Good morning, everyone, and welcome to Stora Enso's conference call today. And today, we are dedicating the call to the announcement what we made just an hour ago, namely a containerboard machine investment to Poland. In a minute's time, our Executive Vice President, Masno Nander, who is in charge of our Packaging Business Area will be giving you a briefing and then we will open a Q and A session. But I just want to remind everyone here in the beginning that this call is reserved strictly to the containerboard machine investment in Poland and we are not commenting on any market or results related information. So after these words, Mats, please go ahead.
Yes. Thank you, Ulla. I'm delighted, of course, to sit here today. And the question is what we are why we are here today. Well, as we see it, we are continuing to build a stronger Stora Enso.
And in that sense, we are specifically continuing the development of building our Ostroleka site to the cost benchmark in Europe in this specific part of the industry. As an introduction to this, I would like to present to you a few slides here. And I suggest that we would start with Slide number three. This the investment that we are presenting today are fully in line with the direction that Sturenza has the strategic direction that Sturenza has announced. It's an investment in a growth market, although in Europe, and it's focusing on building a stronger fiber based packaging business.
And if we then continuing with Slide number four here, the we are going to serve a fairly big market or a very big market, although this investment is focusing on Central, Eastern Europe and specifically to serve our plant network. But we have to remember that the European containerboard market is in the size of 26,000,000 tons in 2010. It's a market that is growing and it's growing primarily in the recycled fiber base containerboard and also what we are calling the new model lightweight containerboard demand. The overall demand in Europe is growing around 500,000 tons annually. And the growth rate in Central Eastern Europe, where we are primarily located, is with a higher rate than this is representing.
If we then would go to the next slide, where as we said, this is going to serve primarily our own plant network. We are quite short in terms of containerboard supply today. And we have over the last ten, fifteen years built quite a successful corrugating operation in the Northeast Border Of Europe. We have today 20 plants with a capacity of 1,300,000,000 square meters. What is interesting to see is that we have a footprint today where two thirds of our capacities in Central Eastern Europe and it's fairly or a very new and modern capacity here.
We're today consuming around 560,000 tons of containerboard already today, and we have around 2,900 employees. If we then move over to the next slide, the whole purpose of the call today, as I said, was to present the containerboard investment in Ostroleka, Poland. It's a EUR $285,000,000 investment, and it's done in a very cost efficient way. We will be producing around 455,000 tons annually, and our own integration level in our own corrugating units will be increased from 35% to 60%. At the same time, as we are starting up this new machine, we will also close down PM2 in Ostroleka, limiting the net impact to 370,000 tons.
The new machine here in Australia will be the cost leader in Europe. We have a very efficient energy solution. We have started up in quarter four last year or ending '4 last year, the new power plant in Ostroleka. It's a plant with relatively low fixed costs. And since there is a brownfield investment, this is a brownfield investment, we could also limit the capital expenditures here when building this capacity.
The whole project is planned to be started up in the 2013, excuse me. So there is still some time to prepare and to do the project. Why have we then chosen Australek as the site? Well, if we look then into the next slide there. First of all, the location is excellent in terms of serving our own corrugating network.
It's in the heart or in the center here of our own corrugating network. We have just finalized a very important energy and power plant investment that has been designed to accommodate this new machine. And there is a capacity or a potential to collect more recycled fiber in Poland. First of all, the paper and board consumption in Poland has increased substantially over the last ten years. And the recycling rate in Poland is only on the level of 41%, which is well below the European average and European levels.
And today almost 2,000,000 tonnes of paper and board goes into landfill in Poland. This is of course a very good opportunity to be used. On top of that, we are only already now we are having our own established collection network of recycled fiber in Poland and we are planning to expand that and to capture this opportunity. And this of course, this new containerboard opportunity and this raw material supply will also support further growth in growth markets in Central Eastern Europe and Russia. So we feel that this is a perfect location.
It gives us the cost leadership in Europe, but it's not only economically a good and sound investment, it's also a very sustainable investment going to slide number eight here. I've been talking many times now about our new efficient power plant, but the new paper machine has a low energy consumption as well, the low water consumption, and we are able to produce a new generation of lighter packaging based on lightweight containerboard. And the growth of these products are quite big and bigger than the average growth of product. As a summary, then going to the next slide. We are building now a stronger packaging by renewing our containerboard capacity.
We can strengthen our leading position in Central And Eastern Europe. So this is supporting our growth strategy in packaging. The market in Central And Eastern Europe has a healthy growth and there is a demand from customers to for modern lightweight corrugating packaging and that is increasing quite rapidly. And last but not least, this is really improving our cost competitiveness and at the same time reducing the environmental impact we are and footprint of our business. With these words, I hope I have convinced you that this is a good and sound investment.
Thank you.
Thank you, Mats. And we are now ready for the Q and A session.
