Good day and welcome to the Q2 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.
Thank you, Rhonda. Welcome everybody to Stora Enso's call. Today we have four people speaking in this call. It is, of course, our CEO, Jouko Karvinen, and also our previous CFO and current division head of Printing and Living, Kalle Sundström. Then our Acting Chief Financial Officer, Jyrki Tammivuori. We will start now with Jouko's and Kalle's presentation, and after that, we will have a Q&A session. Please go ahead, Jouko.
Thank you, Ulla. Thank you everybody for joining us on a summer Friday afternoon. Appreciate your interest. Let's go straight to page three. Second quarter results, as expected, or I guess the specific term is pretty exactly as we guided in our outlook in April, EUR 124 million. Cash flow, that's the good news, EUR 344 million. We're back to our rock-solid cash flow generation, which we obviously need for our transformation. Strong liquidity and okay net debt to operational EBITDA. Diving into it then, the Renewable Packaging, good performance, improvement. Very good improvement in Building and Living, and to be very totally transparent there, half the improvement, we believe was our own doing with the streamlining efforts that started in the fourth quarter of 2012 in Building and Living earlier on than the others, half the market upswing.
The big disappointment and the one number that I'm very unhappy with is the Printing and Reading loss. That is not acceptable. The good thing there, obviously, is that we have launched the streamlining program in April. Before you tell me, I can tell you, yes, we should have started maybe even earlier, but at least we have started it. We're in the implementation, as you will see in a few pages. The point of the story is it's very important that we don't lose time, we don't hesitate. We need to keep moving in this difficult market situation. We need to be sure that we get ahead of the curve and nothing else. Page four. There you see both the EBITDA development, four quarters rolling, which in the past two quarters has come to a low level.
At the same time, you see that we are able to keep the cash generation going. I do, as you do, understand that that gives you a bit of a time delay, the message is the same. We have to get our costs in shape because only a solid EBITDA generation longer term is what brings you the cash that we want. On page five, we actually show you the cash generation from operations before and after investments. There you can see that in Q2, even with the very disappointing Printing and Reading results, the cash generation was significantly good and obviously also important for our company. Moving on. Page six. What's the news here?
The news is that we still believe that the structural transformation of the market, the digital transformation, as we called it in the printed media, is continuing, we believe it is in the 4, 5% a year. What we see now, specifically in the coated grades, is that the weak economic situation of Europe, the E.U., and also our customers has turned into an additional reduction. The point of the story is that in coated grades, we talk about almost a 10% reduction year-on-year. Point of story, we need to speed up in improving our cost base and our competitive base. We get to page seven with our first progress report, I'd like to spend some time on the streamlining and structure simplification program, the EUR 200 million program we announced.
First point, the target to the team is EUR 200 million annual net fixed cost savings, which means that any inflationary pressures have to be compensated. In addition to that, we're not going to come back in a year to say that we saved, the inflation ate half of it. EUR 200 million is EUR 200 million. We will now start and show you a progress report every quarter. We saw the takeout of the cost, which is the program impact. We show also separately other impacts on fixed costs. Point being, capacity reduction programs, other programs announced earlier that still have an improving impact. Also if you start a new business like the China announcement, I'll talk about it.
Those we show separately, because I think it's really important for us and you also that we are very specific that when we say we're going to deliver EUR 200 million cost out, we deliver that in this program. The simple, very early progress report is if you do the simple 7 million times 4, that's about 14% of the run rate savings happen in Q2 due to the program, whereas there were other savings, obviously, because of other things. We also will show, like we show today, the year-on-year actual fixed cost reductions or fixed cost in 2012 and 2013 and year-on-year basis, because we also believe that we need to show you what we take out. The only interesting thing is that what's there is competitive enough. This will be repeated many times. Moving on. Page eight. First, a few progress reports.
