Stora Enso Oyj

Seppo Parvi - CFO Karl-Henrik Sundstrom - CEO Ulla Paajanen - Head of Investor Relations

Antti Koskivuori - Danske Bank Justin Jordan - Jefferies Harri Taittonen - Nordea Robin Santavirta - Carnegie Linus Larsson - SEB

Thank you. Good afternoon, everyone and welcome to this late Friday conference call of our Q4 2016 result.

And in order to save time, I will hand it over to Karl for a brief presentation. Please go ahead, Karl.

Thank you and very welcome to this quarter and good morning or good afternoon depending on where you are in the world. So, we -- I would like to start to go through the Q4 earnings and I would like to make sure a couple of things.

So, first of all, we came in on a sales which is basically 2% below the same period last year. However, we were growing in the areas where we wanted to grow by 4.5% and that is excluding structurally declining paper as well as the divested entities.

Operating EBIT came in at €191 and very clear expectations, why? and that is hardwood pulp, Beihai and Enocell.

We managed to have a very strong cash flow in the fourth quarter and we came in on the return on capital employed of almost 9% and slightly above 12% if you exclude Beihai. Net debt to operational EBITDA is down to 2 times versus 2.3 times a year ago.

We have also launched today, based on the uncertainty in the European area in the global economy, a cost reduction program focusing at reducing our -- mainly our fixed cost with €50 million. This is also a way of making sure that we're nimble going into uncertain future.

We have also today published that we -- where the Board proposed a €0.37 dividend per share which is an increase of €0.4 or 12% versus last year. This is actually a vote of confidence that we're leaving 2016 as a stronger company when it comes to product portfolio compared to when we entered 2016.

I will come back to that later on. But then going into explaining what has happened in the quarter, if you look upon this simple table, it actually explains what has happened in the quarter, but also demonstrates the underlying earning potential in the company.

You can see that consumer board is down by €50 million, but in reality, the business excluding Beihai and the ramp up of Beihai mill is actually €10 million above and sales excluding Beihai is more or less flat, but we have improved the efficiency, resulting in €10 million higher result than a year ago. Packaging Solution coming in like €3 million below and then, we have a big profit fall in biomaterials.

And that is explained by basically two components. We're having, in Europe, a hardwood price that is more than 20% lower than a year ago and a double digit also in China, even though the prices there has not fallen as fast as they have done in Europe, but that is 35 million in hardwood pulp prices.

On top of that, we have an unfortunate with the power generation and the third buy in Enocell costing five. All of that has -- is based on capturing the development in biomaterials.

Paper came in with €23 million better results and then ,we have others coming in €11 million lower and that is basically because of lower energy costs as well as lower wood prices. But with this slide, I think it's also important to remember that when we have additional costs, as we have in the quarter, because of Beihai is because we take them earlier and I will come to that later on.

This is a slide that I'm very, very happy about. We have actually managed to delever the company from above 3 times net debt to EBITDA to coming down to 2 times in 48 months.

That is a strong performance on how we manage cash and how we manage profitability going forward. I also will repeat everybody that 2016 has been an extremely busy year for us.

We started up one of the biggest investments we have ever done in May, that is Beihai. We have started up the LVL production at Varkaus.

We have inaugurated Murow. We managed to get to an EBITDA breakeven in Varkaus.

We have done a lot of additional small investments. And today, we also went out with an additional investment to increase quality, capabilities and capacity for €28 million in Heinola Fluting Mill to get us today to the next level in the high quality in Fluting Mill -- Fluting Ford area.

At the same time, we have divested which is represented on the right hand side of this slide, about €915,000 tonnes either in closing down, selling off or [indiscernible]. This represents a €306 million cash inflow.

Coming to Beihai and I think it's important that we're ramping it up and it's going very well and we're ahead of time. That's why we spent €4 million more than we previously thought.