We will take our first question today from Myles Allsop from UBS. Yes.
Just a few quick questions. First of all, if I remember correctly, when you bought this mill in 2004 and then you did a feasibility study in 02/2007, and then you got a tax free status zone for the mill in 02/2008. Is that the case? Are you getting will you get tax benefits from building this new machine at Ostraleka?
Do you want me to take that question directly now? The special economic zone as it's called is granted to Storians of Poland and it's valid. We still need to update some premises and a final decision has not been taken whether we are using that or not. But that is valid the same tax free zone. Ostroleka is within that tax free zone, yes.
And how much would that be worse? I mean is what would the kind of net present value of that tax benefit be?
Ulla, are we disclosing those numbers?
Well, you can give a round estimate.
Yes. If we would be using it, the value would be around €40,000,000
Okay.
And that comes as you generate profitability, so from 2013, 2014, 2015 and so on. Is that the way we should think about it?
Correct. Correct.
Okay. And what's and after the new machine starts up, what would the energy integration of the new machine of the mill be overall? Would it be 100% self sufficient?
In terms of steam, yes, 100% self sufficient. In terms of electricity, 60%.
I from a strategy perspective, this kind of caught people a little bit off guard because when you talk about sort of packaging being the favorable area, we've always been thinking more this was the paperboard side rather than the containerboard side. And is there I mean, obviously, by making this investment, you're clearly sort of stamping your feet down that containerboard is also very core to the group going forward. And should we I mean, should we expect further investments? Is that the plan going forward in containerboard?
I would like to turn it around just slightly. Corrugating packaging in Central Eastern Europe is a core business of us. And supply of cost efficient modern and competitive containerboard is the prerequisite for a successful operation. So the way I'm defining it is that corrugating packaging Central Eastern Europe is the core business.
Have you chosen a supplier for the machine yet?
No, we have not.
When do you expect to choose the supplier?
'1.
Okay. And how much testliner is currently being produced at Ostroleka in total? Is that because I had 270,000 tonnes in my mind, but
That is not all testliner. We are producing kraft paper, MG kraft and testliner. And today, the total capacity of test liner is 180,000 tons and we're closing the 80,000 tons machine in connection with the start up of the new machine.
How many machines are there in total in it?
Four.
It's four machines. And the total capacity of the mill is 270,000 tonnes?
Right. Correct.
Okay. That's good for the time being for me.
We will take our next question today from Oscar Lindstrom of Erik Pence Bank. Your line is open. Yes.
Hello. I have three questions. The first one regards a little bit could you provide a little bit more detail about what type of containerboard or testliner you're looking to produce here basis weight, white top liner, etcetera?
Yes. Well, we are let's take the easy part first. We're not going to produce any white top liner there. It's basically going to be two main qualities. It's test liner and recycled fluting is the two main grades.
And the machine is designed for an average basis weight of 107 grams. And I if I would take the basic criteria design criteria of the machine, it's going to be a 7.8 meter wide machine. And the speed running speed average running speed is going to be or let's talk about the drive speed. The drive speed is going to be around 1,700 meters a minute here. That gives a net production of 455,000 tonnes.
All right. And second question relates a little bit to the supply of recovered paper. I mean, you have a collection system in place today. Will this investment mean that you're also required to invest more in recovered paper collection and sourcing? That's not part of this investment of the €285,000,000 That
is correct. And we are already starting implementing these investments. So it's part of the, I would say, CapEx frame that we are operating within. All right. But when it comes to recovered paper, I think there is a it's a very important issue in this investment.
I would say the OCP capacity and the potential of Poland here. Poland is consuming around 3,800,000 to 4,000,000 tonnes of paper and board today and the recycling rate is only 41%. And Poland is a net exporter of OCC today. So that means that almost 2,000,000 tons goes into landfill. So this gives also a unique opportunity in terms of raw material sourcing in Poland.
Right.
And if I may fill in here also that the collection rates in Western Europe currently are about 70%. And now Poland being member of EU, they need to increase the collection rate of the OCC and RCP.
Right. My third question relates
a little
bit to your view of the European containerboard market. Historically, it's had quite a lot of volatility when it comes to pricing. Barriers to entry have been relatively low with a lot of new capacity coming in. Are you sort of what's your outlook for the European containerboard market? Do you view that that sort of historical pattern is not going to be repeated in the future?
And if so, why?
I would say that this question has many angles. First of all, the European containerboard demand has been continuously growing historically. And we believe that it will still grow on the European level going forward. What we like to see when we are looking into this investment, we are more perhaps focusing on the Central Eastern European growth and demand for modern lightweight containerboard here. And that is very important here.
The market has become so big in Central And Eastern Europe. And we have to remember that Poland alone is more than 1,500,000 tonne containerboard market and it's a net importer into Poland of containerboard today. That's very important element. And this is going to be the cost leader into that to this industry that has a cost curve that is interesting. So we believe that this is going to be a very competitive machine in any market circumstances here.
