Good day and welcome to the Stora Enzo Q4 twenty thirteen Earnings Conference Call. For your information, today's conference is being recorded. At this time, I would like to turn the conference over to Ula Payanan Sainio, Head of Investor Relations. Please go ahead. Thank you, Sarah.
Good afternoon, everyone, and welcome to DuraEnter Q4 And I will now hand it over to our CEO, Jocko Karvinen, who will start with the presentation. Jocko, please go ahead.
Thank you, Ula. 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 question.
Zeppelin will join us officially on February 1. So welcome, Zeppelin. I'm sure you'll get to talk a lot with the good people on the phone.
Thank you, Jakob. Let's then
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. Design overall relatively okay and very proud of the team what they achieved in the earnings in a difficult environment in Q4. I really am thrilled about the continuation of the strong cash flow.
The €152,000,000 as we opened this day includes a €19,000,000 positive impact of the depreciation result after impairment. But obviously, overall on a group level, still a too low number. But once we get to talk about the segments, you can see it's a very different story in different divisions. Cash flow of €470,000,000 before $310,000,000 after investing. And then one comment that we made some time ago to you, the Ostelleca machine is in full swing.
It did earn the 20% margin, which is interesting enough even in the highly profitable Renewable Packaging division is already a positive contribution to the margin levels. Net sales last twelve months 2.3 from 2,500,000.0 net debt down $320,000,000 And then the net non recurring items combined of the impairment essentially paper assets and the positive of deferred value valuation of the Guangxi plantation. Now that we are in implementation, we did that as the IRFRs also say. Let's move on to page four, which is a graph, a long term graph, so say that the history from the beginning of 2009 and because of 4Q rolling it's actually even 2008 there in the first half. And there you see two things.
The CAT engine still works including Q4 with all eight cylinders I guess. And that's really, really important. And it is based, yes, when the volume shrink that helps a bit when you manage your inventories. But if you look at the green, the operating working capital ratio four 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. And you start from the 25 plus level and we're now at 70 and we're also not going to stop there.
So that's another factor where I feel really good about not mine, but the team's effort. Next five, fixed cost. And I'll talk a bit about the program we call ReShape in a minute, but this is the actual fixed cost development again on a four quarter rolling average. And I read two things from the chart. We had from 2011 to 2002 way too long, a flat period, but now we're on the right path again including Q4.
Now year on year, the total cost fixed cost went down $60,000,000 Then when we talk about the resale program, if you call it the program announced in April 2013, which is a fixed cost only non variable cost program, it is outside or excluding the capacity reduction programs, which we always disclose also the fixed cost impact of that. So this is improving fixed cost ratios and that's on fixed cost within the scope, because I think it's very important that we don't mix that with obviously, we take capacity, we have to take that fixed cost too. Having said that, two things. 70% I'd say of the actions, which there are a lot of detailed actions to take that €200,000,000 off by Q2 twenty fourteen compared with twenty twelve have been completed by year end. And 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 and then 900 plus are still going to go now in the early part of 2014.
And you can translate that as well as I can. That means that most of the actions the one time cost have been booked in 2013, but only a relatively small minority of the cost positive impact is in the fourth quarter number or the let alone the 2013 numbers. And that's one of the spark in our H and I 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. And if you look at them back to the total reported numbers, we the stock today that the year on year our total headcount went down about 500 plus people.
But when you do the math, when you take into account the airport people who moved on our payroll and the five eighty people growth in China. In Europe, we actually reduced about 2,000 people, which is a significant number given the revenue development also there. So, we will continue on that path. Page six, I 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. Well, I admit I was a bit late, but I'm not disappointed anymore because this cash is in the bank.
And I can assure you we're working on many others. And I obviously, I'm happy that we could complete that proof point also at least before today. Page seven, then we move to the businesses. No other way, but to say weak earnings in Printing and Reading. Continued strong cash generation almost €400,000,000 And that has been for many, many years in the highs and the lows and the difficulties a pretty standard number.