If you look at this slide here, on the red little thing here, that red represents, for increased capacity, 38,500 tonnes. We managed to get basically 5,000 tons more in 2016.

We're estimating that we can drive up even more this year, 33,500 tons in 2018. So, that is actually going faster than we thought.

We still are talking about the EBITDA breakeven in Q1 2018. We started up, as previously announced, the BCTMP mill in the fourth quarter.

The other thing I would like to say about the fast learning curve or the people that we have trained over 2 years who's running the mill, when it comes to efficiency, this was the second highest efficiency within all the consumer mill board machine in the month of December. It's going really well.

Before handing over to Seppo, I would like to come back to the slide that we're looking on every quarter. We have moved from a company of having 30% in non-paper business to almost 70%.

We had a very strong quarter in paper which means that now one third of the profit. However, two thirds of the profit is coming from business that was less than 40% in 2006.

So the transformation continues. With that, I hand over to Seppo.

Thank you, Karl. And I'll start with key figures and the reported sales that went down 2% versus Q4 a year ago.

Unlike other sales, sales were actually up 3.5% if you exclude paper and divestments. Full year sales figure was €9.8 billion.

Operational EBITDA margin was 12.7% for the quarter, slightly down compared to year ago, but the full year EBITDA was flat at 14% level. Operational EBIT €191 million.

Operational return on capital employed, excluding Beihai project, was 12.1%, slightly below Q4 a year ago. Full year 2016 return on capital employed, excluding Beihai, was 13%, reaching our strategic target level, that is also up from 12.2% for 2015.

And net debt to the last 12 months operational EBITDA decreased during the year from 2.3% to 2.0%. That is the demonstration of the strong cash flow that we're continued to generate.

Then moving forward to different divisions and I'll start with Consumer Board. The ramping up of Beihai mill continues and that is also reflected in the sales growth of 3.6%.

Operational EBIT increased €10 million, excluding Beihai operations, thanks to improved efficiencies and lower wood prices. And that demonstrates the good underlying performance of the operations.

Beihai operational EBIT loss was €38 million in Q4 and we expect that to be approximately €34 million less. And year-on-year, if you look at the expectations in Q1, we expect that [indiscernible] about €30 million negative in Q1 this year versus last year.

Operational return on capital 7.4%, but this score in Beihai Mill, it was 30.8%, so at an excellent level. An investment of €9 million was announced during the quarter where we're investing in micro-fibrillated cellulose production at Imatra, Ingerois and Fors mills.

Then, look at the packaging solutions where ramp-up of Varkaus kraftliner mill is at the final stage and sales increased 18%, reflecting Varkaus startup, but also Inpac in China and higher volumes from containerboard mills and corrugated Russia. Operational EBIT was €3 million lower, mainly due to lower recycled containerboard sales prices and higher recycled paper prices.

And Varkaus kraftliner mill ramp-up is proceeding and EBIT break-even is expected in Q2, as said and communicated already. Authorized feasibility study that we announced last year is at the final stage at the moment and we will come back to that later.

We also announced this morning new investment at the Heinola Fluting mill in Finland, that we spent €8 million, addressing and preparing for the increasing demand of high-quality fluting globally. And that investment is expected to be completed in Q2 2018 and return on capital is expected to be about 20%.

That is our expected target level for packaging solutions division as well. Then, biomaterials where the result and sales are impacted by historically low hardwood pulp prices.

FX was €35 million, like Karl said, during the Q4 the year before. And also Enocell power generator problem affected the result by €5 million during the quarter.

We're working on fixing the problem, but unfortunately, we expect repairs to take some time and the effect is about €10 million negative during the first quarter. Then, we're moving ahead with the startup at the bagasse-to-xylose demonstration plant in Raceland, U.S.A.

The first batches of xylose are expected to be delivered this year. We also have signed now first commercial contract for xylose.

Wood products. There, we have also strategic investments ramping up and that is Varkaus LVL Mill and Murow Sawmill, they are also increasing sales.

