahead.
Yeah, 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? 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 cost lower?
The earnings, I think definitely on year-on-year comparison, let's be specific, it was the cost, both the variable and fixed cost that was the major driver of the group results improving, in addition to the, on the EBIT depreciation reduction. Individual segments like Building and Living have some market recovery, but also cost driven. That would be that. As you know.
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.
Yeah. Well, this was slightly better, I think.
I think we are still within the guidance, but of course, closer to the higher end of the range that we gave in the Q4 call. Like you also said earlier, we have been able to get through the EUR 200 million cost improvement program faster than we originally expected. Good, great progress there. Variable costs down and also quite good performance on the Renewable Packaging and Building and Living side, supporting the result development at the same time.
Okay.
Very much cost control driven.
Looking forward then, if driving the business or driving earnings higher in the next coming quarters beyond the second, I suppose, what is going to be the main driver of further profit improvement?
First of all, Lars, we don't give guidance, as you well know, beyond the following or the ongoing quarter. You already highlighted, yes, it will be very helpful to start that pulp mill, especially in this ongoing quarter, which is very minor. Slowly and surely, it will have an impact. The only other thing I can say is, yes, we've completed almost of all the takeoff. We'll finalize in the second quarter on the Reshape. 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.
Sounds good.
That's all I can say now.
A final take. Do you have any visibility for Montes del Plata startup? Is it going to be next week or a month from now? Do you have any type of guidance you can give?
I think we said weeks because the point of the story is to complete it and commission, which is a very specific term. We're now working with the DINAMA authority to get the operating permit. I can assure you, we all want it to start really soon. Yeah.
I think we all do. Thank you very much.
Thank you.
We take the next question of Johan Fjellberg of Carnegie. Please go ahead.
Thank you very much. Could you give an update on the recovery boiler incident up in Skoghall, how much of an impact that had on the first quarter results?
It was essentially EUR 4 million negative, which is the, you have to pay, when you got an insurance, you have to pay a small piece first yourself. Well, small, EUR 4 million. Relatively to the damages, it was a good solution, to put it in mind. It's EUR 4 million negative.
Okay. Basically you can say that there was no real impact upon the first quarter result. I remember that, I have a vague memory that there was some uncertainty how you would book that, how that would look in Q1. Basically that was fine.
Well, it was fine, yeah.
Oh, okay. Also, just to give a feeling for when Montes del Plata will come online here. When will be the first quarter where you will see positive EBIT given today's market conditions as you see it?
Well, it's September. Maybe I can comment, Jouko can then take it from there. Typically, wrapping up a mill like that takes a couple quarters, so it will be towards the end of the year that we start to see the positive impact, or beginning of next year. Of course, a lot depends how prices there on the market, et cetera. Of course, we assume that the market prices will Like I've been communicating earlier, we will be able to hold quite well with the additional capacity we are bringing to market.
The only thing I'd add is, if you visualize it, every day and every week you delay a startup now, obviously you lose the last day of the year, so to say. That's why we gave you also the update on the volumes and so forth. Yeah.
Okay. My final question. Upon Renewable Packaging, you highlighted 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 up a few papers here. I'll get back to you. We can go on with the next question, I'll get back to you.
Okay. Perfect.
Right.
That was all my questions, actually. Thank you. Looking forward to your answer, Jouko.
Cheers.
We take the next question of Mikael Jåfs of Kepler Cheuvreux. Please go ahead.
Yes. Hello. Good afternoon, everybody. 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 to picture that situation affecting your packaging business? Could you give an update on the Varkaus conversion of the fine paper machine into containerboard? Are there anything new to say there?
In Eastern Europe, I think what you refer to is the Ukraine crisis and so forth. We are very small, first of all, in Ukraine. I think we've got six people in Ukraine that's in the sales office. Whereas in Russia, we have three packaging units and a couple of sold.
Couple sold.
Yeah, everybody is worried, to be honest. We have about 1,000 people there. It's based on what we all read in the newspapers. There's no business indication yet that that would have a deteriorating impact on our business, to be honest. At the same time, obviously paranoid me, but I've asked people to look at alternatives, including if there would be implications on EU putting some penalties on Russia, and what would that impact on the wood side and so forth. All those contingency plans are being put in place, but no bad news beyond what the newspapers write yet. Hopefully it will stay that way.
Okay. 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. We'll announce the decision when we made it. Let me just leave it at that, because otherwise you're going to try to guess what the decision is.
Yes. No. That's fine. Actually, a final question. We saw this morning that Metsä Group is about to build a new pulp mill in Finland. What's your view on the potential effects on wood prices, et cetera, 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, Kari Jordan, because he doesn't want me to comment his news any more than I want him to comment mine.
You should probably call him up. If I read the news correctly during this busy day, the decision they made is an environmental assessment study. That obviously has no impact on anything yet. The only other comment, without understanding, because they talked about a bioproduct factory or mill. It depends on what the fiber supply for that would be and so forth and so on. They talked about mostly domestic fiber. Well, that's where I leave it, because again, I think it would be inappropriate for me to start commenting on Kari's investment. You need to ask him what he thinks to put supplies there.
Okay. I'll have to call him. Many thanks for your answers. Thank you.