And that is critical and continuously critical for us to finance our transformation. We closed in the past thirteen, fourteen months, three newsprint machines during the one in France in last year that's clearly showing in not only the operating rates in newsprint are very high, but once I get to talk about a bit about the outlook, I think it shows up there too. We have also announced two separate plans, Reiksloto, Paper Machine one, co determination of starting plan to take that out permanently. And then we have launched in France a social plan under the French legislation, which includes still possibility to sell the assets if we can find with the support of the local authorities buyers. But it also includes the alternative subject to all the co designation negotiations and so forth of closing the asset if we're not successful finding the buyer.
So,
I want to give credit to this team. Maybe they started a bit late, but that's because of me. But I can tell you they're at full speed, no hesitation. We continue their battling that. Biomaterials next page.
Different graph, it essentially shows again what's the return on operating capital with or without the Monde de Plata, which is now very close to the start up, because we are in the 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're like 97% complete on commissioning and all the reports imply good quality technology and good construction.
So, 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. We have new capacity coming onboard. And then interesting enough, if you look at the past last few months on hardwood pulp, and I say this against the backdrop that until Mundesflat is really up and running, our market long position is in softwood and the hardwood is almost neutral yet and it obviously changes on the spot. Point of the story is, we see a relatively stable environment in the hardwood area.
And therefore, that's coming mid down. And obviously, from a store end 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 of the price is a little higher or lower and so forth and so on. So we're all hands on deck to make that happen finally now. Spending and living. You could say great recovery, good returns actually clearly value enhancing returns also.
Yes, the sales prices, but especially the product geographic mix improved and very important there they started the ReShape program before the others and that's showing also in their results. Small business yet, but more and more signals that the multi floor building solutions business 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 and the question is more how do we grow multiple from last year to this year. So, I'm not going to make a great whole future of Suroriente, but I think for this it's quite an exciting opportunity. Page 10, Renewable Packaging.
What can I say? Brilliant market 3% to 5% growth. I read the report from yesterday where they talked about the paper and board capacity kind of slightly decreasing or whatever. And 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% to 5% continued growth.
2013 was a record year ever on operational EBIT, very strong cash flow also. Also like the product to help in Q4. And then smaller, but strategically important, the fact that the impact acquisition from two years ago is growing very fast in the consumer goods market is I think really exciting. Two other projects there Guangxi, many, many, many years of planning. Now we're working.
We're almost halfway through on the middle side leveling. We have the permits and we expect the board machine part. Remember, designed the project. We expect the board machine to be up and running in early twenty sixteen. And that's really interesting.
Bula Shah Pakistan, I think the biggest news of a lot of good work and improvements in many, many areas, but I think the good metric is that we have actually started to get back to port delivery from Pakistan. Then if I may hand over to our very experienced but brand new CFO, Svepak, to go through
the numbers. Svepak? Okay. Thank you, Jakob. So 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 €123,000,000 mainly because of sales of paper products declined.
And this is partly due to the permanent shutdowns of two paper machines in Zildstedt and one paper machine in Vlaanzweiden and lower average sales prices. Q4, sales were improved compared to a year ago by cost related T and V volumes. Also currency had a negative impact on the top line. Then looking at operational EBIT, where we see a small about €6,000,000 decline. That was due to both like always both positive and negative factors driving the different directions.
Looking at the negatives in total about $48,000,000 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 because our divisions are lower pulp costs, which increased operational EBIT to get about €23,000,000 And we have to note that depreciation was about €22,000,000 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 investments it would have been 9.1%. There is a slight improvement compared to year ago, but we are not yet on satisfactory level. We are well positioned to implement our growth strategy.
Equity and balance sheet are strong and we were able to reduce our net debt by over 300,000,000 during 2013 to €2,400,000,000 level. And this is very important in order to be able to fund our future capital expenditure and growth projects going forward. Then moving to next page, page 13, where we can see the bridge from 2012 operational EBIT to 2013. And in this analysis, our ongoing transformation is well visible. What was mostly the volumes and prices was partially compensated by lower cost mostly variable.