But operational EBIT decreased €4 million, mainly due to the increased cost and depreciation due to our strategic investments. LVL Varkaus is moving ahead, where now we have 70% of products certificated and remaining are expected to be done during the quarter that has just started, Q1 this year.

Feasibility study that we announced last year for the CLT at the Gruvon Mill will be finalized during the spring and more on that later. €12 million investments was announced during the quarter to biocomposite granules in Hylte Mill in Sweden, that is new type of production opportunities that we're looking forward to and we expect to finalize that investment next year in Q1 2018.

Then, paper. The strong performance continued in Q4, both result-wise as well as strong cash flow generation that continued at record level.

Also important to note, the sales remained flat, excluding the divestments and that is a great achievement by the team and division, taking into account the declining market. And operational EBIT increased 56% year-on-year.

And that is thanks to active cost management and lower depreciation and a very much strong operational performance during the whole year and also in Q4. Strong cash flow after investing activities to sales continued and was clearly above the target level for the second quarter in a row now and reached 11.8% level, our strategic target is 7%.

We also completed, during the course, the divestment of divestment of Suzhou Mill site divestment and the internal review that we announced earlier continues on how to create the best conditions for the paper division to compete under increasing cost pressures and declining market. Then, looking at the strategic targets, where we stand there, both Q4 and full year.

First of all, look at the growth. We continue to grow and beat the market.

So for the quarter, it was 4.5% and full year 3.1%. That actually continues to strengthen.

If you look at the net debt operational EBITDA as well as debt to equity ratios, we're below our strategic target levels. And operational return on capital excluding Beihai was 13% for the full year, reaching the target.

Fixed costs remain at 25% level. We continue to work to reduce that and as part of that, we're also announcing a new €50 million program, that Karl mentioned earlier, to address the costs also.

Divisional targets were the targets on return on capital in packaging divisions, biomaterial and wood products, paper cash flow related, [indiscernible] consumer board excluding Beihai was 30.8% or 36.2% for full year, clearly above the 20% targeted level. Packaging solutions was below 20%.

There, we can see the burden of the Varkaus start-up and we expect that to move in the right direction now that we have the final stage at the Varkaus kraftliner. Biomaterials 6.1% for the quarter and 8.5% for the year.

That is a reflection of the historically low hardwood pulp prices. Wood products 30.1% for the quarter, 16.8% for the year, slightly below the targeted 18% level, but I think we can still summarize and comment that they continue solid performance and we believe that they will also improve going forward.

And paper clearly about targeted cash flow after investing activities of 7% for the quarter and full year. With that, I hand over back to you, Karl.

Thank you, Seppo. So, coming to the guidance for the first quarter of 2017, sales are estimated to be similar to the amount that we had in the fourth quarter of 2016.

Operating EBIT is expected to be in line with €191 million recorded in Q4 2016. Operation EBIT estimates include negative impact of the ramp-up of Beihai and a power generator failure at Enocell of €34 million and €10 million, respectively.

No major scheduled annual maintenance shutdowns in Q1 2017 and as I said in the initial slide, Stora Enso will start a profit improvement program targeting to decrease the annual costs by €50 million with a full annualized impact in 2018. Today, the Board has also gone out [indiscernible] the report with a dividend proposal and the policy is to strive to pay stable dividends linked to the long term performance and that is one off for the net profile, a profit over a cycle.

So, the dividend proposal that will go to the AGM is €37 per share, totaling €292 million. It's a 12% increase versus the dividend of the last year.

So, as I said initially, we believe that we're well prepared for 2017 and beyond. 2016 has been a year of transformation.

We've strengthened the balance sheet, we've proven once again that we have strong cash generation capabilities, we have a solid performance despite low hardwood pulp prices and the Beihai start-up costs that are coming earlier than expected because we're ahead of the schedule. The low hardwood pulp prices, we believe, has gone around at a stable level.