Montes del Plata, we now say that we estimate to begin to start up end of Q3. The April announcement was during Q3. We know now better because we're closer, we're 90% complete. The closer we get, obviously, the better we know where we are and both Stora Enso, Arauco, Montes del Plata, and our key partners, that's the target that we start at the end of the third quarter. There is no other news in that context. This year it's going to be a slightly negative impact. Next year, we expect to have the full 650,000 tons, which is our half of the volume coming out, and then once we really get the premium quality, the design capacity and so forth in the latter part of 2014, we expect the full positive EBITDA impact from the project. Page nine. Ostrołęka, the new board machine.
On plan, proceeding according to plan and so forth. We expect about 20% EBITDA, again, in the latter part of this year. That'll come soon. I hope, and I claim, the good news from China. Many good news. First of what we have received in the very recent weeks, a written stamp approval, final approval from the Chinese NDRC, the National Development and Reform Commission. The second good news is that maintaining our original targeted returns, internal rate of returns, we're now implementing the project in a different sequence than before. The original plan was basically build the whole integrated on one go. That was the EUR 1.6 billion number.
We're saying, no, we start with the board machine and the related industrial investments, that should be ready 2016, which is about a year earlier than we could do it in an integrated fashion, which is great for our customers and our market access, and it'll help obviously with cash generation when we implement the second phase, which is the chemical pulp mill. That obviously then has two implications. The balance sheet impact is significant because we're talking about a half the investment in the first phase and half in the second phase. I want to now be super clear to you, the project is still an integrated project. It's a difference in the implementation sequence. Nothing else changed. We repeat here that the project will clearly exceed the 10%-13% target.
Very good, I think, for our financial capability, and to be honest gives us a lot more opportunity in that sense. It also from a responsibility point of view is very good because now we don't have to rush, so to say, in ramping up the forestry operations and all those things, and even land expansion because of the fact that we'd have a pulp mill waiting for wood. We can do it in a controlled, cost efficient, and responsible manner. I think for the company, it's also very good news. If you ask, what do you mean launching? I'll tell you. An hour ago, I approved the very small capital investment to start leveling the mill site. This is for real. This is not any more PowerPoint. We're off and going. The next, page 11, is a different, clearly a lot smaller financial investment.
I think quite a critical sign of what we want to do. Accelerate innovation is what we call biorefinery at Sunila, which many of you know as a relatively old pulp mill. We invest EUR 32 million, and what do we do? With good contacts already with global customers and tests even, we will start producing lignin to replace fossil materials in insulation foams, in adhesives. In the second phase, I'd call it more a bit later, also replacing fossil materials for carbon fiber, which is a very exciting opportunity. I will not tell you the IRR of the project, but you can imagine the value of these products is in a different class than the traditional forest industry products. So it would be unfair to talk about clearly exceeding 13% because it's so much more.
Target to start it up in 2015 Q1, the most important thing to me is we believe that we have know-how and capabilities that will allow us to replicate this investment in several of our existing pulp mills. Who knows, even become a technology provider one day. That's the news, so to say, now I will hand over to Kalle as the CFO of Q2. Specifically because of the trauma and challenge in the Printing and Reading area, I've asked Kalle now to comment specifically in his new role as the Division Head for Printing and Living, also the earnings situation in Printing and Reading. It is a poor result. We're not going to explain anything else.
As before, we need to act, I asked Kalle to talk about what are we doing about it, not what are we only planning to do about it. I am convinced that with Kalle's leadership and his team, with the tough program we already launched in April, we can significantly improve our performance. With that, Kalle, over to you.
Thank you. Before I go in on the group financials, I will spend some time on what happened in Printing and Livi ng. I think this slide is pretty self-explanatory. It is, as we have said, a structural decline market, we continue to follow that down. We have taken out basically 110,000 tons of capacity with the three closures, one in Kvarnsveden and two in Hylte. What happened is that, if you look upon the sales price and the mix and the volume impact, you're talking here over EUR 60 million of profit disappearing while we basically haven't had any improvement in the fixed costs. That's not sustainable. What in reality is that we are very much focusing now on going through this cost reduction program that Jouko mentioned, obviously, the majority of the announced EUR 200 million is coming into Printing and Reading.
