Good day, welcome to the Stora Enso Q4 2013 earnings conference call. For your information, today's conference is being recorded. At this time, I would like to turn the conference over to Ulla Paajanen, Head of Investor Relations. Please go ahead.
Thank you, Sarah. Good afternoon, everyone, welcome to Stora Enso Q4 conference call. I will now hand it over to our CEO, Jouko Karvinen, who will start with the presentation. Jouko, please go ahead.
Thank you, Ulla. Welcome, everybody. Thanks for taking the time. Let me start by introducing our brand-new CFO, day three in the office. He'll be an active participant to answer the questions. Seppo Parvi joined us officially on February 1. Welcome, Seppo, and I'm sure you'll get to talk a lot with the good people on the phone.
Thank you, Jouko.
Let's get going. Page, we try to stick to the page numbers a bit. If you go straight to page three, which essentially summarizes what we show in the release. Divine, overall, relatively okay and very proud of the team, what they achieved in the earnings in the difficult environment in Q4. I really am thrilled about the continuation of the strong cash flow, obviously. The EUR 152 million, as we openly say, includes the EUR 19 million positive impact of the depreciation results after impairment. Obviously, overall on a group level, still a too low number. Once we get to talk about the segments, you can see it's a very different story in different divisions. Cash flow, EUR 470 million before, EUR 310 after investing. One promise that we made some time ago to you, the Ostrołęka machine is in full swing.
It did earn the 20% margin, which, interestingly enough, even in the highly profitable Renewable Packaging division, is already a positive contribution to the margin levels. Net sales, last 12 months, EUR 2.3 billion, down from EUR 2.5 billion. Net debt down EUR 320 million. The net non-recurring items combined of the impairment, attention to paper assets, and the positive of the fair value valuation of the Guangxi plantation. Now that we are in implementation, we did that at the airport, we'll also say. Let's move on to page four, which is a graph, a long-term graph, I'll say, with a history from the beginning of 2009, and because it's 4Q rolling, it's actually even 2008 there in the first dot. There you see two things. The cast engine still works, including Q4, with all eight cylinders, I guess. That's really important. It is safe.
Yes, when the volumes shrink, that helps a bit when you manage your inventories. If you look at the green, the operating working capital ratio 4 quarters rolling, I don't have the exact number, but I can assure you there's a lot of money that went out from the inventories and receivables and so forth. When you start from the 25+ level, and we're now at 17, and we're also not going to stop there. That's another factor where I feel really good about, not mine, but the team's effort. Page five, fixed cost. I'll talk a bit about the program we call Reshape in a minute, this is the actual fixed cost development, again, on a 4-quarter rolling average. I read two things from the chart.
We had from 2011 to 2002, way too long, a flat period, now we're on the right path again, including Q4. Now, year-on-year, the total fixed cost went down EUR 60 million. When we talk about the Reshape program, as we call it, the program announced in April 2013, which is a fixed cost only, not variable cost program. It is outside or excluding the capacity reduction programs, since we always disclose also the fixed cost impact of that. This is improving fixed cost ratios, and that's with fixed cost within the scope. Because I think it's very important that we don't mix that with, obviously, when we take capacity out, we have to take that fixed cost out, too. Having said that, two things.
70%, I'd say, of the actions, which there are a lot of detailed actions, to take that EUR 200 million out by Q2 2014 compared with 2012, have been completed by year-end. To use a different metric, if you look at the people numbers, about 1,300 people of the 2,200, 300 in the total program left the company in the very late months of 2013. 900 plus are still going to go now in the early part of 2014. You can translate that as well as I can. That means that most of the actions, the one-time costs, have been booked in 2013, but only a relatively small minority of the cost positive impact is in the fourth quarter number or let alone the 2013 numbers.
That's one of the spark in our eyes now is that, as tough as it is, we think that this is the right thing to do. We can still do it and keep doing it. If you look at them back to the total reporting numbers, the stats say that the year-on-year, our total headcount went down about 500 plus people. When you do the math, when you take into account the Inpac people who moved on our payroll and the 580 people growth in China. In Europe, we actually reduced about 2,000 people, which is a significant number given the revenue development also there. We will continue on that path. Page six. Somebody asked me in the October call whether I'd be disappointed if we get nothing done on the string of divestment of non-core assets.
I admit I was a bit late, I'm not disappointed anymore because this cash is in the bank, I can assure you we're working on many others, I obviously am happy that we could complete that full point also, at least before today. Page seven, we move to the businesses. No other way but to say weak earnings in Printing and Reading. Continued strong cash generation, almost EUR 400 million. That has been for many, many years in the highs and the lows and the difficulties, a pretty standard number. That is critical and continues to be critical for us to finance our transformation. We closed, in the past 13-14 months, 3 newsprint machines, 2 in Hylte, 1 in France late last year.