The question is on how fast that will increase? And then, we're moving away as demonstrated in the releases of the investment that has been popping up recently, like the MFC, the wood composite investment in Hylte, as well as the Heinola announced today, we're moving more towards the innovation and sales transformation.

Thank you very much for that. With that, I would like to open up for Q&A.

I have a few questions and the first one is on the Beihai ramp-up cost. Sorry, I missed that part.

So you're taking the extra cost on Q4, €5 million or so, is that also included in your guidance for Q1 of the €34 million? Could you please explain that a bit?

That'll be the first question.

When you ramp-up demand and when you increase the capacity and when you're training the staff, there is a value to ramp this up which is 100. And the faster you do it, the early you will get the costs.

You understand.

Yes.

Of the total value, we have constantly taken costs earlier. It's not that they are becoming more costs, it's not that they're coming earlier, because we're ahead of the ramp-up which is demonstrated in my slide.

Alright. The follow-up question would be that if you're taking early now, will that impact to your kind of expected level where you're going to be in every quarter in 2017 or is it just the few quarters that we're seeing here?

Now, we have taken some extra costs and this quarter, we came in by €4 million. That is basically moving €4 million from that.

We really changed the EBITDA breakeven, nobody would constantly do this in the coming quarters during 2017 absolutely.

Okay. The second question on the sales price on Consumer Board division.

If I just do the math, it seems that your average sales price is down €50 per tonne since Q1 2016. I was just wondering whether this is purely Beihai impact or whether there is something more behind that decline?

I think you cannot calculate that because you need to understand that we're seasonally low always in Q4. The other one is the mix.

So, if you remember my slide from the Capital Markets Day, 60% of what we sell is liquid or CKD for Foodservice board, very stable prices and then, we had multi-year contracts. 30% are FPD and there, we have the majority with fairly stable prices because cigarette is very stable.

You have luxury like Tambrite, Performa Brilliance and those which are focused on very specific segments. And then, you have a 10% which is SBS club's specialties.

And so, it is more than mix that moves around.

Okay. So, basically, excluding Beihai, the pricing picture has been stable?

Absolutely. You cannot use statistics on FPD on us.

It's a very little commodity activity.

I've just got a few quick questions on packaging paper. As previously said, obviously, Varkaus had a maintenance shut in Q4, but just for 2016 overall, just give us some color.

Can you tell us what the total tonnage produced was in calendar '16?

What was the grade?

I was talking about the ramp-up of the Varkaus kraftliner mill.

Okay. So, that is cost line.

So, obviously, you're successfully ramping it up and I'm just trying to get some sense of in calendar 2016 overall, what was the total tonnage produced from the mill?

So we produced 270,000 tonnes in 2016 and [indiscernible] 73,000 tonnes including maintenance in Q4.

Fantastic. And just, obviously, you were citing lower sales on the prices and higher OCC prices within the packaging paper result in Q4.

It's not unusual for anyone who is familiar with the factors, sadly, but what's your view on the price increases that are currently being announced by peers for testliner and kraftliner for spring 2017.

So, you're absolutely right, testliner declined during the second half of 2016, absolutely right. And kraftliner, there has been a decline in the first, but they have been stable for the rest of the year on a low level.

However, if we look in for kraftliner, we believe that the prices will go up in the first quarter of 2017. However, we have not calculated any effect on kraftliner because of what happened in Pensacola.

We don't know that yet, that 500,000 tonnes gone after the market and we don't know when it's coming back.

Okay. And just with regard to the Ostroleka study that you're doing potentially expanding that mill, can you just give us a timeline to when you might be in a position to take a decision and communicate that?

It's got to be Q1. It's a bit delayed.

Okay. Alright.

And just very quickly then, just on biomaterial, obviously, prices have been falling in Q4, but in recent weeks, big prices [indiscernible], you're relatively stable than anything potentially going up in 2017. I don't know if you have a view on pulp prices in Q1 '17?

