Good day, welcome to the third quarter 2013 Stora Enso earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ulla Paajanen-Sainio, Head of Investor Relations. Please go ahead.
Hello. Good afternoon on my behalf. It's Ulla Paajanen here. Welcome to our Q3 2013 conference call. I will hand this over now to our CEO, Jouko Karvinen, who will give you a presentation. After Jouko's and Jyrki's presentation, we will have a Q&A session. Please go ahead, Jouko.
Thank you. Good afternoon, everybody from sunny Poland this time. We'll try to be brief on our slideshow and make sure you get enough time for your questions. Exceptionally, obviously, we have pre-announced the key results. We came with a little more comprehensive story. The operational EBIT of EUR 184. Yes, it was better than guided and what we expected in July when we gave the guidance. Essentially driven by strong performance in Renewable Packaging, which was both cost driven, also revenue driven. Also Building and Living segments bouncing back through their cost improvement program that they started late 2012. The reported return on capital employed, nine. If you take the growth investment now, slightly above 10. I think to me, always important, solid cash flow, EUR 331 million. With that, also a strengthened liquidity at EUR 2.1 billion.
An improvement on the net debt to operational EBITDA. If we go to page four, I believe. There you have the graph of cash flow from operations for quarter rolling and operational EBITDA. I think there's two messages. One, yes, the cash flow trend is good. Two, when you look at the EBITDA levels, it's very obvious that we need to keep on running and going on our cost improvement program. Also including not just the capacity closures, but also the Reshape program we announced in April, where we have promised a EUR 200 million fixed cost reduction on its own. Page five. The one graph that we've seen too many times, it's a graph that has no news. Essentially, the structural decline has continued in the third quarter. As before, there is variances in obviously the grade between printing grades and non-print grade called office paper.
The bigger thing we also stated in the title is that there is overcapacity now with the exception of newsprint. That is driven by the fact that, for example, we've taken three machines out in the last 12 months. Next page, decreasing fixed cost. This is the total fixed cost picture. The quarters, obviously, on the scale jump around quite a bit because there's seasonality and so forth and so on. If you look at the late part of line, which is a four-quarter rolling average, you can start seeing that we're heading to the right direction.
I would say from a cost takeout perspective, meaning what actions have we actually completed in the Reshape in terms of taking fixed cost out on the program that we announced in April, we are at 40% now, pretty close, of the actions to reach that target. That's the actions completed, meaning that the negotiations and so forth have been completed and the agreements have been reached. The P&L impact comes with some delay because of local laws and how long people stay on our payroll and so forth. Based on that, we confirm the target and say we're going to make it happen in the second quarter of 2014 as promised. Page seven. Projects. We've given you a little more color on the Mäntsälä situation. Start up during first months of 2014.
Against the previous target of end of September, we're more than three months late, obviously, and we won't give you the exact date, but the important thing I think for your analysis is that we estimate now based on this target that we will produce about half a million tons for Stora Enso purposes in 2014. A total of a million tons. That obviously does require a couple of things. One, as I pointed out in my CEO comment, we need to have the peace at the site continuing, so to say, with labor relations. The last six, seven weeks have been very good. Given the fact that we're 93% complete, I think all stakeholders on all levels do understand that we need to complete this mill because it's a great mill, but it's a great mill only when it produces pulp at capacity.
Guangxi Consumer Board Mill. This is obviously now called Consumer Board Mill because we reshaped that project into two pieces, starting with the Consumer Board machine. We have basically no news there. The start update for the machine is beginning of 2016 as before. There's a little time there. The MOFCOM approvals we expect to receive by the end of 2013. Maybe the other thing is that, yes, we've practiced and rehearsed a bit locally there at the mill site leveling and so forth and so on. There is really no more, that much more details in that context, given where we are today. One more slide from me before I hand over to Jyrki. The transformation from half paper to about 40% paper in our revenue stream at the end of third quarter.
If you zoom it down to European printing paper, it's obviously even a bit less. I'd say roughly a third. It's still significant and it's an important source of cash flow for us and so forth. We need to stay on that case as well. Let me stop there and if, Jyrki, you would please go relatively quickly through the financials, I'll summarize at the end.