That's clearly showing in not only the operating rates in newsprint, which are very high, once I get to talk about a bit about the outlook, I think it shows up there too. We have also announced 2 separate plans. Veitsiluoto paper machine one, co-determination are starting. Plan to take that out permanently. We have launched in France a social plan under the French legislation, which includes still possibility to sell the asset if we can find, with the support of the local authorities, buyers. It also includes the alternative, subject to all the co-determination negotiations and so forth, of closing the asset if we're not successful finding the buyer. I want to give credit to this team. Maybe they started a bit late, that's because of me.
I can tell you they're at full speed, no hesitation to continue their battle in that. Biomaterials, next page. Different graph. It essentially shows again what's the return on operating capital with or without the Montes del Plata , which is now very close to the startup, because we are in the first month of 2014. Before you ask, I will not give you a new schedule. I said earlier today in the press conference that the next news is going to be the day when it starts. We'll tell you. The report on commissioning is good. We are like 97% complete on commissioning, and all the reports imply good quality technology and good construction. We expect, I admit, quite a bit late, a very good quality and very competitive mill. The price levels in softwood, very positive view on it. Inventory is low.
No really new capacity coming on board. Interestingly enough, if you look at the past last few months on hardwood pulp, I say this against the backdrop that until Montes del Plata is really up and running, our market long position is in softwood and the hardwood is almost neutral. It obviously changes with Montes del Plata . The point of the story is we see a relatively stable environment in the hardwood area, therefore, that's calming me down. Obviously from a Stora Enso point of view, getting this mill at full speed towards the end of this year, full capacity with the targeted EBITDA margins will be very much contributing anyway, independent if the price is a little higher or lower and so forth. We're all hands on deck to make that happen finally now. Building and Living. You could say great recovery.
Good returns, actually. Clearly value enhancing returns also. The sales prices, especially the product geographic mix improved and very important. They started the Reshape program before the others. That's showing also in their results. Small business yet, but more and more signals that the multi-story Building Solutions business, which is important for them, is really taking off now. We have all of the key partners, for example, in Finland on board of construction companies. The question is more, how do we grow multiples from last year to this year? I'm not going to make a great whole future of Stora Enso, but I think for this business, quite an exciting opportunity. Page 10. Renewable Packaging. What can I say? Brilliant market, 3%-5% growth.
I read the CEPI report from yesterday where they talked about the paper and board capacity and slightly decreasing or whatever. When I do the math and deduct the strong reduction of the paper volumes, it seems that European board manufacturing is still growing, even in Europe. What we say here is that in the segments we have strategically selected globally, we see 3%-5% continued growth. 2013 was a record year ever on operational EBIT. Very strong cash flow also. Also, like I said, it helped in Q4. Smaller, but strategically important, the fact that the Inpac acquisition from two years ago is growing very fast in the consumer goods market is, I think, really exciting. Two other projects there, Guangxi. For many years of planning, now we're working. We're almost halfway through on the mill site leveling.
We have the permits. We expect the board machine part Remember, we designed the project. We expect the board machine to be up and running in early 2016. That's really interesting. Bulleh Shah, Pakistan, I think the biggest news of a lot of good work and improvements in many areas, but I think the good metric is that we have actually started liquid packaging for delivery from Pakistan. If I may hand over to our very experienced, but brand new CFO, Seppo, to go through the numbers. Seppo?
Thank you, Jouko. I will comment some of the key figures on page 12 and start with the sales. Where in Q4 compared to Q4 a year earlier, sales decreased by EUR 123 million, mainly because of sales of paper products decline. This is partly due to the permanent shutdowns of two paper machines in Hylte and one paper machine in Kvarnsveden, and lower average sales prices. Q4 sales improved compared to a year ago by Ostrołęka PM5 volumes. Currency had a negative impact on the top line. Looking at operational EBIT, where we see a small, about EUR 6 million decline. That was due to both, like always, both positive and negative factors going to different directions.
Looking at the negatives, in total, about EUR 48 million reduction year on year, owing to clearly lower sales volumes, especially for Newsprint due to earlier mentioned permanent paper machine shutdowns, and slightly lower sales prices in local currencies for all paper products. These were partly offset by slightly lower wood cost across all divisions and lower pulp cost, which increased operational EBIT to get about EUR 23 million. We have to notice that depreciation was about EUR 23 million lower during the quarter, mainly due to the fixed asset impairments, like mentioned earlier. Operational return on capital employed was 7.6% for the group, and excluding strategic investment, it would have been 9.1%. There's a slight improvement compared to a year ago, but we are not yet on satisfactory level. We are well-positioned to implement our growth strategy.
Liquidity and balance sheet are strong. We were able to reduce our net debt by over EUR 300 million during 2013 to EUR 2.4 billion level. That is very important in order to be able to fund our future capital expenditure and growth projects going forward. Moving to next page 13, where we can see the bridge from 2012 operational EBIT to 2013. In this analysis, our ongoing transformation is well visible. What was lost in the volumes and prices was partially compensated by lower costs, mostly variable. In the segment, the decrease in operational EBIT in the Printing and Reading was partially compensated by the growth businesses in Renewable Packaging and Building and Living.