And in the segment, the decrease in operational EBIT in the Printing and Reading was partially compensated by the growth businesses in Renewable Packaging and Fielding and Reading. New investments of Montes de Plasca and Biofineries lowered the resulting Bio Materials, but actually it should be noticed that in fact Bio Materials operational EBIT improved versus previous year taking into account the burden of biorefinery cost that we moved from segment other in 2013. That is also why other looks so positive. So that's a good note here. Then 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 full operational cash flow to fund our strategic investments and projects such as Montes del Plat, Austro Ecop, Q1C and Plesha and the restructuring programs that we are running. This is building to our future. And also after the mentioned investments the dividends and tax payments etcetera are taken into account. We will still have to reduce our net debt by over €300,000,000 during the year. Then moving to page 15 and our capital expenditure forecast for the coming year, for the year that has actually started already.
So the total CapEx is forecasted to be €850 to €930,000,000 including tested injections capital expenditure itself $820,000,000 to €900,000,000 including maintenance CapEx of about €200 to €250,000,000 and Guanxi consumer cost milled about €300,000,000 Due to the delay of Montesqueplast pulp mill still some €150,000,000 will be spent in 2014 And this is instead of 2013. So, important to note is 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. And we will consolidate now whether or not there's therefore line by line in accordance with those rules. And this is also affecting our CapEx lines.
So 50% of both are now included in capital expenditure instead of equity injections as was the case earlier. And finally, just to repeat what was mentioned earlier about the depreciation. Impairment charges that we announced today are lowering depreciation by approximately €80,000,000 annually. And the previously equity accounted variable amount is the product. We increased the depreciation by €60,000,000 So net effect is €20,000,000 going forward.
That's why also the difference is not so high between the two years in the table on page 15. Okay, Jocko, time to look at the future.
Good. At least short term future. Our guidance for the ongoing quarter, that is expected to similar, so that's pretty straightforward. And then operational EBIT from similar to somewhat higher compared with 2013, but the sequential guidance. And then I don't know how to tell you if you when you read that and then you yourself do a year on year comparison with Q1 twenty thirteen, you see that we expect a clear significant improvement there.
But I don't want to cherry pick the comparison points. So this is a sequential guidance. Pricing improving, what do we really mean with that? Well, specifically, maybe in the two largest areas, I'd say, billing and living looks pretty good. And Alf, I already commented, but both in packaging and paper.
We see a light or slight improving impact sequentially and specifically in paper. And this is based on actually completed agreements So, 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 base.
So I guess also gives you the logic of the we are now planning to reduce capacity and so forth. That's a slight negative. Overseas pricing is also important in the smaller. It's more challenging than European outlook, But 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.
And then in Renewable Packaging, just to be transparent, the buildup of the resources and the actual operation in Guangxi will burden renewable packaging a bit in or in the first quarter, because now we're doing things not just planning things. And then we had a boiler incident in Skookal and you know what an important asset that is. So that will cause some burden. We believe we are very well insured. We have a brilliant team that has been able to manage partially operating the mill even without the boiler being functional.
And we
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. So rather than I said already, here's kind of a long release of what I believe are proof points of what the strategy means. Dollars 1,250,000,000.00 cash, again exactly the same number pretty much as the year before. Fixed costs going down and continue to go down, but then more importantly, Postaleca, yes, it works the way we did at 20% EBITDA.
If you promise not to tell the factoring guys, I'm going to put 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. On to the Plata, early months. Well, now it's early months, we'll have to come real soon. Impact, again, 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 through the year staying closer to the brand owners and so forth. Ulesha, I mentioned Building Solutions only. That stuff that strategy in action things really happening in a few quarters obviously with Mondeza Plaza, it will start showing more and more also as a positive contributor to the value creation for the company. And then a big example Guangxi project now we're implementing will take a couple of years to get the first phase done really important strategic for us and can really create the point of view. And in the longer term, it's more in less than $32,000,000 But 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 is the subsidized commodity market. And with some of the fossil fuel changes in the world, we believe we need to focus on specialty chemicals, food stuff and so forth. And it will take quite a few years, but I think 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.