Sure. Thank you, Jouko. Our sales were slightly lower, some 5% year-on-year and sequentially. Operational EBIT was slightly higher year-on-year and some EUR 60 million higher quarter-on-quarter. That is equivalent to 0.6 and 2.6 margin points, respectively. Our operational EBIT generation was year-on-year relatively stable. The big picture is that the sales prices are mixed. In addition to volume decline, it decreased the profit. It was more than compensated by decreased variable and fixed costs. The biggest EBIT contribution for the quarter came from Renewable Packaging. That segment improved clearly both on year-on-year and sequentially, and the improvement was due to lower costs. Building and Living improved significantly from a year ago and decreased somewhat quarter-on-quarter due to seasonality. Printing and Reading operational EBIT improved sequentially some EUR 30 million owing to lower costs and slightly higher prices.
Compared to a year ago, the result was roughly three-quarters lower due to lower volumes and prices. Biomaterials result decreased significantly owing to the Enocell mill annual maintenance stoppage and the unfavorable current impacts and additional costs, including write-downs of capitalized costs at the Veracel mill. With that, I hand this call now back to Jouko.
Thank you. Okay. Let me get to the guidance, which is quite important actually, because there are two drivers here. We said it's going to be clearly lower in fourth quarter 2013 than fourth quarter 2012. One reason is, yes, the weak European paper market. I think it's important to try to describe also that two of our segments, namely Renewable Packaging and also Building and Living, they're seasonally both a bit different than the others. Meaning their fourth quarter, and if you look at that in Renewable Packaging as example, they make between 80% and even 90% of their yearly profits in the first three quarters, and also Building and Living is a bit more seasonal than the others.
Well, what's different this year is that if you look at the year-to-date numbers in the first three quarters, the contribution of these two more seasonal segments is actually clearly bigger, for obvious reasons, than a year before. Rough numbers this year, I think year to date, about 70% of our operating EBIT was the seasonal segments. Whereas a year ago, they were like half or slightly less. Point of the story is this content change actually makes the group earnings Q4 also more seasonal than maybe traditionally. The reason I tell you that is that there is no drama in the outlook. It's as is. The structure of the earnings and the fact that we need to complete our cost improvement programs and get them to the P&L, which is going to happen more next year than this year.
We go to the final slide, the summary slide then. Yes, it was not only significantly higher than we expected, it was very, very slightly higher than a year ago. The cash flow was solid, important for us. The fixed cost savings, as said, are proceeding and I want to emphasize that these are fixed costs identified as fixed costs, not fixed and variable. We stick to the commitment that we will, in addition to that, compensate for inflation, so it's not going to eat that. The fourth bullet obviously says the obvious. It's really, really important also in light of the fact that the European paper markets, in our view, remain weak as they have been. Final point, yes, transformation is proceeding, admit with the delay of a few months more in Montes del Plata, but I think the important message there is a great investment.
We need to get it up and running, and so forth. I think with that, I would hand it over back to Ulla and you for your Q&A, please.
Yes, we will start now the Q&A.
Thank you.
Session.
Ladies and gentlemen, if you would like to ask a question, please press the star or asterisk key, followed by the digit 1 on your telephone keypad. 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 been answered, you may remove yourself from the queue by pressing star 2. Once again, please press star 1 to ask a question. We will pause for a moment to allow everyone to signal. We will take our first question from Karthik Ramakrishnan of Merrill Lynch. Please go ahead.
Hi, everyone. Karthik Ramakrishnan from Bank of America, Merrill Lynch. Thank you for taking my questions. My first question is on the Renewable Packaging segment and the guidance. To understand this a bit better, you've reminded the market that the segment typically books around 85% of the year's operating profit during the first 3 quarters, implying that Q4 will be about 15%. I'd also assumed that we'd also have to add on the benefit of Ostrołęka year-on-year, if it had started to contribute meaningfully from Q4 onward, and perhaps also some volume and price benefits. A bit of clarity on that will be helpful and whether the guidance is actually a little bit conservative.
Very good. I'll try to answer as clearly as I can. As you know, we're not guiding segment by segment, but your point is well made. Yes, the seasonality analysis, I mean, it's not 85%, it actually varies between 80% and 90%, so a number in the middle. That's one inaccuracy in that calculation, one. Two, the Ostrołęka machine, I've seen it with my own eyes up and running yesterday, and I've been reconfirmed that the guidance we've given on the fourth quarter margins, EBITDA margins, is still valid. That'll help. I mean, it's not a huge help, but it does help. I think I don't know what more to say. I mean, the pricing and all that, I wouldn't say anything very significant there.