The investments of Montes del Plata and Biorefinery lowered the results in Biomaterials, but actually it should be noticed that in fact, Biomaterials operational EBIT improved versus previous year, taking into account the burden of Biorefinery costs that we moved from segment other in 2013. That is also why other looks so positive, so that should be noted. On page 14, look at the net debt change. Basically confirming what I mentioned earlier. Look at the key figures that we were able to use our good operational cash flow to fund our strategic investments and projects such as Montes del Plata, Ostrołęka, Guangxi, and Bulleh Shah, and the restructuring programs that we are running. This is building for our future.
Also, after the mentioned investments and dividends and tax payments, et cetera, are taken into account, we were still able to reduce our net debt by over EUR 300 million during the year. Moving to page 15 and our Capital Expenditure forecast for the coming year, for the year that has actually started already. The total CapEx is forecasted to be EUR 850 million-EUR 930 million, including equity injections. Capital expenditure itself, EUR 820 million-EUR 900 million, including maintenance CapEx about EUR 200 million-EUR 250 million and Guangxi Consumer Board mill about EUR 300 million. Due to delay of Montes del Plata pulp mill, still some EUR 150 million will be spent in 2014, and this is instead of 2013. It is important to notice that this expenditure as such is in line with the earlier communicated figures for the project.
As of 2014, beginning of the year, there are changes in IFRS 11 rules. We use consolidate now Veracel and Montes del Plata line by line in accordance with those rules. This is also affecting our CapEx lines. 50% of both are now included in capital expenditure instead of equity injections as was the case earlier. Finally, just to repeat what was mentioned earlier about the depreciation. Impairment charges that we announced today are lowering depreciation by approximately EUR 80 million annually. The previously equity accounted Veracel and Montes del Plata, we increased the depreciation by EUR 60 million. Net effect is EUR 20 million going forward. That is why also the difference is not so high between the two years in the table on page 15. Okay, Jouko. Time to look at the future.
Good. At least short-term future. Our guidance for the ongoing quarter. Sales is expected to be similar, that is pretty straightforward. Operational EBIT from similar to somewhat higher compared with Q4 2013 versus sequential guidance. I don't have to tell you, when you read that and then you yourself do a year-on-year comparison with Q1 2013, you see that we expect a clear significant improvement there. I don't want to cherry-pick the comparison point. This is the sequential guidance. Pricing improving. What do we really mean with that? Well, specifically maybe in the two largest areas, I'd say Building and Living looks pretty good, and then [Parvi] already commented, but also in packaging and paper, we see a light or slight improving impact sequentially and specifically in paper. This is based on actually completed agreements with customers.
This is not a forecast, and it's important that I say that because I don't forecast pricing. We see in Europe agreements going up from low to mid-single digits. That's kind of the range with one clear exception, and that's coated mechanical, coated magazine paper, which I guess also gives the logic of we are now planning to reduce capacity. That's a slight negative item. Overseas pricing, which is also important even though it's smaller, is more challenging than European outlook. Overall, it's not enough of a negative to take away a slight, and I emphasize a slight, positive momentum in our total paper price portfolio for Q1. Fixed cost decreasing will never stop.
In Renewable Packaging, just to be transparent, the buildup of the resources and the actual operation in Guangxi will burden Renewable Packaging a bit already in the first quarter, because now we're doing things, not just planning things. We had a boiler incident in Kaukopää, and you know what an important asset that is. That will cause some burden. We believe we are very well insured. We have a brilliant team there who's been able to manage partially operating the mill without the boiler being functional. I won't give you the schedule, but we expect to be back in business pretty soon, but it will have an impact still in Q1. Last slide. Strategy in action. Rather than everything I said already, here's kind of a laundry list of what I believe are proof points of what the strategy means.
EUR 1.25 billion cash, again, exactly the same number pretty much as the year before. Fixed costs going down and continuing to go down. More importantly, cost breakup. Yes, it works the way we did at 20% EBITDA. If you promise not to tell the factoring guys, I'm going to push a little more from that, but I won't give you the number. I think it's not quite yet there where it can be, but I think that's already a brilliant achievement. Mondi Feforza, early months. Now it's early months, so we'll have to come real soon. Inpac, again, a smaller thing, very fast growth there, and I think it's an interesting segment also from a value creation point of view because we get through the design studio, staying closer to the brand owners and so forth. Full of shine, I mentioned. Building Solutions, small example.
That stuff, that strategy in action, things really happening. In a few quarters, obviously, with Mondi Feforza, it will start showing more and more also as a positive contributor to the value creation for the company. A big example, Guangxi project. Now we're implementing. It will take a couple of years to get the first phase done. Really important strategic for us and from a value creation point of view. A longer term, small investment, EUR 32 million. There is a real thought there. Our Biorefinery strategy does not start from biofuels. In fact, that's about the least interesting part for us. It's a subsidized commodity market, and with some of the fossil fuel changes in the world, we believe we need to focus on specialty chemicals, foodstuffs, and so forth.
It will take quite a few years, I think. Let me put it this way. The industry today uses less than half of the valuable materials of wood, and we think there's a great opportunity there. That'll take a few calls before we get to talk about those results. The mantra, nothing's ever good enough. Everybody wakes up every morning not saying, "Oh, we've done so much." Everybody wakes up saying, "We haven't done anything today." We're not planning to stop. After any program, we plan to move on. Thank you for listening. Time for your questions.