That is very much in the focus to have a speedily execution and focus on cost and productivity. It is also, I think, an area where we need to continue to work is to increase the flexibility to change between fixed and variable costs. It's very much about simplification and differentiation. Last and not least, we also need to decide on how we do business. Not all customers are equally profitable. With that, I would like to hand over to the next slide 14. This is the summary financial of the group. I think you all studied it and knows it as probably as well as I do right now, but I would like to point out a couple of things. Sales were basically on flat level, even with movements between the different business areas on a year-on-year level.
We have the sequential increase, which is the traditional seasonality in the business. I also would like to point out that on the operational EBIT, it is some 70 basis points lower than a year ago period, and it's up 220 basis points compared to the previous quarter. What I would like to highlight is also when it comes to the cash flow from operations and our liquidity situations. We are now having EUR 1.8 billion, which is EUR 100 million up from last quarter in liquidity. That is despite the dividend and despite the seasonally high payment of interest in the second quarter. However, supported by the selling of the Tornator and the Bergvik debts that we did during the quarter, which is part of the release. With that, I would like to move into the next slide, which is an explanation, basically what have happened.
The headline of the slide is that fairly stable despite the challenging paper market. If you then look and have an understanding that the sales and price mix of minus 1.5, 1.4 percentage points on the year-on-year figures, it's EUR 40 million, and over 95% is actually coming out of Printing and Reading. Volume or minus 0.3% or EUR 8 million. That is basically slightly more than EUR 20 million coming out of Printing and Reading. However, compensated by increased volumes, mainly in Renewable Packaging and Biomaterials, of totaling EUR 17 million plus. Variable costs are EUR 25 million lower or 0.9 percentage points. That is basically explained by lower fiber cost of wood, recycled paper and pulp, and chemicals that is cheaper than the year-ago period.
It also includes a EUR 15 million increased cost of energy, which is coming from green certificates, but also that we had some issues in certain plants with boilers, so we have to buy. Also some of the mix of the energy that we have bought, it's been more coal in this period than expected. You basically have a fixed cost variation of 0.4 percentage points or EUR 10 million, and that's a number of smaller items. If you look on the sequential, you have the sales and price mix increase of 0.3 or EUR 9 million. That's almost everything coming out of Building and Living, and it's part of that seasonal strong quarter that Building and Living had in Q2. Volume, minus 0.3 is EUR 9 million, and that is basically coming out on a slightly lower sales from Printing and Reading and Biomaterials.
Variable costs are lower. It's the same thing. It's the fiber supply, about EUR 26 million or one percentage point. If we move into the next slide, that is the guidance. We guide for Q3 or the next quarter. Sales expected to be slightly lower, operation a little bit in line with or slightly higher. If we take the summary, the result came in as we guided. We had a solid cash flow. We had strong liquidity. We are advancing with a 14% realization so far on the EUR 200 million fixed cost savings on plan. European paper, we need to get ahead of the game. As Jouko Karvinen said, maybe we started too late, but we started at least, and we are actually under implementation.
The other one that I think is very important to turn out is that we have an acceleration in our transformation, especially with the approval of the Guangxi investment and the Sunila biorefinery, but also that both MDP or Montes del Plata and Ostrołęka are getting into traction. With that, I hand over to Q&A.
Thank you, sir. The question and answer session will be conducted electronically. If you would like to ask a question, please press star 1 on your telephone keypad. Please ensure 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. Again, please press star 1 to ask a question. We will pause for just a moment to allow everyone to signal for questions. We will take our first question from Mikael Jåfs of Kepler Cheuvreux. Please go ahead.
Yes. Hello, everybody. Good afternoon. I have two questions. The first one is more relating to the paper division. I read yesterday in a trade magazine that paper pricing of publication paper seems to be going up in Europe for the second half. If you please could comment on that. The second question is on the Building and Living. You say that you've seen a seasonal uptick there in profitability. My question would be, should we expect then that to sort of fall back again during the second half? Thank you.