But that will take a few calls before we get to talk about those results. The mantra, nothing is ever good enough. Everybody wakes up every morning saying, not saying, oh, we've done so much. Everybody wakes up saying we haven't done anything today. So we're not planning to stop.
After any program, we plan to move on. Thank you for listening. Time for your questions.
Questions.
We will now take the first question from Kak Sikwami 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. So 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 and 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. So, that's the first comment.
Second comment, the relatively old equation of operating rates still works. So the low to mid single digit is true very much in newsprint where we have very good operating rates. Why? Not because the market is doing, but because somebody said 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 5%, which is mid.
And then, I don't want to call it exception, but caustic mechanical grades, we see as a small exception where we see a slight negative pressure and it's not rocket science either. The operating rates in the industry on that grade are too low. I don't think I can and then I said that the export market is a little more difficult. But we add it all up, it's still a slight positive.
So 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?
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. And then the renewal, I have to be a little careful, but typically they are more and more six months. They used to be they used to be purchasing twelve months and so forth. So it does come through relatively significantly.
I apologize I don't have the exact data with me, but I'm not talking about something that I will then say well it has no impact before second half. This is starting to impact or have started to impact as we speak, because we start to sign 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 missed the earlier part of the call, but 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 muted to have a price increase of about €60 per tonne. And I'm assuming that could be taken as broadly representative of your cotton 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, but I would say the headline story is again implemented not forecasting, sorry to repeat myself, low single digits. And then this is on the board side, whether it's Consumer Board or Container Board, a bit better on the corrugated packaging side. Not a big huge change, but 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. 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 the cost takeout, it's seeing as it's coming through quite meaningfully. Could you give us any quantification of what the actual benefit was in Q4 in the quarter? And then we can annualize that number.
And 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 start there and then I just have a question more specifically on China to follow-up.
Okay. I'll ask I'll try. The and I won't give you exact numbers, but if you remember and let you use people numbers because that's one of the key drivers of the reduction. So, we've completed the co determination negotiations and so forth. And 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, but they left the company in the last quarter, so very late in the year most of them.
And then you can do the math. That means that it was limited to a limited minority of the €200,000,000 annual run rate, which would be a limited piece of a quarter of the €50,000,000 limited margin to give you so scripted answer.
No, no, That's perfectly clear. So, effectively what you're saying there was little or nothing in the quarter?
Yes. Not nothing, but little. And then the second question and maybe it sounds complex, but I've been so particular in our own team about it. 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 cost out. That's why we kept it separate very clearly.
So, we use the existing scope. And then when we announced plans, for example, rate law or the earlier plan, 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. So, the point of the story is that the €200,000,000 program on an annual level compared to 2012 though to be exact. That's only a part of the fixed cost reduction. But I if I may Lars caution you that if you look at the total cost fixed cost reduction then you will have to like I do look at the capacity reduction too.
Otherwise you can't so anyway sorry for the long answer.
No, no. Is complex. Thanks for that. Now turning to China and just have three specific questions. I'm not fully understanding the Guangxi cost.
Wouldn't you be capitalizing this? Is this in our project? And why do we see that coming through in the P and L? And a 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, 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 we've in some instances to 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.
Let me some of the China cost let me take a step back Lars. 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. And 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 of the standing stock. And that's an operational expense. So that's one part of the thing.
And 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 cost does get capitalized obviously. But 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. So that would be the answer. The most important or 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, with a pretty good strategic alignment with our key customers do grow and they're driven by demographics, organization, improvement of standard of living, if you talk about many of these not only in liquid and food packaging, but in some of the consumer goods. So I would say that that's one factor.
The second that our plan is starting at 2016 makes me also think that I kind of if I read this, I guess the same impulse 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 selected. There's very good growth in some of the segments even double digit growth in the longer period. And then final comment, if I'm not mistaken, the full capacity of the board machine when it's up and running late sixteen, that will about the one year growth of that market, just the growth.