Thank you. If you would like to ask a question at this time, please press the star or asterisk key, followed by the digit 1 on your telephone. Please ensure that 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 an opportunity to signal. We will now take the first question from Karthik Swami of Merrill Lynch. Please go ahead.
Hi there, gentlemen. Thank you for taking my questions. Firstly, I was wondering if you could give us a little bit more color on your prior comments on price increases on the graphic paper front. Did I hear you correctly saying that you were going for price increases across the board for every grade apart from coated mechanical? A bit of clarification and perhaps a little bit of color on some of the weaker grades and how you could manage to achieve price increases there, ex the coated mechanical side, would also be useful.
Okay. I'll try. I hope you forgive me that I'm very specific. My comments did not relate to what we're aiming to do or planning to do or forecast to do. The comments are related to the actual customer contracts we have completed, and that's the way it has to be. That's the first comment. Second comment, the relatively old equation of operating rate still works. The low to mid-single digits is true very much in newsprint, where we have very good operating rates. Why? Not because the market is booming, but because somebody took a significant capacity reduction about a year ago. On the other grades, it's more towards the low single-digit range than the low single digits to five, which is mid.
I don't want to call it exception, but the coated mechanical grades, we see a small exception where we see a slight negative pressure, it's not rocket science either. The operating rates in the industry on that grade are too low. I said that the export markets are a little more difficult, if you add it all up, it's still a slight positive.
Just to follow up on your comment. The timing of the price increases filtering through, could you just remind us what proportion of your contracts actually came up for expiry? Or is everything now rolling over because they're all six months or lower duration?
I could, if I would remember that detail right now. The completion rate of the contract is in clear majority already in all of the grades. The renewal, I have to be a little careful, typically they are more and more six months. They used to be personally 12 months and so forth. It does come through relatively significantly. I apologize, I don't have the exact data with me, I'm not talking about something that I would then say, "Well, it has no impact before second half." This is starting to impact or has started to impact as we speak, because these are signed contracts.
Understood. Thank you. I could follow up on that later. My second question was on the Renewable Packaging division. I really apologize if I'd missed the earlier part of the call, I had trouble dialing in. If you haven't covered it, could you please give us a little bit of color on what's happening on pricing trends? I understand that folding boxboard, for example, was mooted to have a price increase of about EUR 60 per tonne. I'm assuming that could be taken as broadly representative of your carton board operations. Is there any kind of news on that front and where pricing negotiations have gone?
We see a slight I won't go to folding boxboard on all that detail. I would say the headline story is again, implemented, not forecasting. Sorry to repeat myself. Low single digits. This is on the board side, whether it's Consumer Board or Containerboard. A bit better on the corrugated packaging side. Not a huge change, definitely a positive trend there. Sequentially, again.
Is there any color you could provide us on inventories?
I'm sorry?
Is there any color you could provide us on inventory?
No, I don't. I think the only inventory we talk about is the public information on pulp inventories, but I don't have that at hand, no.
Okay. Thank you very much.
Thank you. We will now take the next question from Lars Kjellberg of Credit Suisse. Please go ahead.
Good afternoon, gentlemen. Just a couple of questions. Talking about your cost takeout, it's seeing as it's coming through quite meaningfully. Then we can annualize that number. Just to be clear as well, is this outside the benefit you're talking about fixed costs outside the capacity closures, if you want to quantify that or clarify that? If you stop there, and then I just have questions more specifically on China to follow up.
Okay. Hi, Lars. I'll try. I won't give you exact numbers, but if you remember, let's use people numbers, because that's one of the key drivers of the reduction. We've completed the co-determination negotiations and so forth. In the overall plan, about 70% of the people, which is about 2,200 plus in total in that specific program, about 1,300 left the company. They left the company in the last quarter, so very late in the year, most of them. You can do the math. That means that it was limited. A limited minority of the EUR 200 million annual run rate, which would be a limited piece of a quarter of the EUR 50 million.
Understood.
Limited margin. Sorry to give you so cryptic answer.
No, that's perfectly clear. Effectively what you're saying, there was little or nothing in the quarter.
Yeah. Not nothing, but little. The second question, maybe it sounds complex, but I've been so particular in our own team about it. I said we cannot talk about fixed cost improvements and mix capacity reductions because if you take 10% of capacity out, well, before you start improving, you have to take 10% fixed costs out. That's why we kept it separate very clearly. We use the existing scope, and then when we announce plans, for example, Veitsiluoto or the earlier plans, we've given always, I think, a separate number on saying, "We take so many tons out, and we will take this much fixed cost out." The point of the story is that the EUR 200 million program on an annual level compared to 2012 level, to be exact, that's only a part of the fixed cost reduction.
If I may, Lars, caution you that if you look at the total fixed cost reduction, then you will have to, like I do, look at the capacity reduction, too.
Of course.
Otherwise, you can't. Anyway, sorry for the long answer.