Okay. This is Jouko. Hi, Mikael. Let me try to respond to that. Before I give you any numbers, let me be very explicit. I will comment things that we have actually agreed with our customers, or we have informed our customers of our intent. I will not talk about some of the other pricing initiatives we have that we have not communicated to the customers because I think it's inappropriate to try to communicate through this channel. Long story short, if I start with newsprint and specifically standard newsprint, yes, we have agreed on the open volumes for an increase, I'd say in the order of magnitude of about 3% for the second half. I think it's a start to be exact if you look at the numbers. The operating rates after the capacity reductions are very high and so forth and so on.
We have informed customers on SC and uncoated wood-free paper for, say, late third quarter initiatives to improve pricing in those segments, that's where I stop. The overall fact is, in my opinion, that if ever
This cost rate we're on and implementing the reshape and the streamlining faster than ever is mission critical. Those are the data points I can share with you, Michael, on that one. On Building and Living, I'll give you a short version. We had a good quarter, and we were very open in saying, "Well, let's take credit for what the team has done," which is about half of the improvement because they started fourth quarter, their cost rate. That's coming through more and more within the coming quarters still because it's not all true. That will continue to support their earnings. There is really a seasonal thing also, Q1, Q2, the construction, the summer, if you want to call it, and that way and so forth.
Let me summarize that answer that I'm really glad we started in the fourth quarter the effort, and we're not done there either. There's some of the EBIT in Q2 is seasonality, but I don't expect to go back to the situation for the past three, four, five quarters where I was very negative on the total lack of profitability. I hope you can make something out of that.
Okay. Many thanks.
Thank you.
Thank you. We will take our next question from Johan Sjöberg of Carnegie. Please go ahead.
Thank you. Could you give an update on the impact now from this big cost-cutting program? It's fully implemented as of the second quarter 2014, but when should we see that come through in your P&L, would you say?
I try to be clear here. The one table on the slide where we show the overall fixed cost went down, if you go back to page seven, EUR 26 million. Us being the honest, transparent people, we say only seven of that was the program impact. You multiply it by four, you get a 14% impact already now. It's going to continue now more and more every quarter, Q3, Q4. It's a ramp-up, so to say, of the impact. It's not a linear ramp-up. The important news is it starts being more every quarter, but the big impact, I'd say, is in the last quarter of this year and especially first quarter of next year, because come second quarter, we have to have all of that EUR 200 million.
I assume that this minus seven now in Q2 is related to the EUR 30 million program within Building and Living announced in conjunction with the Q4 figures, isn't it?
I would say of that seven, around 50% is coming out of the Building and Living announce and 50% is coming out of what we're doing in Printing and Reading.
Okay.
I think it's very important that we are trying to have this format that we have on the slide seven.
Yeah.
It's also depending, because this is a negotiation according to the laws of the Co-determination that you have in Finland, Sweden, and Germany, which are the main countries. Depending on how we get to an agreement with our counterparts, but we are very confident that we will deliver this, and we will show it like this quarter by quarter.
That's great. Also just coming back to your slide 13, Kalle, commenting upon the Printing and Reading tough environment. Normally, we are spoiled to see normally Q2 being better than Q1. I understand this is a nice bridge year-over-year. However, looking quarter-over-quarter, it's hard to understand how the underlying EBIT can drop by EUR 19 million quarter-over-quarter. Normally, we see some type of seasonal uptick or what am I missing?
Both volume and prices were ticked down in the second quarter.
Okay. All right.
We did not have any reduction in reality in costs.
Okay.
It's very much volume.
Yeah. All right. Also, a final question. Apart from being Head of Printing and Reading and Building and Living, you're also in charge of divesting non-core assets. Could you give us some thoughts upon what type of assets we are, or could you just give an update on that situation?
What we are doing, I would hand over to Jouko on this question, it's important. I need to spend 120% of my time on making sure we change out the cost and getting back to be working in a different way, how we work with customers. A lot of the divestments, I will actually make sure that Jouko and Jyrki are actually going in. Maybe you want to say something about that.
No, thank you. As much as I loved having Kalle as the CFO, that was over June 30th. He is the division head speeding ahead now to solve this issue for us. The assets that we're planning to exit from, that's a group-level effort for all the BS, essentially. We have put and are putting a small team together with both M&A type of people, but also business people into that dedicated team. If you don't like what we get done in the coming quarters, you should call me, not Kalle. On a serious note, Korvenkangas that we talked about openly before. Difficult to do it in a way that minimizes value destruction or maximizes value creation, if you want to be more positive.