Okay. In which case, just to understand your potential price cost squeeze during the fourth quarter, could you remind us whether you're long or short Containerboard, and what your rough net sales volume or purchases will be?
We're net short. We were a lot short until we invested the machine. I think our level is 60-plus % now self-sustained. Okay?
Okay. You're actually purchasing quite a substantial proportion on the open market. Finally, I just wanted to understand, what was the dynamic, be it price, cost, or volume, that surprised you with respect to the Renewable Packaging segment in the third quarter? Because you clearly revised your guidance from slightly above to flat quarter-on-quarter into Q3 to substantially above, and Renewable was a contributing factor. A bit of color on that would be helpful too.
The underlying factor is costs, I'd say both fixed and variable costs of cautiousness in forecasting the improvements in fixed cost development in the original guidance, also the fiber cost turned out to be more favorable than we estimated in July. Those were the primary drivers of the great performance.
Just a couple of quick questions as well. Similarly on the Building and Living business, again, you pointed out seasonality, but I'd also expect you to benefit year-on-year from your cost-cutting program. Just to understand sequentially, I mean, was a lot of that already baked into Q3 numbers? Do we have anything further to come through to fully-
Yeah. They've got some to do, and I apologize, I won't give you the exact number, but I guess let me try to describe it this way. That team started their Reshape program about a quarter and a half before, four, five months before the rest of the show. They're further in the progress. More of it is already in their P&L than is true for the others. There's still some more to come. There always has to be some more to come, obviously.
Okay, understood. My final question is on CapEx. You seem to have revised down your CapEx guidance quite substantially. Does that imply that the balance will be taken into 2014, or whether you have any kind of visibility on how we should rejig the schedule?
Sure. Jyrki here. I mean, when it comes to the project-related CapEx, for example, the Chinese board machine, that obviously is then transferred over to 2014 and 2015 as well.
Okay. Should I take it that there is no CapEx into China this year, and you'll actually start your schedule from 2014 onward?
No, we have guided EUR 40 million-EUR 80 million that we estimate that we are spending on the Chinese project this year.
Okay, that's great. Thank you very much.
Thank you.
We will take our next question from Lars Kjellberg of Credit Suisse. Please go ahead.
Good afternoon. I had a couple of follow-ups on the cost takeout. Jouko, you mentioned that fixed cost takeout, the EUR 200 million program is over and above inflation. You obviously had another bunch of smallish programs, and when I last looked, that added up to about EUR 100 million in incremental cost savings from Q4 onwards. Is that what you meant when you're talking about those small things offsetting inflation, and that's why you're going to keep the EUR 200 million to the bottom line, or is there something else that we should be looking at?
The way we track this thing internally is that we look at division by division, BU by BU, mill by mill, and unit by unit cost takeout, which is obviously EUR and also people. That's Reshape. That does not include the earlier announced capacity reduction programs. My logic, Lars, has been that when you take capacity out, you take revenue out and then you get to this spiral, well, how much do you need to do what? The Reshape specifically is only fixed cost without capacity takeout. We just said that in addition to that, the people have to find ways to compensate for inflation. What I don't want is that the cost takeout then gets deflated, so to say, by people saying, "Yes, we saved X," but it's not coming true. We try to keep the three things very separate.
Inflation, and then the earlier capacity reduction programs, which we have announced and disclosed and separately, and Reshape. Does that make sense?
It does. The next question, I suppose, when it comes to the actual P&L impact, because now you're obviously saying you're 40% done, the P&L effect isn't there, and you say by Q2 next year, you'll be done with the program. Can you give us any color of when you actually expect the P&L effects? When should we see this?
Well, we need to see it in the second quarter of 2014.
You're going to see all of this then?
Well, that's what we promised.
Okay. It's not just the program is done and then the lead effect comes later.
Second quarter. I'm sorry?
It's not like the program is then done and then the cost effect comes after.
Well, sorry, I'm talking over your voice. I apologize, the point I was trying to make before I answer your last question is the impact on the P&L first and then on balance, the cash flow impact obviously comes later, and it doesn't come as a step because depending on the country and the contract and the ruling, we take the P&L essentially when the people leave, physically, and that varies country by country. Gradually you start seeing benefits. Obviously, you've seen some already in the third quarter, more in the fourth quarter, and then we better see a lot more in first quarter and so forth in the second quarter. We internally not only look at the actual, we also forecast by quarter and so forth, but I will not give you the quarterly forecast. Lars, you had one more question, I apologize.