It is complex, so thanks for that. Turning to China, just have three specific questions. I'm not fully understanding, the Guangxi cost. Wouldn't you be capitalizing this if this is now a project? Why do we see that coming through in the P&L? The more broader picture, I suppose, if you look on or listen to everyone in various packaging substrates in China at this moment, they are very bearish, right? If you go from the paper guys to the glass guys to the beverage can guys, they're having excess supply, pricing pressure, and basically all saying, "We're not going to commit any money," and in some instances, they're pulling out of China. How comfortable are you with this particular project, with that backdrop? I just wanted to see how you think about that.
Some of the China cost. Let me take a step back, Lars.
Yeah.
One of the things in the redesign of the project is that we know that we have a pretty good wood stock there, standing wood. To make this more logical and feasible, part of the redesign together with our partner is that we're actually ramping up harvesting to sell wood off the standing stock. That's an operational expense. That's one part of the thing. Then there are other areas of preparation and so forth on many areas of safety and sustainability and so forth and so on. The project costs does get capitalized, obviously. What am I saying? We're building operations up, even though we don't have a mill yet, because we got the standing stock and so forth there.
That would be that answer. The last question, and most important maybe, I would say, first of all, packaging is not packaging. I believe that the segments we've selected to serve, I think we have a pretty good strategic alignment with our key customers to grow. They're driven by demographics, urbanization, improving the standard of living. You could talk about many of these, not only in liquid and food packaging, but in some of the consumer goods. I would say that that's one factor. The second, that our plan is starting in 2016, makes me also think that, because I read, I get the same inputs as you do. What matters to me right now is the underlying long-term trend, and there, we are very convinced in the segments we've selected. There's very good growth in some of the segments, even double-digit growth in the longer period.
Then, final comment, if I'm not mistaken, the full capacity of the board machine, when it's up and running late 2016, that'll be about the one-year growth of that market, just the growth. We're not trying to take over China in one go. Therefore, we believe that the superior quality, unique product, will do very well there. That's a long way to say, yes, we're confident.
Sounds good. One technical question, just finally on the line-by-line consolidation of the Veracel and Montes del Plata going forward. Does that have any impact on operational EBIT, if you had done this last year? You've given some hints, of course, of depreciation charges and also how will this impact your debt, if you can give us.
Zero impact. Lars, once in a lifetime I can give you a short answer. No. Zero impact.
Wonderful. Thank you.
Thanks.
Thank you.
Thank you. We will now take the next question from Kari Winter of SHB. Please go ahead.
Yes, thank you. Maybe firstly on the write-down of paper assets. Can you discuss the mechanics behind this decision? What triggered it specifically now? Which assumption did you change the most to arrive at the write-down that you took? Maybe how do you reconcile this with the comment that you made in the presentation, that you expect paper to be, in the future as well, stable cash flow contributor? Thank you.
Okay. It's not happening. It's not a single decision. We do this every year, like I believe all the companies reporting under the IFRS accounting standard. We first of all do an annual update of our long-term business plan strategy. That goes through a review process and an approval by the board of Stora Enso. The rest is simple IFRS math. If you look at the history, we've even written up some years and so forth. The specific question, what changed? Well, first thing that changed is that already 2013 was a clearly disappointing year for us. Very low in sales and so forth, which means, by the way, also that we're entering 2014 differently than we did think in late 2012.
When we combine the well-known long-term structural change, the famous 5% decline, which continued in 2013, with the no growth Europe, then that strategic business plan saw a reduced earnings capability. Like I said, this is an annual test, and the result is the result based on the approved strategy. Does that help you at all?
Yeah, it does. I should keep my declining EBIT numbers in my estimate going forward on the back of this announcement. Another question maybe to Seppo. If I look at Stora's financial costs, both on P&L as well as in the cash flow statement, they are persistently what I consider to be very high given your very stable financing position, in my opinion. Specifically during your three days in the office, do you have any ideas of how to bring Stora's financing costs down? More specifically, when I look into 2014, should I look at the financing costs in your cash flow statement, i.e., roughly EUR 170 million or P&L EUR 220 million when I try to figure out what would be the financing cost for net financials for 2014?
First of all, sort of average interest rate for our loan portfolio is about 5% for modeling purposes. You have to remember, we have kept lot of cash in our balance sheet because as I said, we have a lot of investments coming up during the coming years that we have wanted to ensure financing and funding for the projects going forward without having to be at the mercy of the banking market that has been so turbulent in the past couple of years. Of course, for the cash portion, even though that we are doing our best and the treasury team is investing money with the best possible return, but of course yield is very low and close to zero at the current market.
If you then look at the cost of liquidity, where of course there is an extra cost for this, but we see it as an insurance going forward at the moment.
No big changes, moves expected for 2014?
Well, like I said, we are moving with the investment projects and of course we are using cash to pay those capital expenditure payments. I cannot and I will not take any stand on our liquidity planning going forward or-
Give him a little more time than three and a half days.
Fair enough. I'll get back to this in three months time. Thank you.
Thank you.