We are in the process. My guidance, and I've been quite involved myself, is yes, we definitely want to finish that project. I'd rather take a few more months than do something silly. I don't want to solve my problems with too much money on it. The others, which I will not name now, are, I'd say, a couple of more in the works. More positive ones also. I hope you forgive me that I won't name them or give you more specifics. Trust me, both me and my board are very focused on getting that simplification done for the company. You just have to give us a few quarters to show more concrete results.
Okay. Is it fair to assume that the ambition is to have something on the table during 2013? Do we have to wait until 2014, would you say?
I'd be very disappointed if it's not this year.
Okay, great. Thank you very much.
If it's not this year, I'd be disappointed. Let me answer it that way.
All right. Great. Thank you.
Thank you.
We will take our next question from Kari Rinta of SHB.
Yes, thank you. Kari Rinta, [inaudible]. China, the decision which I think is smart, but I would like to understand the background of it. That initially you were planning on building a pulp mill that is double the size of the packaging machine that you have. Now you are delaying the pulp mill. I want to understand if that's a reflection of how you see the pulp market developing, i.e., it might become oversupplied in the next few years and you don't want to contribute to further oversupply in the market, or is this a reflection of something else? That's my first question.
Okay. Thank you for the question, Kari. It's a very good question for the conference call because it's not based on some kind of a demand-supply pulp scenario. It's based on making a great project happen with the original returns, getting onto the consumer board market a year earlier than with the integrate, significantly reduced financial risks, and also reduced responsibility risks because you're not being rushed there. The concept is still a full integrate, which means a board machine, CTMP, and a chemical pulp mill with the option to add another board machine in the future. If you think about it, you could say Well, I'll put it this way. I love it because you might say we're building backwards, I think now we're actually building the right sequence.
We get to the market, build our market position, the customer relationships, it'll have a great impact on it. We can buy pulp from the market. In fact, we have our own pulp coming soon more, that's not the point. It has nothing to do with that. It's a de-risking, making sure that it works in an attractive financial way and it also works in a responsible way. That's the only reason. The other thing that we are convinced that long-term, plantation-based demand pulp will continue to grow. Yeah. I understand when there's a lot of plantation-based pulp coming online in a short period, you get volatility. This is for those reasons that Jouko mentioned. Long-term, we believe in plantation-based pulp. Absolutely.
All right. Fair enough. That's helpful. Second question relates to the cash flow generation, especially in the Printing and Reading. How much of that came from a working capital release that was released from the paper machines that you closed down? Was that a meaningful contribution, possibly, the second quarter cash flow from Printing and Reading?
Printing and Reading generated, as you saw on Jouko's slide early on in the presentation, almost EUR 120 million of operating cash flow. The effects, as I said on slide 13, from Kvarnsveden and Hylte, is very limited. This is basically that we managed to keep the working capital over sales at the same level, basically, at the end of the year. We've been working very hard with that. Obviously, a lot of the targets that we work with in Printing and Reading is cash-focused because profit-wise, it's nothing to be very proud of. The cash flow, the people have worked hard on. Do you want to add something, Jyrki? I think that's a very fair summary. Impact from the closures is small. I'm sorry, Jouko wants to add something. I think it's an important point, again.
I think, because obviously when you say cash engine focused on the cash, that also means that we would never produce into inventories to compensate for the weak EBIT. Cash is king.
All right. Finally, on the Sunila project, I'm not an expert on the lignin market, how much is this in tonnage that you expect to produce in Sunila when you're up and running with the biorefinery? You talk about this being scalable and can be replicated at your other mills. Is there a risk of that you disrupting the market? I just want to get some numbers, some understanding of the size of this market.