No, I was asking the question because you basically said that the impact in 2013 will be limited and you've made 40%, which means 60% is still to come, yet you say it's going to be fully in place from the second quarter. That's why I asked, but I think you clarified that. One final question, or two. One big one and one smaller one. In any shape or form, have you changed your view on your participation in industry consolidation? You obviously mentioned that cash flow is paramount for the Printing and Reading business, and I'm sure you're well aware of all the rumors have been flying around with various new constellations. You communicated a fairly strong view where you didn't see the merits for this for Stora Enso specifically to participate. Is there any change in direction how you think about that?
Final, smaller question, of course, is the capitalized cash cost in Veracel, what sort of amount was that?
Well, Jyrki can take the last one while I'm trying to answer the first one. Whether you call it a change in direction or whatever, I will not obviously comment any specific cases on consolidation, but I say this. One, what I'm telling my own people is run your lives. Don't assume any consolidation or any other miracle to save you or save us. Think the way that every day when we improve, it makes us better, it makes us a more valuable partner for any potential consolidation case and so forth. Because the worst thing I can see is that we would start waiting for miracles or my people who work in the paper sector and paper segment would do that. Their working assumption is, make it on your own.
At the same time, obviously, I, as the CEO, have to be open and consider any alternative solutions and structures, also technical structures that would enhance our shareholder value. As you can guess, Lars, that's the end of my answer on that one.
Okay.
Okay.
Good. On the Veracel, I mean, it's one-time costs and they are around EUR 10 million.
Yeah.
Thank you.
Good. Lars, I thought I should have told you before when I answered about the progress. When I say 40% completed, the actions are completed, the agreements are in there with unions and people and so forth and so on, name by name and so forth. There is another significant number that's in negotiations and in progress. I won't give you that number, but I just want you to understand that if 40% is done, 60% is nothing. There is a significant [symphony] that I will not quantify. Why? I don't want to quantify it before we have these agreements with our counterparts and so forth. That's why I'm repeating my 200 commitment for Q2. Sorry for a late answer.
Thank you.
Thank you.
We will take our next question from Johan Sjöberg of Carnegie. Please go ahead.
Yes. Hello there. Just returning to the cost-cutting program. In the Q2 figures, you were referring to net fixed cost being EUR 7 million lower, and that was like 14% of the targeted EUR 200 million, which I assume gave effect during the second quarter. Now, in the third quarter, you're talking about 40% of the program being dealt with. Could you say what was the impact in the third quarter from this cost-cutting program?
Well, if it's okay, I think to be clear, because it's quite important if you can pull the number. The fixed cost change Q3 to Q3, I think you can, EUR 26 million.
EUR 26 million.
Do the simple math. That's total fixed cost reduction. Remember, quarters, rate and blah, blah. The point of the story, that gives you a flavor on if you multiply it by 4, of that impact now is so.
Okay.
Just a quarterly impact.
All right. Also looking at the Montes del Plata startup. You earlier said that that will have a negative impact, I think, in 2013 by EUR 7 million. Is that correct? What is the new figure now?
There is no new figure.
Okay. EUR 7 million, that one should assume at the beginning of 2014 or?
Yeah. That number was what we already told before, which is the impact of the delay on in the 2013 books, effectively fourth quarter books. The reason why it's such a small number is that even in the earlier schedules, the ramp up takes still quite a bit of time, and you don't get to big contributions in the first weeks and months.
Okay. When do you see this mill being contributing to Biomaterials EBIT? As of the second quarter?
Take it this way. We say a few things. We're starting in the early part of 2014, we said that we expect us, meaning Stora Enso, half to be 500,000 tons, or half a million tons, which is a reduction of 150,000 tons against the previous schedule.
There you can do the typical 40% EBITDA market price impact on the schedule change. I think you can get a flavor on the 2014 EBITDA impact also, roughly at least from the half a million tons.
Okay.
There we go. All right?
All right. Yeah, that's perfectly clear. A final question also regarding your asset divestment program. Can you give an update on how things are progressing there? I think I asked the question earlier, and I think you responded, Jouko, that you expected to see some divestments during 2013. Otherwise, you would be disappointed, if I quoted you right there.