And just to clarify, you say Poland is a 1,500,000 tonne market. That's consumption of containerboard in Poland today?
Correct.
And you say it's a net importer. What are the net import volumes?
Totally, it's 600,000 tonnes. I have to actually have to review my exact data here, if you bear with me in a minute here. The total imports I'm taking this now. The total imports was 300,000 tonnes out of which it was actually 600,000 tonnes of recycled based containerboard. Let's see.
I have it here. I'm checking now the data. Latest data net import was RCP based. I'm looking now on it was 600,000 tons out of which testliner was 400,000 tons, fluting was 180,000 tonnes and there was a net exporting of kraftliner.
All right. And finally, just a final question. Will you supply any of your Russian plants or any other Russian customers from Osloye?
Osloyeka? We have the opportunity. That is yet to be seen, but that's not at the same degree as other units. But yes, we have the opportunity to do that. Yes.
All right. Thank you very much.
Next question today comes from Ari Tassenin from Nordea. Your line is open.
Yes. Good afternoon, Martin Ulla. A lot
of questions have been answered already, but maybe could you drill a bit on the sort of the market potential for the lighter weight? You said the average grammage is about 107 gram and sort of the standard testliner is more like 140 gram. Just give a feel of what the sort of current share of the lighter weights are in the European context and sort of what share it could take as the substitution goes on?
This is a very, very complex also question to be very, very exact. But we believe just to give you some numbers, we are believing that the demand for lightweight grades, specifically lightweight grades are going to increase plus 1,000,000 tons in the next five years, 1,000,000, one point five million one point one million tons. That's our best estimate today. Okay.
And is there sort of other capacity additions to that sort of particular segment that you know of, say, Pro Group's investments last year or other projects that have been announced? Is there other supply chasing that growth?
Of course, the new machines that have been built are designed many of them are designed to serve these markets. But it is also so also that most of the machines has been built by integrated corrugating operators. And in order to have a successful corrugating operation as we are having today, we have to secure the availability of modern lightweight qualities in order to serve the end consumer in the end.
Okay. And then on the CapEx side, how do you estimate that CapEx to be distributed over this year and next then?
If we are talking about 2011, we have an estimate of SEK 60,000,000 this year.
Okay. And just sort of reminding on the group level sort of maintenance CapEx, it's probably how far from sort of €400,000,000 or so is it? I mean, if you sort of look at the sort of minimum full CapEx for this year given this investment and other sort of known projects?
As far as I know, we haven't given any guidance on the CapEx for 2011.
Yes. My impression as well.
We will get back on that on the February 8. But we have not changed our policy either which is to maintain the CapEx under the level of depreciation. But this is an issue for February.
Yes. But then you have to remember that when we did this reversal of impairment, our depreciation was increased to about €550,000,000 annually.
Yes, yes, yes. Okay. That's very good. Thank you.
Our next question today comes from Marco Reisman from Hermes Fund Managers. Your line is now open.
Yes. Hi. I would like
to know who is currently supplying the containerboard for to bridge the shortfall that you have? Sorry to put it a little bit bluntly, but we are not disclosing our supplier base, but there are a number of suppliers. Okay. All right. Thank you.
Our next question today comes from Karri Rinta from SHB. Your line is now open.
Yes, thank you. You mentioned that the corrugated business in Central And Eastern Europe is your core business and sort of cost competitive containerboard production is a sort of important prerequisite. But if you would look at this investment on a stand alone basis, I. E, forgetting that you have a corrugated business that this plant is supplying, would this still make sense? Would this still be a sort of a sensible investment taking into account your cost of capital and such I.
E. Are the containerboard prices high enough currently and the sort of the average cost per tonne in this new machine low enough to make this a sensible standalone investment?
I could have put that answer very short, but the answer is absolutely yes. This when we are calculating our investments, we're always calculating them on a stand alone basis as a principle. And then we're looking to achieving synergies, of course, when we're having a value chain. But these investments will fill fulfills all criterias for investments that store ends are putting on investments on a stand alone basis, absolutely.
Even if you would sell all production to the sort of the external markets?
Correct.
And does this include the 40,000,000 tax benefit or excluding the 40,000,000 tax benefit in this calculation?
We are not basing our investment decisions on tax relief or this decision on the tax relief.
Okay. And then a sort of a clarification, this that this investment takes your self sufficiency from 35% to 60%. How does the math work? Because the numbers that you put in the press release would suggest somewhat different percentages, I. E, how have you calculate what do you include?
Do you include all production from Hainola? Or do you exclude production from Hainola in this calculation?
It's including the production in Hainola and it's seen from the corrugating perspective. I think that's important to see how much of the corrugating how much of the raw material to our corrugating units will come from own integrated sources. That's going be 60%.