I don't like tons. I like EUR. Try to understand that the first phase to Sunila is the revenue is in that phase, it's less than EUR 100 million when we're up and running. Which essentially means that within our own opportunities longer term, the revenue will be hundreds and hundreds of millions of EUR. The more interesting thing to me is that the value of the product with multiples of the traditional products. The figure I look at is the margins and the profit contribution of these things, and that's meaningfully significant for us. The interesting part is then that because we're replacing polyols and phenols, and later on carbon fiber raw materials, is that the market is so big that that's not going to be a problem.
When we can at or below the fossil alternative cost produce things with the same quality of product, then in that type of a business scenario, there is no demand supply issue because we're such a better alternative. Without subsidies also in terms of the actual running business. This is why I'm all over this, very interested in this business concept because everything we calculate in terms of the business returns on this business, well, they're not based on an EU subsidy like on biofuels or wind energy or something like that.
This is real business. I happen to think it's the foundation of a healthy investment. You'll hear more about this in the coming quarters. I think it's very cool.
Did you have a number on the tonnage in Q4?
No, I don't. Actually, I don't, but we can get it to you. The sales is slightly under EUR 100 million when we're up and running from the Sunila investment. With very good margins.
All right. Thanks.
We will take our next question from Linus Larsson of SEB.
Thank you very much, good afternoon. I'd like to come back to your guidance statement for the third quarter, and if you could maybe add some detail to it. For instance, when we try to bridge the EBIT from the second to the third quarter, what kind of maintenance cost change will we see? Other costs, price volume aspects that you would like to clarify as well?
Jyrki, you want to take this or you want to?
I'm trying to decide which one of my two CFOs is going to answer.
I think Jyrki will take this one.
Yep. Basically, the maintenance on the third quarter is on the same level as on the second quarter.
Okay, good. I take it that, in your guidance as you've put it, that includes a certain price improvement in paper. Is that right?
Yeah, I'll take that. Yes, it does. Remember, it's a limited impact because I told you about the newsprint situation which you have agreed upon, which is improving. Newsprint is, so to say, in this difficult situation, one of our best anyway. The others either come later or I won't talk about them yet. The pricing impact in totality of the company result is still limited in Q3.
There'll be more next year.
Okay. On the, for instance, variable or fixed costs, any pointers to share?
No. We expect the same historical pattern as previous years.
Okay. That's fine. Thank you very much. Coming back to the discussion about non-core asset divestments, could you provide any ballpark enterprise value on the assets that you are at least considering to potentially divest?
No, Linus, I appreciate and fully appreciate that you're interested, I won't be able to give that to you. If it's okay-
you have to just wait until the news comes out, and I promise it'll come out as soon as possible. I have a great interest in getting this part of the journey done, too.
I have to be very clear, we are not talking about Bergvik or Tornator.
That one.
That one I would like to clear because there's been some speculation about that.
Yeah.
Excellent. Also in relation to this, given what you announced today about the changed pace of the Chinese investment, does that change your eagerness to sell non-core assets? Is that a completely separate topic?
That's a completely separate topic. We're absolutely We were never thinking of selling non-core assets in a fire sale to finance China. Not my cup of tea anyway. My thinking is very clear and has been We either have to invest in business and make it more successful or exit it. The worst thing we can do, and there are some sad examples in our industry, you sit with marginal businesses and you destroy them because you don't do anything with them. That's the thought process there.
Right. Yeah, that makes sense. I would also like, if we talk quite a bit about supply demand in paper, when we look at pulp, there is also a potential supply demand issue coming up. You are contributing to growth in supply yourselves. Are you contemplating any capacity closures in connection with your additional of supply into the pulp markets?
Well, let me tell you, I'm working day and night personally to add capacity to the short-fiber pulp market right now from Uruguay. That's the focus there. No, we don't have any specific capacity reduction plans. You've seen that we've done some changes, for example, in our wonderful Enocell, we went for dissolving pulp and so forth. In Sunila, interesting enough, maybe I should say it more clear, this lignin effort also not only reduced the CO2 footprint and all that, but it actually improved the profitability in terms of break-even points and so forth. We're trying to become more competitive in these areas, but nothing further.
Great. Finally, coming back to Printing and Reading, you talk about the importance of staying ahead of the game and being ahead of the curve, et cetera, and that has been a recurring theme. I just wonder during the course of your rethinking process, if you have also re-evaluated the merits of consolidation through M&A in the context of European graphic paper.