So we're not trying to take over China on one goal. And therefore, we believe that the superior quality unique product will do very, very well there. So that's a long way to say yes, we're confident.
Sounds good. One technical question just finally on the consolidation line by line consolidation of Aerosol and Montes de 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
There are impact. Once in a lifetime I can give you a short answer. No zero impact.
Thank you.
We will now take the next question from Karri Rinta 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?
And which assumption did you change the most to arrive at the write down that you took? And 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 Sora and Soc.
And the rest is simple IFRS math. And if you look at the history, we've even written up some years and so forth. And then 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 different than we did think in late twenty twelve. And when we combine the well known long term structural change, the famous 5% decline was continued in 2013 with the no growth Europe, then that strategic business plan saw a reduced earnings capability.
And like I said, this is an annual test and the result is the result based on the accrual strategy. Does that help you at all?
Yes, it does. It does. So, I should keep my declining EBITDA numbers in my estimates going forward on the back of the this announcement. Then another question maybe to Seppo. If I look at STORA's financial costs both on P and 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.
So specifically during your three days in the office, do you have any ideas of how to bring Stora's financing costs down? And more specifically when I look into 2014, should I look at the financing costs on in your cash flow statement I. E. Roughly SEK 170,000,000 or P and L SEK $220,000,000 when I try to figure out what would be the financing costs for or net financials for 2014?
Well, first of all, sort of average interest rate for our loan portfolio is about 5% for modeling purposes. But you have to remember, we have kept lot of cash in our balance sheet, because as said, we have a lot of investments coming up during the coming years. So 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. And of course, for the cash portion, even though that we are doing our best that 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.
And if you then look at the cost of liquidity well, of course, there's extra cost for this, but we see it an insurance going forward at the moment.
So no big changes moves expected for 2014?
Well, like I said, we are moving with investment projects. And of course, we are using cash to take those capital expenditure payments. But I cannot and I will not take any stand on our liquidity planning going forward Give
him a little more time than two point five 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 Diaszc of Kepler Cheuvreux. Please go ahead.
Yes. Hello. Good afternoon everybody. A couple of questions. On pulp thereon, 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 That's me if that's already my first question.
Okay. Yes, 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 and it will be late twenty fourteen anyway before it's at full swing.
And therefore, it's not an imminent thing. And I guess our relatively calm view on this is that whereas we're obviously fully aware of the mill Eldorado mill decided about a year ago almost really and so forth. When we look at the last three, four months inventory developments and what we see in the short term window, we don't feel it's that dramatic. And 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 is obviously a clear contributor positive contributor to any of our margins with EBITDA or and so forth. So that would be, I think, the best I can say.
I would not start forecasting all the Chinese reacting in the third quarter and so forth and so on. And 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 the short fiber. So 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.
Yes. No, thanks. And then two perhaps more technical questions. In our models what tax levels should we model in for 2014? And then a question on your longer term net debt.
If we look on the current net debt to EBITDA it's at 2.3 times. And 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 on the tax, of course, the effective tax rate looking at the latest report is strongly affected by the NRIs and other extraordinary things. If you look at the history, have been around 20% or even below are looking at let's say huge and the latest developments in countries like Finland on the statutory tax rate, think fair assumption is something between fifteen percent and twenty percent going forward. On the net debt to EBITDA ratios, we have 2.3% going forward.
And I think the target we have earlier mentioned is that we should remain below 3%.
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 that it was €19,000,000 So take that out of the reported number, which we just talked very clearly today. And then when you look at it and you remember that there were $2,500,000,000 above 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. And that's okay. The answer then on why?
Well, Renewable Packaging from a segment point of view did very well. Also printing and reading, I must say at the very low level, we can take the impairment of CO2 plus doing well. And then variable cost, I would say was another factor that was 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.
And 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 2022. Okay?
Thanks. That's good. And then 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 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 March and a bit more in the So I'm just curious to know if there was anything extraordinary happening in Renewable Packaging in 2013?