Thank you. We will now take the next question from Michael Diaz of Kepler Cheuvreux. Please go ahead.
Yes. Hello. Good afternoon, everybody. A couple of questions. On pulp there, you talk about that you expect to see the market swallowing the new pulp capacity during the second half of the year. Could you give some more color and flavor of that? I missed part of the presentation, so forgive me if that's already answered. That's my first question.
Okay. Yeah, I don't know how much more color. Like we said, next news is going to be when we start the mill. We're not going to give you any daily or weekly schedules. It will start in the early months, and then the ramp up starts. It'll be late 2014 anyway before it's at full swing. Therefore, it's not an imminent thing. I guess our relatively calm view on this is that whereas we're obviously fully aware of the mill and rolled out another site about a year ago, almost really, and so forth. When we look at the last three, four months inventory development and what we see in the short-term window, we don't feel it's that dramatic.
The other part that I said, yes, if there's pressure, but from our year-on-year conversion point of view, even if there's pressure to get this low cost pulp mill up and running at full swing, it's obviously a clear contributor, positive contributor to any of our margins, be it EBITDA and so forth. That would be, I think, the best I can say. I would not start forecasting how the Chinese react in the third quarter and so forth, so on. The other thing I said, if you didn't hear it, is really short-term. Remember, we're long in long fiber, and we're almost neutral in short fiber. We don't care too much about the short fiber in the very short-term, but late this year we do care. Hope that helps.
Yeah, no, fine. Thanks. Two perhaps more technical questions. In our models, what tax levels should we model in for 2014? A question on your longer term net debt. If you look on the current net debt to EBITDA, it's at 2.3 times. What do you consider to be an optimal level once you are through with your CapEx programs? Those would be my two remaining questions.
Okay. Thank you. First of all, the tax, of course, the effective tax rate, looking at the latest report is strongly affected by the NRIs and other accelerated things. If you look at the history, we have been around 20% or even below. Looking at the, let's say, future and the latest development in countries like Finland on the statutory tax rate, I think fair assumption is something between 15% and 20% going forward. On the net debt to EBITDA ratios, we are 2.3 going forward. I think the target we have earlier mentioned is that we should remain below three.
Okay. Thank you very much.
Thank you. We will now take the next question from Linus Larsson of SEB. Please go ahead.
Yes, thank you very much and a very good afternoon. Regarding the fourth quarter performance, which seems to have been better than you had guided, I would like to know if there was anything or rather what surprised you positively apart from possibly a lower than expected depreciation in the fourth quarter?
Okay. If it's okay, let's first take the lower depreciation out of the picture. It was EUR 19 million. Take that out of the reported number, which we discussed very clearly today. When you look at it and you remember that there were EUR 2.5 billion of revenue a quarter, then the way I read it is, yes, we were very much at the high end of the guidance window, the verbal guidance. That's okay. The answer on why, well, Renewable Packaging from a segment point of view did very well. Although Printing and Reading, I must say at a very low level, we can take the interim out, so too was doing well. Variable cost, I would say, was another factor that developed favorably.
Let me add to the answer that I think is quite important, and you know this, but if I can highlight that is, that this EBIT or EBITDA was not done by producing into inventory. If you look at the working capital level, this is real market revenue. Therefore, the working capital metric I think should be a proof point to you that we do the right thing and got a great cash flow and obviously it gives us a good starting point for 2014 too. Okay?
Thanks. That's good. If I just may dig a little bit further. If you look at Renewable Packaging, which seems to have had a solid quarter, and I think I seem to recall that you have said that normally 85% of EBIT in Renewable Packaging occurs in the first three quarters, and this year we had a little less in the three first quarters and a bit more in the fourth quarter. I'm just curious to know if there was anything extraordinary happening in Renewable Packaging in the fourth quarter of 2013.
Well, you're correct mathematically, 80%-85% was the number. They had a very good fourth quarter, but they had a very good 2013 overall, too. I would say it was more the variable cost, good productivity, good quality, and so forth and so on. I've been honest, guys, the market was a bit stronger than we also thought. From incident point of view, this is listed. We had actually a technical incident in Imatra, which we reported in NRI level, which we also hopefully recover from insurance. The operational EBIT story is what I said before. There was no incident in this way or that way. It's a clean EBIT.
Great. Then just moving on to your paper division and specifically newsprint, where you have done an awful lot of heavy lifting over the past year or so. Now you indeed achieve some price improvement at the start of 2014. If you look ahead, what's your assessment? Is there a need in the market for further capacity closures in order to hold or even hike newsprint prices by mid-year 2013? Not necessarily by Stora Enso, but just as a general observation.
Okay. Now I will try to be very controlled because I can't possibly tell anybody else. It's tough enough to run this company. I'm not going to try to run the industry. If we go back to the fundamental issue, consumers read less on paper. The trend, unfortunately, all the years I've been here, the proof is there. The structural change is happening. Time and again, including in the past 12 months, the proof is there. Capacity needs to be reduced in line with the market share. The positive proof point being the newsprint actions we took. We're taking one action when we go to mechanical. Rather than maybe talking about what should happen mid-year or late this year is the market is now 30% smaller in Europe than it was short time ago when I joined the industry.