Short answer is yes, I am thinking about it, not every day, but every few days. My fundamental view, as it has been, is twofold. One, everything we do to improve our cost position, competitive position, is going to be positive and valuable to our shareholders if and when. If we find a consolidation opportunity one day. The other side of that same coin is what I don't want now Kalle and his team to spend even a day on is waiting for some miracle to happen to solve the problems. Not my cup of tea again. Final comment, because you're too polite, I am a bit upset with myself because To be honest, I've always thought that I'm not the slowest CEO in the world, but on some of these streamlining things, I say we should have moved earlier.
I'll try to learn from that. Anyway.
In principle, you think there's nothing wrong with your way, apart from the pace and one can always debate how fast one should pursue things. In principle, you think that you have the tools in place and, in principle, you are addressing the problems of the paper industry in the right way. That's your conclusion?
Don't take this negative. I'm not trying to solve the paper industry problems. I'm trying to make sure that we solve the Stora Enso problems. What I'm trying to say is everything we do, including this streamlining program, which we could have started earlier, but we've been going full speed, gas pedal down now. That will support any possible structural solutions in a positive manner for Stora Enso. Then I think the risk is, and I've said that openly before, is if this magic word consolidation becomes too overwhelming, then I'm worried that we lose momentum and speed. That will be fairly dangerous when, back to the second quarter, when you have demand erosion of 5%-10% year-over-year.
We don't have time, and we need to move on, move on, and the better we can get ourselves, I assume the more attractive talking partner we'd be to anybody.
Absolutely. That's great. Thank you very much.
Thank you.
We will take our next question from Kartik Swami of Merrill Lynch. Please go ahead.
Hi there. Thank you for taking my question. Kartik Swami calling from Bank of America Merrill Lynch. First question was a little bit more color on the packaging side of your portfolio. We've seen some announcements from some of your peers raising testliner price increases, and I was wondering whether Stora is considering participating in that and what you believe are the chances of success given the focus has been on increasing prices in the middle of summer. The second question was the guidance on your capital return target for China seems to have a little bit of variability, so above 13% return on capital. I was wondering what stops you from putting a more concrete, higher target on it, and where do you think the risks are?
Is it supply, because daily we see some news of capacity additions in China, potentially not directly in the niche that you're focused on or whether it be demand on the macro front and uncertainties there. My final question is on your plans to convert a mill into kraftliner. I thought that the supply-demand dynamics of the kraftliner market seemed incredibly compelling, and there was probably little to stop you from doing the conversion and getting a very good return on capital. Is it more that you're putting in place a review period in order to evaluate whether you could do it on a technical basis, or are there still some doubts on how supply-demand could evolve?
Okay. If I can do this backwards a bit. The conversion plan, we've done a pre-feasibility study, which I liked a lot. What you do next is you do a feasibility study, because still you need to do the process correct, and assuming that result is as good as the pre-feasibility study, well, I'll tell you what we do then. Then we convert. Because it has other benefits also in our uncoated wood-free portfolio and so forth and so on. That's the first thing. It's just a process and a disciplined process to do a project like this. On the China project, clearly exceeding the famous 13%. At this stage of the project, that's all we say. It's more a practice that we don't individually start plotting out profitability or return targets project by project.
You see now in a smaller case in Ostrołęka that we actually, once we get closer, we even give you an approximate EBITDA target, so forth. It's a bit of a timing question. On risk, very evidently, this two-phase implementation is dramatically lower risk. Not just the fact that you spread the CapEx over a longer period of time, but building a greenfield board mill and CTMP is a lot simpler thing than building a full integrate on one go. If there were risk, it's a lot better now. I sleep a lot better now. Anyway, on your first question on containerboard pricing, I obviously won't comment what competitors are saying. Specifically, I won't comment that, therefore also say that what's true in paper is true in containerboard and everything else. Pricing quality is the key interest for us.
I hope you forgive me, that's where I'm going to stop.
Okay. Thank you.