Correct. Thank you for reminding me. Same answer today.
Okay. All right. Thank you.
It's getting closer, but I won't change my answer.
Good. Thanks.
Thanks.
We will take our next question from Linus Larsson of SEB. Please go ahead.
Thank you very much, and good afternoon. Jouko, you mentioned overcapacity in the context of the exception of newsprint, where you have been addressing the overcapacity very aggressively yourself. I wonder how you look at the rest of the graphic paper segments. We're approaching the end of the year and the price negotiations. If not, what can you do to change that in the frame of just a bit more than two months until the year has ended?
We start with the operating rates. I think the Q3 operating rates, the way we read them, are very good news, 94%. Why? You know why, and thanks to whom. On FC, we're still kind of in the nine-ish percent, 90% something, which isn't that bad. On the coated sector, it is clearly below 90, and that's problematic. I do understand after my six and a half years that this has a significant implication on the price situation and so forth. The only thing I would not say, because I can't predict what everybody and anybody is doing in the last couple of months before the pricing negotiations happen. How do I say this now? In the coated sector, there's a clear operating rate problem driven by the structural demand change. I think I have that answer there.
I don't want to speculate ahead of time.
Just practically speaking, from your point of view, you have programs running as we speak. Is it even a theoretical possibility for you to do something before the end of the year, or is that, for practical purposes, not doable?
In terms of capacity reductions? Well, curtailments and all that we obviously do all the time and so forth. I have to be careful. I would not want to speculate forward-looking on permanent capacity reductions, because you know very well, as they do the legislation and so forth. We would have to announce the program separately to our own people and the unions and so forth and so on. How do I say this? We're watching the situation constantly, every day.
What's the update on, for instance, Corbehem? What's happening at Corbehem right now? Is there anything? What's the status there?
Complex process. I've been pushing it even myself and met different stakeholders and so forth. No news to bring yet. Let me put it that way, that I put a lot of time pressure on both my own team and the other stakeholders, because we need to complete that process. Not to be specific that I could say this is the one divestment or whatever that we're going to do this year. The point of the story is, for the sake of the good people there who may be fed up with us, with the time going on and on, but also because of the financial performance of the site, that's one baby we need to get done pretty quick.
I'm working on it a bit personally, too.
Right. The plan A for that mill, is that a repurposing into something which would not directly compete with Stora Enso?
I can't comment because we've signed a few too many non-disclosures and so forth and so on.
Okay.
Looking at more than one alternative.
Okay.
I don't want to-
That's fine
say anything more.
Just one detail coming back to the discussion around CapEx. You also changed your equity injection guidance to EUR 75 million for the current year. Should we assume the balance of your previous guidance in 2014, i.e., around EUR 35 million for 2014?
Yes, that we expect to happen in 2014. Yes.
Great. Lastly, on a pretty general question on Renewable Packaging. Volumes have been pretty strong. If you look at paper and board deliveries up 8% for you year-to-date and for the industry as a whole. Can you describe what's driving which market segments, end uses that you see strength in, and maybe also weakness?
In packaging?
Exactly.
Sure. Interesting enough, I won't be able to go the geographic and sub-segment and product line and so forth and so on, but if you just look at our packaging Consumer Board and Corrugated packaging, I would say that the low single digits demand growth has been consistent throughout this year in 3%-4% kind of a thing in Consumer Board, which includes, not necessarily all of it. On the corrugated side, it's been actually relatively flat if you look at it. We have to remember also that because we tend to do the year-over-year comparisons, last year fourth quarter was actually quite a strong growth in Consumer Board demand. The comparison becomes a little more difficult in the coming fourth quarter just because of the mathematical impact. It's a healthy market. Slow growth, maybe you can call it, but it's at least growing.
As you've seen now throughout the year, it's a clearly value creating segment for us. There isn't a big boom in any way to say.
Okay. Thank you.
Thank you.
We will take our next question from Karri Rinta of SHB. Please go ahead.
Yes. Thank you. Three questions. I'll start with the paper. Paper volumes. They were a bit lower than I had expected, and I do understand that you closed the capacity, but I had thought that you would be able to move those volumes elsewhere. Did you lose market share in the process of closing capacity, or don't you have place on your existing facilities to take those volumes? Where did my logic go wrong when I had expected better volumes for you in paper?