That trend we expect to continue in the foreseeable future. That must mean capacity needs to be removed. I would not want to go into who should do and who should not. I think it's a proven reality, but it's also a proven reality, and I can assure you, every capacity reduction we have done or are planning has an investment payback calculation in addition to all the human suffering and all the negative things there. That's the way it is. If I go back to Kari earlier, I'm not going to argue about EBITDA levels and whatever, but I actually think I'm very proud of the fact that the company's been able to maintain the strong cash generation in a market that's in Europe, 30% smaller than I came.
I would also, I'm sure Kari would agree with me, if you look at five years, 10 years ahead, the actual size of the market will have some impact on the actual cash flows and the values of the assets. That's how I read also the math and the IFRS rules.
May I follow up on this? Would you agree if I said that Stora Enso has somewhat different ambitions when it comes to capacity management in newsprint than in, say, coated mechanical? That in newsprint you are actually trying to rebalance the market and to create pricing power, whereas in some other grades, like coated mechanical, that's not part of your rationale.
The rationale, the logic, is equal in all segments. We have relatively done more in newsprint because we used to be number one in newsprint in Europe, and then we have intentionally and successfully made us not number one anymore, and I think it's been a good [ newsprint] . We just announced a plan to take a coated mechanical machine out in late in the negotiations now. One possible outcome of the social plan in France is also capacity reductions. In other cases, I don't have the list with me here, when we've taken, I think, more than a quarter of our paper capacity out, it is very consistent. There's no different logic, and there's no thinking we'll do this, then maybe somebody else. We're trying to look at what can we do to get a return on that investment, and it's valid for all grades.
Great. Thank you very much.
Thank you. We will now take the next question from Johan Sjöberg of Carnegie. Please go ahead.
Thank you. Could you just say something about the EUR 200 million program? When do you expect to see a material impact from that one?
Thank you for the question. I'm trying to be explicit here. What we said is, in the announcement, we expect the annual fixed cost reduction of EUR 200 million to be visible in the second quarter of 2014 compared with 2012. Sorry, I'm so specific, but I don't want any misunderstandings there. That means that it showed a small minority in late last year. It will show more now, and then, I guess, not so much in the next call, but in the next call in July. Then it has to be there. Because that's the second quarter call.
Okay. Also-
Remember, that's an annual number. Sorry, go ahead.
Yeah, of course. It's EUR 50 million per quarter, I guess you haven't realized that much in your numbers so far. We're looking forward to the effect of that one.
Me too.
Yeah. Just looking at the recovery boiler incident also, could you quantify that, how much you have lost and what type of insurance claims you will see here?
Sure. If I can a bit, it was a small explosion, structural damage into it. The technology works, so to say that it broke where it was supposed to break. Exceptionally brilliant team. Nobody got hurt. Everybody, including suppliers, on the case, on the day, we expect to be back up and running relatively soon. At the same time, the management team in Skoghall, I think, has done an exceptional job where they've been able to run on a few machines, even with the boiler down. To give you the financial answer, we sincerely believe that the exposure to us after insurance coverage is in the mid-single digits, about. That's essentially what we put together in our guidance also. Yes, it's not done before. It's done with insurance companies.
If we would get in trouble, I give you a low teens to mid-teens worst case scenario, if there would be no insurance coverage, which obviously will not be the case. Hopefully that will give you enough of a range.
Just to come back to your guidance for the first quarter, saying that it's going to be flat to slightly up compared with the fourth quarter here, operational EBIT. What type of assumption, or do you use for insurance? Do you expect everything to come now in Q1, or what is
I don't know yet, but we will soon. We don't need the cash flows. We need to know within the quarter what the coverage is, I can tell you that it's 24/7 in the works. What I was trying to say is the guidance includes this post-insurance of EUR low to mid-single digit millions, the full risk is low teens. In the guidance, it's about EUR 4 million-EUR 5 million. That's it.
EUR 4 million-EUR 5 million?
Right. Yeah. Because we expect the rest is covered by the insurance.
Okay. All right. Fine. All right. Thank you very much.
Thank you.
Thank you. We will now take the next question from Antti Koskimäki of Danske Bank. Please go ahead.
Yes, thank you. If you could talk a bit about the Guangxi project status still
What is the status there at the moment? Is the JV formed already? If you can talk about also about the write-ups in the forest assets, what's the driver behind that one? Thanks.
Okay. The famous major final approval from MOFCOM was received late last year in record time, which I appreciate a lot. The joint ventures have been formed. Then on the physical side, like I said, the hillside leveling is at full swing, has been for a while. It's done actually many machines and so forth. It's working actually very well. Then the other side, which is the forestry in the new setup, we're ramping up harvesting and then also ramping up wood sales to the open market. The cost to fair value change, which we announce now in the NRI release. It's a simple fact that until the project was in the pure planning phase and there was no final decision to launch and start, the view was that we keep the assets at cost, and we'll be very transparent about it.
Now that we're implementing plans of harvest and sell, it needs to be fair value. It's as simple as that.