Okay. And then finally, do you have any comments on because honestly, I've never been to Hainola plant and I have no idea what kind of setup you have there. So can you sort of educate me on what you have in Hainola and how is the outlook for the Hainola plant?
Yes. The outlook for the Hainola plant first of all in its niche of virgin fiber based fluting, it's very competitive. And we are I'm going to just find some exact data for you here now. And we are producing a little bit more than 200,000. Let's say, we're producing around capacity of 280,000 tonnes in Hainanola, 270,000 to 280,000 tonnes capacity.
It's very competitive on a European scale. And of course with the new outlook of Russian duty, it's using consuming quite a lot of birch in. And so therefore, the outlook has, I would say, improved beyond 2011.
Okay. And is it one machine, two machines?
It's a one machine. One machine.
Okay. Thanks. Those were all my questions.
We will now take our next question from Myles Allsop from UBS. Just
a few quick follow-up questions. Could you give us a sense of what the mill margins are today at Ostraleka?
I'm sorry, we are not giving out individual.
Okay. Well, maybe sort of looking at the investment then, could you give us a sense of what return on investment you would expect at normalized prices for the new machine?
We have said in our investment criteria that it has to fulfill the return of capital employed of 13%. And as I said, this is well fulfilling the investment criterias of Stora Enso.
So 15% to 20% would be sort of well above, I guess?
It's well fulfilling. I don't want to give you a precise number here, but we are very comfortable with the investment here.
Yes. And could you remind us why you postponed this project after the feasibility study in 02/2007?
Yes. We actually decided to make or the investment was done in two phases. We made the power plant investment. So we invested actually €137,000,000 into a new power plant that has just been commissioned and started up. But at that time, the timing wasn't right.
First of all, I mean, were two main things. We were hitting into the biggest recession, I would say, ever. We all remember it. And there was a number of mills that were decided at the same time. And of those investments there was another investment in Poland.
So the timing wasn't really right at that time. If we would have done it simultaneously as Mondi was doing it then I would then we could have discussed whether we would have an issue with the OCC collection. But now we feel that the time is absolutely correct.
So there's no chance now of I mean if we get sort of three private companies announcing new testliner machines tomorrow, you'll still be going ahead with this whatever now?
We are feeling confident that this is the best investment of those growth investments, yes.
And just to clarify as well on the integration, if we look at it at a group level, you are long testliner. You'll be what your capacity will go up to around sort of 850,000 tonnes and you're consuming what sort of was it five sixty you said in your presentation of from in your corrugated network today?
There are two things. First of all, we have I said that we are having two thirds of our footprint in Central And Eastern Europe. It's growing. It has a healthy growth every year that capacity. And we have built some new capacity not lately, but we have quite modern capacity and we have some free capacity as well.
Okay.
So we are expecting to grow our needs here. And we have a higher share of sales outside Storanza of the Hainola qualities, meaning virgin fiber base. There is a smaller internal needs of that specific quality. And that can travel also much longer distances, can take longer distances.
Yes. Okay. Maybe one last question, which may defer till the February 8. But I suppose from a strategic perspective, what the market is looking for is more restructuring consolidation on the paper side and these investments in containerboard are a bit of a concern if it's distracting management from that focus. And is I mean, the kind of priority still very much in terms of sorting out the paper operations and this is just a bit of a sideshow?
Or are you kind of recognizing now that it's very difficult to sort out paper and we've just got to try and invest our way out of the problem?
I don't recognize that description from inside the company. I'm heading the global packaging business here. And since we have announced that this is a business that we are going to grow and to build, my focus is on building the business and getting the right focus and the right returns out of this business. I wouldn't be involved in sorting out the paper businesses in any case from
We'll ask Joko in January. Are
there any other Yes, remind one more thing. It's Mats and I on the phone, so that's also indication who is taking care of this business here.
Yes, sorry. Maybe one last question then on are there any other major investments you're planning on the paperboard side?
We're always planning, but nothing that we are ready to announce now. No.
Should we expect any further investments or scalable investments on the paperboard side over the next one to two years?
Then I really need to go back to the first slide or Slide three, I remember. The direction of STURANCE was growth markets and fiber based packaging. And we have made last year, we made three different moves. We divested laminating paper. We made an investment in impact.
And now we are announcing the Ossroleka investment. And my agenda is not over. We have not fulfilled our strategy by this investment. So this is still valid, this direction continuous direction of Sturenso.
Okay, great. Thank you. Ladies and gentlemen, that will conclude our question and answer session for today. I would now like to hand back to your host for any additional or closing remarks. Thank you.
Thank you. Thank you very much for everybody participating in this lively discussion. And we will then speak latest on the February 8 in connection our Q4 results where we will be able to answer to some of the questions that were left unanswered in this phone call. Thank you very much and bye.
Thank you, Torg.