Karri, I would not dare to say that your logic is wrong, but let me tell you what my logic is. Maybe you tell me that my logic is wrong. If you look at the market structural demand change in most cases, we talk about the four, five, 6% runway. If you look at our paper volume development, that wasn't that different. When you say, okay, we close capacity, well, the whole carousel that improves profitability isn't actually based primarily on the idea of that we take a machine that we close, and we take all of those customers to a lower cost asset. It's not a, "Let's get operating rates up only." It's actually quite a selective process.
I think a big part of the return has always been that we try to select the good margin, strategic customers, if you want to call it that, and from the to-be-closed machine and move them to lower cost assets. They also replaced volumes from those assets that we don't think are attractive in margin. How do I say? The math is net, not gross. See my point, Karri?
Yeah, I see your point. All right. That's helpful.
Thank you.
A follow-up on paper, of course. In the second quarter, you had a slide in your presentation package, which showed that you had a strong cash flow from paper, I think roughly EUR 100 million in operating cash flow. You don't have that slide anymore. Can you give us a sense of what was your cash flow from paper-
Sure
in Q3?
Absolutely. If you hang on for one second, I'll pick the number out without slides. Cash flow. Okay. Give me one second. I'm trying to pull. Yep. Okay. The segment cash flows from cash from operations. Renewable Packaging, EUR 194. Biomaterials, EUR 31, and Building and Living, EUR 42, and Printing and Reading, EUR 56. It was lower, but it was still clearly better than, obviously, the profitability level. The important thing here is, well, here you see why we need to take costs out, specifically in paper, so we can keep that cash engine going. Now you have the number at least.
All right. Thanks. Just to clarify, this is before CapEx, right?
Yeah.
All right.
Correct.
A final question. If I look at, again, your paper division, you had sales down 10%, volumes down 8%, and costs down 7%. You have taken out costs, but at the same time, given what's happening structurally and what's happening to prices, the cost takeout doesn't even match what has happened to volumes and sales. If I look at EBITDA, down 44% year-on-year in the first nine months of 2013. My question is that I understand that internally you need to communicate something to your employees, but my question is that how much patience do your shareholders have for let you to continue with these internal actions when you see that it doesn't really play a role? You can take out all costs you need, but at the same time, when prices drop, your EBITDA goes down by 50%.
When will you start taking action which actually will stabilize prices?
I'm sorry, Karri, but now I have to push back a bit. If you look at the past six and a half years, you look at the number of assets we've taken out with a good cash return. If you look at the number of years that this business has been a cash contributor and still is, then I would plea that it's not a question of when we will start taking actions. I think we started a few years ago. Second point, which you also understand very well is when there is a structural change amplified by this weak economic development in Europe, where the demand development in the first half of this year was clearly faster than the structural average, then yes. What did we do? In April, we announced another EUR 200 million program, fixed cost. We took three machines out and so forth. I'm sorry.
Yes, we could not get all that cost out in the third quarter of 2013. I would suggest that this unfortunately happens also that the cost takeout in the legal environment we're in takes a bit more time than you or I would like to. I will not then go back to the structural discussion, but I would express my view that we've done a few things, and we are doing quite a few things now, too. All right?
All right. Helpful. Thank you.
We will take our next question from Antti Kosvikuori of Danske Bank. Please go ahead.
Yes. Thank you. Firstly, could you elaborate a bit about the saw milling and wood products businesses? The volumes seem to be up year-to-date quite, I mean, 3% and then price even more. Where is this positive market impact coming from? Talking about geographically wise. What's your view on that market? Is that the indication that the strength will hold, or what do you see?
Well, okay. Thank you for that question. I think the first point I want to make before I talk a bit about what I think we've seen in the market demand and so forth is actually that there's always a kind of a Risk that we think things are getting great when we compare with a very poor quarter a year ago.
Right? Because the percentage, when you compare with the whole, yeah, it looks better. I would claim that the market development in this year's quarters has been pretty good, I would not say it's really that brilliant.
We've had the specific Japan is important for us, and that's been very helpful for us. We'll see how long that will hold on that thing in the cyclical industry. Middle East, Africa, which is important. We all know those issues there has dampened that demand a bit, and Europe is Europe. I would still claim that percentage-wise, the third quarter looked good compared with last year in demand, total demand in Building and Living.
That's mostly because we're comparing with a big haul.
Therefore, I would suggest the key reason for the profitability improvement is in pricing or volume recovery, it's essentially majority of it is cost improvement that they started early. Self-help.