All right.
in the business. Okay?
Yeah. Thank you. Still one question about the write-downs, the EUR 556 million. You say that most of it is from Printing and Reading. Could you quantify the exact amount between the-
Yeah. If you give me the total number was 568?
Yeah.
Was it? Exactly. All but EUR 18 million is in Printing and Reading.
Okay. Thank you. Does this include something from Veitsiluoto or would possible write down there be on top of that?
No. This includes also the cash generating unit, including Veitsiluoto. It, as you well know better than me, the test is done on cash generating unit base.
Yeah.
Seppo, just to highlight, that impairment calculation as such is totally different from the planned close of the machine in Veitsiluoto. Be clear on IFRS rules and the way it is done.
Exactly. In fact, thank you, Seppo, for reminding me. In the impairment test calculation for the IFRS rules, you cannot include any restructuring that has not been formally decided.
Yeah.
It is very strict in that. Thank you, Seppo, for reminding me. That is the case in our case.
All right. Thanks a lot.
Thank you.
Thank you. We will now take the last question from Rebecca Clements of Blue Mountain. Please go ahead.
Hi, can you hear me?
Yes. Hi.
Hi. Just a quick follow-up here. First of all, it sounds like you're a little bit more comfortable in terms of generically graphic paper outlook, and that there's been at least some sort of stabilization in the downward trend. Would you say that's an accurate read?
Gladly, no. I'm never comfortable anyway, but the spark in my eyes and many other people's eyes for graphic paper is more that I see the momentum and the action, the results of ourselves improving the cost structure, continuing to take capacity out successfully, if I may say so, and so forth. The only external spark, if you want to call it is, that I think the very, very slight positive momentum on the paper pricing that I give you. Everything else, we're doing ourselves. The market is still shrinking as it did before. There's no change there.
Okay. Would you characterize, for example, in newsprint, I know that we started to see some price increases coming through or at least on the screens anyway, late last year. Did that actually impact directly in the fourth quarter, or is that something that's going to be more of a first half 2014 benefit?
I can't quantify this exactly. If you remember, the operating rate improved around mid-year because we took the three machines out in the early part of the year, physically. In the mid-year negotiations of the six-month contract, we saw some slight improvement in the pricing agreement. It started to come through then. I also have to be very clear that what we talked about today is the sequential comparison and so forth, Q4 to Q1. What I said today about the overall very slight improvement, that's still a further improvement. It's not a year-on-year improvement. How do I say that? There was slight improvement in second half, and there's slightly more coming now.
Okay. From an export markets perspective, across the grades, are you seeing a pretty significant change there from currency, or is it relatively unchanged for you?
Trying to think how I answer this, because when I thought about it before, it was more the market pricing. I didn't really think it in terms of currency. I think our overall answer is with the mix in the export markets we're in, nothing dramatic. I don't think I can give you a more accurate answer right now than that.
Okay. Just to follow up on the CapEx, I guess I was rightly or wrongly expecting a little bit less than the forecast for 2014, and that more of that would be spread out across 2014 and 2015. Is there a chance that some of this range of EUR 850 million-EUR 930 million spills over into 2015? Or do you think that that's a pretty good number in terms of the amount spent for 2014?
Yeah. Before I really answer your question, I think there was a spillover, clearly, like we discussed, that we discussed from 2013 to 2014. With that, there's always the risk that something will spill. I don't want too much to spill because it tends to say that we're late. Also I'd like to maybe highlight the impact of the line-by-line consolidation, IFRS 11, which moves some of the equity injections into the CapEx line. Maybe you took that into account in your comments almost. Yeah.
Okay. The EUR 150 million or approximately EUR 150 million for Montes del Plata, does that constitute a concentrated amount in the first quarter as you get started up and then a lower amount over the next three quarters? Or is that actually a number that will be fairly evenly spread out through the year?
Short answer. First of all, that's a spillover like Seppo explained from 2013 to 2014, and it's in this ongoing quarter, essentially. It's not all over the year.
Okay. Probably concentrated in the first quarter and then a little bit more evenly in the remaining quarters from that particular project.
Vast majority in Q1.
Okay.
This quarter.
Okay.
All right?
That's helpful. Guangxi, will that be more evenly spread out, or is that something that is going to be more concentrated at a certain point in the year?
I think it will ramp up. I can't give you the quarter thing off my head.
Maybe first half versus second half?
I don't want to give the number right now because why do I say this? We're right now in the phases of very important negotiations also with the very eager technology suppliers and so forth and so on. We're also negotiating what does it mean in terms of cash payments up front and later and so forth. Clearly, the center of gravity is more in the second half than the first half. That I can say.
Okay. That's at least helpful. Okay, thanks very much.
There are no further questions.
Good.
Okay. Thank you, Sarah. Thank you for everybody attending our call. I will still hand this over for Jouko for final words.
Yeah, they'll be short because we are a bit over time. First of all, thanks so much for being interested on our journey, and we have spark in our eyes, and we intend to keep it for future. Thanks for listening. Thank you.
Thank you.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.