Okay, good. There was a question on pricing improvements in packaging. I won't give you a total answer, but I think the major positive is not a huge positive still. It is in the general packaging and cigarette board areas mostly, that we've seen that positive development. Okay? If you need more specifics, I'm going to have to ask you to call Ulla afterwards, because I won't be able to give you a lot more data now. Anyway.
We take the next question now from Linus Larsson of SEB. Please go ahead.
Yes. Thank you very much. Good afternoon to everyone. Just a clarification, if I may, on Montes del Plata. 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 Seppo said in a careful way that it's going to be the last quarter of the year kind of when it starts contributing. Which if you take 180 day, which was the two quarters ramp up, you need to get that maybe to full speed, and that's how you get into.
Okay
that situation. We'll talk about it more in July and October. I just want to get that mill started, okay?
Yeah.
I'm tired of talking about a brilliant mill that doesn't run.
That's all right. Also, an update, if possible, on the situation in Corbehem. 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. Twofold, the production is down since January 20th or something, and it's because of the extremely tense situation in the mill, unfortunately. Two, the only thing I can also legally say is that there is still a dialogue about possibility to divest, whereas in Pärnu we have launched the 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 Corbehem. That's all that I can say. For legal reasons, I cannot give you any specific date yet. I'm sure you understand that it's a difficult call.
Sure.
Sorry.
Just in that potential scenario that you did divest the mill, is that for the same type of production, or is that for conversion to other product?
If I understand your question, Linus, it's Seppo here. If you divest the mill, you divest the mill, you cannot, of course, limit what is done with that. We don't see that even if the potential buyer, whoever 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, it's not the core of our portfolio.
Okay. Also, another topic here, the non-core asset divestment program. You have finalized the Tillä kaolin divestment. What's in the, let's say, 12-month horizon on that program?
More, but don't ask me for the names of them. It's a bit of a catch-up bottle, it's not a linear curve. We're working very hard on a few, but as you can guess, we'll talk about them when they're done.
Okay. Then just finally, a bit of a detail. You have provided a particular guidance, when it comes to maintenance specifically, would you care to give a guidance on what kind of a delta in maintenance cost that you expect for the second versus the first quarter, please?
Like we listed, there is maintenance going on Q2 in Biomaterials and Renewable Packaging, it will mean that there will be higher maintenance cost in Q2 than Q1. We are not talking about tens of millions, say EUR ten-ish million more maintenance cost in the quarter than Q1. There is a bigger difference between Q4 and Q1, like we indicated earlier.
If you just repeat that, what was the difference Q1 on Q4?
Q4 versus Q1. There the difference was in the region of EUR 35, EUR 40 million between the two quarters, Q4 and Q1.
Very good. Thank you very much.
Great.
We take the next question of Kari Rinta of Handelsbanken. Please go ahead.
Yes. Thank you. Kari Rinta, Handelsbanken. Firstly, just to confirm the Guangxi project or the China project, how advanced are you there? I guess my fear is that if the new CEO would be a hardcore paper guy and would decide to focus on newsprint, for example, could he still pull the plug on this project? Are you so far advanced that this will be done almost no matter what? That's my first question.
I'm not going to select my successor anyway, I don't know about 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 Jouko invention. That's very strongly supported by the board of directors, by the group management team, we'll stay on that path. Second, I think to give you peace of mind, we have now put the equity in as our partner, IFC, too. We have bought the first critical equipment, we're in for the good. You can ask for the next 30 years. We're going to be there, and we're going to do great work there and so forth.
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. Just to confirm, there is no 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, I say very sincerely, it's been the most difficult job in my life the past seven years, it's been the most exciting and challenging and interesting job, including all kinds of dimensions. 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. I think I've said it in some of the past years, that I always worried that after so many years, the worst thing that any CEO can do is you can start believing your own story.
I think it's good for the company, and that's why I made the suggestion with the personal note that I was lucky enough to take a P&L very early in my life, and I think it's a quarter of a century with the P&L. I'll do some other fun things in the future. There's no disagreement on 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, delayering the organization, and if you'd be at the AGM, you'd hear some great progress in some of these difficult things. That's the story, both for me and my board.
All right. Thank you, and good luck in the future.
Yeah. Thank you.
We now take our final question for today from Martin Melbye of ABG. Please go ahead.
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 newsprint 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. First of all, because it's always demand, supply driven and so forth. Through the actions we've taken in the past 15, 16 months or so, newsprint has been better balanced. We took a Kemi machine out in Veitsiluoto. Then one is down in France. Still overall, I'd say the positive vibrations and positives are more in the newsprint side. 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.
On the other side of the coin, partially driven by this slow recovery in the European economy, the demand slide having slowed down should make sure that all the own efforts don't kind of disappear into the space. We can generate both profits and cash from them. Sorry, I'm a bit vague, but I don't want to go on a segment price forecast either.
Okay. Thank you.
Thank you. All right. All right. I think we're maybe a little confused who's going to say what next, meaning I wasn't sure whether the operator's going to come in. Thanks for your interest today. We believe we had a rock-solid quarter. We're working on very much to have many more to come. Maybe I finish with what I started. The good news is, for me, I can still work with you guys for quite some time until my successor is nominated. 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 dis-