All right, thanks. Follow-up still on paper side. Looking at newsprint, you talk about the better market balance. Is there any reason for us not to believe in improving profitability in 2014 in newsprint?
If you don't ask me to quantify it-
Which I won't. Obviously, a 94% operating rate as we speak, even in a shrinking market, is very helpful.
If you look at the margin levels, which we don't disclose by grade-
They're miserable. Therefore, the push has been on and is on and will be on heavy duty to improve pricing, obviously, because the returns are not sufficient. That's a very long way to say yes, I guess.
Mm-hmm. Yeah. Okay. All right. Those were my questions. Thank you.
Thank you.
We will take our next question from Sven Weier of UBS. Please go ahead.
Good afternoon. It's Sven from UBS. I would have some specific follow-up questions on Montes del Plata. I was just wondering if you could give us some color, what is actually still missing to be completed on the mill? What kind of equipment or logistics you still need to complete? Then you said, I think in your initial comments, that you've been making good progress over the last couple of weeks. I was just wondering if you could update us, if that 93% completion has now moved even higher. Then the last question is just how you think about penalties in the contracts with your suppliers. Do you think the blame is all with the suppliers, or is there also some blame with you? Those would be my questions. Thank you.
Okay. Let me start from the end. I will not, for obvious reasons, discuss any of the contractual relationships and/or negotiations with our key technology partner in this forum. I apologize, but that's not something that I think would be appropriate. On the completion, the 93% is the summary of the summary because as we all understand, that is an aggregate number of many areas from all the different parts of the actual mill site to the harbor and so forth and so on. The mill needs to be complete in all critical areas. It doesn't help if everything is complete except one part is missing and so forth. I would not want to go, and I probably don't even have the documentation here to go in the specific parts of the mill.
I think the good news is that we all understand, all stakeholders, including the local authorities and the people there, that it's a great mill. We need to complete it. We really need to complete it in good shape because by this time, I've said also to our technology partner very clear that the quality of the completion and the quality of commissioning, which is actually ongoing in many areas already, is mission-critical so that the ramp-up with all the cost there and the capital there is then a good, solid, good quality one and so forth. I think they share that thought with me. The estimate we gave now was conditioned on early 2014. As I said in my CEO comment, I think, and I hope everybody's totally focused on completing the mill right now and not argue about anything else.
We did also say that it is obviously at this late stage quite dependent on that our main technology supplier can maintain the labor relationship, the labor peace that have been very obvious in the past five, six weeks. I think that's all I can say about that subject.
At the moment, there are no more strikes? Anybody on strike still, or is it all up and running now again?
Well, I don't check the strikes daily, but I would say that from all sources I hear, it seems that the critical issues that have caused quite a bit of the issues for our technology supplier in terms of progress and the revision of their schedules the past six weeks. My reading from my people in Latin America is that it has gotten significantly better, but that's all I can say.
Thank you very much.
Thank you.
We'll take our next question from Lars Kjellberg of Credit Suisse. Please go ahead.
My question has been answered. Thank you.
Thank you. As we have no further questions. Apologies, we have one follow-up question from Kartik Ramakrishnan of Merrill Lynch. Please go ahead.
Hi there. Just a brief follow-up question, if I may. I just wanted to double-check how much of the output of volume in your Renewable Packaging division was classified as Consumer Board versus Containerboard, and whether you could just make a quick comment on price and volume momentum for Consumer Board going into Q4.
70%. Hang on. I'm checking the number for what it means before I read it. 70% is Consumer Board. Yes. What was the second part of the question, though? I missed it.
Sorry. Price and volume direction into Q4.
I'm sorry. I guess I said that there hasn't been a big drama on either Consumer Board or whatever. It's been kind of healthy. We don't actually give a guidance on going forward segment by segment. You have to extrapolate a bit from my previous here today discussion. Sorry.
Okay. Thank you very much.
As there are no further questions, I would now like to turn the call back over to your host today for any additional or closing remarks.
Okay. Thank you everybody for attending this call, Jouko will say the final remarks for us.
Good. Thank you very much, everybody, for your interest. It's, thank goodness, rare that I get to announce the same quarter twice. I think it was a great quarter, I can only assure you that by all means, organic and others, we try to make many more great quarters where we can not only have your attention but also impress you. Thank you very much.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.