Thank you.
We'll take our next question from Lars Kjellberg of Credit Suisse. Please go ahead.
Thank you. Good afternoon. Most of my question have been answered, but I just want to come back to China. The original plans you talked about, obviously the pulp mill, and that was a critical component to getting the right quality, et cetera. At the time you said it's not really doable with purchased pulp. That seems to have changed. I just wanted to hear your thoughts on that. Secondly, on the pulp mill, when should we expect that to start up? Has the budget in any way changed for the total, probably the EUR 1.6 billion that you talked about in the past?
Okay. Hi, Lars.
Hi.
The total budget hasn't changed. That's not the point. I'm not obviously been in all the discussions. Using imported pulp, that hasn't been a, well, you can't do it issue. It's been essentially a reality calculation where a lot of the value of because trust me, we've broken the returns and the value chain into the pieces. The original plan, which was based on upfront local pulp, is based on a very good contribution from the local plantations and so forth and so on. If you think about it this way, the only so to say incremental cost, if you want to call it that, is that we will have to then recertify the fiber for the products once we move in the phase 2 to the local pulp. We are very comfortable in using imported pulp in the phase 1.
Actually it'll make it quite a bit simpler because then you don't have to deal with ramp-ups of a pulp mill and a board mill and everything, then trying to qualify the quite critical qualifications of fiber for consumer board. That is there. From an overall return and profitability point of view, the fact that the pulp mill will come a few years later on the total life cycle of the investment, no big deal. Final detail, when we now go forward, we have agreed with our partner that we start practicing harvesting. We will actually sell wood from our existing forestry base, which is a good contribution, too, in the phase 1s. It not only gives us a chance to do it efficiently and responsibly, but it starts supporting slowly also our cash balance in the company there.
I hope I answered your questions.
Just to be clear, the pulp mill we should expect to start up towards the end of 2018?
I'm sorry. I apologize. We gave now early 2016 board machine startup. To hopefully make a good job, I've decided not to ever again give you an exact day when I start up something like I did a couple of years back when we talked about the Montes del Plata mill that I have to change. We won't give you an exact date, but essentially, we want that coming up and producing world-class board before we would launch the stage 2, also because of the cash generation and so forth and so on. If the board machine starts 2016, you can do the math thereafter, and then what it takes time to build the pulp mill and so forth, that gives you the kind of timeframe. 2018, 2019 would be kind of the timeframe than if you look at the normal two and a half year implementation.
Sure.
Is that okay, Lars?
That's fine. If you can give us some guidance, what's the full year CapEx for this year and what you expect for 2014, just to clarify with this revised plan.
I will tell you, I'm going to read the number so I don't have to say approximately. It's this year, including China. Now in the CapEx and the equity injections combined is in the EUR 540-EUR 610, is actually in the release on page seven, and that includes about EUR 90 million this year for Guangxi. Going forward, we'll update you more about the schedule. You can do pretty much the math if you see that the phase 1 is about half of the investment, seven, 9, 8, okay.
Sure.
Lars, then in the separate press release on Guangxi, you have a schedule of some of the CapEx expectations for the Guangxi project.
Yeah.
Which is pretty much halved relative to your previous guidance for the combined project.
You got it.
All right.
You got it. We're trying to be transparent here.
Oh, very good. Final, final question. You talked about newsprint, you talked about open contracts. Is there a significant part of your newsprint business that would not have been up for negotiation going into H2?
To be honest, I don't have Do you have the right number right with you? The rough number?
It is about a quarter that has not been contracted.
Okay. Thank you.
There are no further questions. I would like to turn the call back over to Ulla Paajanen-Sainio for any close concluding remarks.
Okay. Thank you everyone for attending the call, and let's be again in touch in October when we come out with our Q3 results. Jouko will now have some final words here.
My words are never final. I want to thank you again on a summer Friday afternoon for your interest. I think one thing I can promise you that we're never going to be a boring company. We'll do things, and we'll do difficult things. We'll do great new things, and I just hope that I'm going to talk to you later in about 90 days with some great things to discuss. Thank you very much for your interest.
Okay.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.