You're correct mathematically. And I think and I'm not arguing with you, we said maybe 80% to 85% was the number. They had a very good fourth quarter, but they had a very good 2013 overall too. And I would say, it was more the variable cost, good productivity, good quality and so forth and so on. And I think the honest guys, the market was a bit stronger than we also thought.
From an incident point of view, the we had actually a technical incident in Yamato, which we importantly in our high level, which we also will hopefully recover from insurance. The kind of the operational EBIT story is what I said before. There was no incidents in this way or that way. It's a clean EBIT.
Great. And then just moving on to your Paper division and specifically newsprint where you as you highlighted have done an awful lot of heavy lifting over the past year or so. And 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 midyear twenty thirteen, not necessarily by store answer, but just as a general observation?
Okay. Now, I'll 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. But if we go back to the fundamental issue, consumers read lead and paper, the trend, unfortunately, the past all the years I've been here, the proof is there.
Structural change is happening. And time and again including in the past twelve months, the proof is there. Capacity needs to be reduced in line with the market share. And the positive proof point being the newsprint actions we took, we're taking one action and we call it mechanical. So rather than maybe talking about what should happen midyear or late this year is the market is now 30% smaller in Europe than it was a short time ago when I joined the industry.
And that trend we expect to continue in the foreseeable future and that must mean capacities needs to be removed. And I would not want to go into who should do it, 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 planning has an investment payback calculation in addition to all the human suffering and all the negative things there. So that's way it is.
If I go back to Karri 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 has been able to maintain the strong cash generation in a market that's in Europe 30% smaller than I came. But I would also I'm sure Karev would agree with me, if you look at five years, ten 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 in the IFRS.
May I follow-up on this? Would you agree if I said that Storrenza has somewhat different ambitions when it comes to capacity management in newsprint than in coated mechanical that in newsprint you are actually trying to rebalance the market and to create pricing power whereas in some other grades like coating mechanical that's not part of your rationale?
No. 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 anymore number one. And I think it's been a good spring. We just announced a plan to take a coiled mechanical machine out in late Loto in the negotiations now.
One possible outcome of the social plan in France is also capacity reductions. And in other cases, I don't have the list with me here when you're taking it. I think more than a quarter of our paper capacity out. It is very consistent. There is no different logic and there's no thinking we'll do this and maybe somebody else is no.
We're trying to look at what can we do to get a return on that investment and is valid for all great.
Okay. Great. Thank you very much.
Thank you. We will now take the next question from Johan Sjoberg of Carnegie. Please go ahead.
Thank you. And could you just say something about the €200,000,000 program? When do you expect to see like a material impact from that one?
Thank you for the question. The and then I'm trying to react with it here. What we said is in the announcement, we expect the annual fixed cost reduction of $200,000,000 to be visible in the 2014 compared to 2012. Sorry, I'm so specific, but I don't want any misunderstandings there. So that means that showed it a small minority in late last year.
It will show more now. And then I guess in not so much in the next call, but in the next next call in July. Then it has to be there to start the second quarter call.
Also
No, that's an annual number. Sorry, go ahead.
Yes. Yes, of course. I mean, it's $50,000,000 per quarter and I guess you haven't realized that much in your numbers so far. So we're looking forward to that to the effect of that one.
Me too. Yes. Just looking at
the recovery boiler incident also, how could you say quantify that if how much you have lost and what type of insurance claims you will see here?
Sure. If I can a bit, let's say, 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 and we expect to be back up and running relatively soon.
At the same time, the management team in Spokao, I think has done an exceptional job where they've been able to run on a few machines even with the boiler down. And then to give you the financial answer, we sincerely believe that the exposure to us after insurance coverage is indeed mid single digits about. And that's essentially what we put together in our guidance also. Yes, there is it's not done before it's done with insurance companies. But 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.
So hopefully that will give you enough range.
But 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 are you do you use for insurance? Do you expect everything to come now in Q1? Or what is
I don't know yet, but we assume and we don't need the casualty. We need to know within the quarter what the coverage is and I can tell you that 20 fourseven in the works. And what I was trying to say is the guidance includes this cost insurance of low to mid single digit millions and then the full risk is low teens. But in the guidance, it's about €4 to €5,000,000 That's it.
4,000,000 to €5,000,000 Got it.
Yes. Because we expect the rest to cover 5,000,000 Okay.
All right. Fine. All right. Thank you very much.
Thank you.
Thank you. We will now take the next question from Antti Koskiwari of Danske Bank. Please go ahead.
Yes. Thank you. If you could talk a bit about the Guangxi project status still. I mean, what is the stats there at the moment? Is the JV formed already?
And 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 Lufkin was received late last year in record time, which I appreciate a lot. The joint ventures have been formed. And then on the physical side, like I said, the hillside leveling is at full swing, have seen for a while, which don't ask me many, many, many machines and so forth. It's progressing actually very well.
And 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. And the cost of fair value change, which we announced now in the NRI release, it's a simple fact that until the project was in a 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 starting to harvest and sell, it needs to be fair value. That's simple as that. That becomes an operating business.
Yeah. Thank you. Still one question about the write downs, €556,000,000 Could you you say that most of it is from printing and reading. Could you quantify the exact amount between that?
Yes. If you give me the total number was $568,000,000 Exactly. Or was All about $18,000,000 is in something already.
Okay. You. And does this include something from Baitsiluoto? Or would possible write downs there be on top of that?
No. This included also the cash generating that includes rate block, because it's as you well know better than me, the debt is done on cash generating unit there.
Yes. But just to highlight that incentive calculation as such is totally different from the planned close-up of the machine in rates.
So, big way on IFRS rules and the rates. Exactly. And in fact, thank you, Stefa, for reminding me. In the impairment debt calculation for the IFRS rules, you cannot include any restructuring that has not been formally decided. It's very strict in that.
So thank you, Stefu, for reminding. That's the case in our case.
All right. Thanks a lot.
Thank you.
Thank you. We will now take the last question from Rebecca Clemens of Blue Mountain. Please go ahead.
Hi. Can you hear me? Yes.
Hi.
Hi. Just a quick follow-up here. First of all on 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?
Politely 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 and the result of ourselves improving the cost structure, continue the capacity up 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 gave you. But everything else we're doing ourselves. The market is still shrinking as it did before.
There's no change there.
Okay. So, you characterize, for example, in newsprint, would you characterize I know that we started to see some price increases coming through or at least on the screens anyway late last year. But did that actually impact directly in the fourth quarter? Or is that something that's going to be more of a first half twenty fourteen benefit?
I can't quantify this exactly, but if you remember the operating rate improved around midyear, because we took the three machines out in the early part of the year physically. And in the midyear negotiations of this six month contract, we saw some slight improvement in the pricing agreement. So, it started to come true then. But I also have to be very clear that what we talked about today is the sequential comparison and so forth of Q4 to Q1. So, what I said today about the overall very slight improvement that's still a further improvement.
It's not a year on year improvement. So how do I say that? So there was slight improvement in second half and there's slightly more coming now.
Okay. And is that are you 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 talked about it before it was more the market pricing and really thinking 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. And then just a 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 $850,000,000 to $930,000,000 spills over into 2015? Or do you think that that's a pretty good number in terms of the amount spent for 2014?
Yes. Before I really answer your question, I think there was a spillover clearly like we discussed that we discussed from 2013 to 2014. And 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. But then also I'd like to maybe highlight the impact of the line by line consolidation, IFRS 11, which moved some of the equity injections into the CapEx line, right?
But maybe you took that into account in your comment on that.
Okay. And the approximately $150,000,000 for Montes Del Plata is that something that 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 that's a spillover like separate spend from 2013 to 2014 and it's in this ongoing quarter essentially. It's not all over the year.
Okay. So 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. This quarter.
Okay. That's helpful. And Guangxi is that also 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 quarterly thing off my head.
Maybe first I half versus second
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. And we're also negotiating what does it mean in terms of cash spend up from the mayor 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, Sara. And thank you for everybody attending our call. And I will still hand this over for Jocko for final words.
Yes. And they'll be short because we are a bit of overtime. 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