Yes, we do have a local view on that, but I think -- so, first of all, you have to understand when you raise prices, it takes about a quarter to get them through the system, right? So if I take hardwood pulp, Europe, we believe it's stable year-on-year and we believe slightly higher.

The question here is what it's like and how fast can it go? The other one is that you have to remember that in hardwood in China, it is a slightly stronger demand and is higher.

However, we only sell like 30%-ish in China, most of it is going into Europe. And the other thing that you have to keep in mind when you think about hardwood pulp is that by selling-off some of the entities like [indiscernible] and other names [indiscernible].

We're getting longer in hardwood pulp and in pulp in total. So, in Q3, we said that we were basically 1.9 million tonnes on an annual basis, we've now gone up to 2.1 million because we have divested and closed down including [indiscernible].

Do you understand?

Yes. Okay.

Just one final question, the new €50 million cost saving target you've announced, is that in addition to what you might do within the paper division review or does that encompass potential--?

This is €60 million across all divisions, all start functions, because the macro right now and you see it in the currency movements, you see it we have elections in France, you had no government in Italy or having a Brexit thing happening, you'll have a potential trade conflict between U.S. and China.

So, we're just being cautious. So, this is irrespective of that.

Just one thing. It includes potential capacity closures?

No.

Okay. So, that would be potentially in addition to that [indiscernible]?

If these things would happen.

Can you say something about the sort of overall cost inflation, because somebody of your peers have sort of indicated at the end of the sort of deflationary, Iran, but what are you seeing in the main cost items on a sort of like-for-like basis?

Hi, it's Seppo here. Hi, Harri.

In general, I would say that the cost pressures are not high, so pretty flat going forward as far as we can see at the moment. [indiscernible] to be largely stable with different input costs in 2017.

But in sort of [indiscernible], it comes out flat.

Another one is a quick. I mean, you referred to the -- talked about the pulp price.

I understand what you mean and that is also the reason why we're doing the €58 million.

Yes. On the power prices, sort of raised that impact on a year-on-year basis, but did you see sort of a sequential change or impact in the same way because we all know that sort of short fiber prices came down already quite early last year or sort of during the spring.

So, that's why asking whether you had sort of a sequential negative in your books in Q4 still from pulp.

Don't know, they have been low, it's not gone down really, but they have not come up, especially Northern Europe. And I think that expectation were that it's going to go fast, but it seems to be harder and hence, I'm a little bit -- I think they're going to go up, both in China as well as in Europe.

But I'm not sure how fast it's going to be. I'm a bit cautious about that.

Okay. Sort of final, Antti already asked about this, about Beihai, about this was really in kind of broad terms or sort of simple terms ask if you have a target of still going to what's EBITDA breakeven in Q1 in 2018.

But how sort of stable or steady trend do you see towards the breakeven point or is there sort of some sort of step that kind of change or is there something you know that [indiscernible] is different?

[Indiscernible] change in the first quarter that we need. We're not going to them, because I don't want to tell them when we pass them, but right now, I feel good, I feel very proud of [indiscernible] in the China

Related to that, there's been some concern about price increases announced by the local players, hasn't there, so have you seen sort of any kind of tightening in the market or sort of which would be improving your possibilities to get the product out to the customers?

So, the Beihai mill is focusing on three grades which is the end game, CKB with food service board. We're launching like a simple noodle cup already and we're working on it, but I feel that the market in China, for various reasons, is probably going to appreciate this and now it's signed, that high quality, you can charge more for.

So I'm seeing those movements and I'm happy with that. But we're not really, so to say, in the area where we should be, we're still moving from basically price to standard folding boxboard when we're trading up the people and then qualifying the liquid customers and CKB and the more advanced food service boards.

A couple of questions from me. First of all, could you comment what's the production run rate at Beihai now when we start the year and what's the delivery run rate?

So, run rate, I can give you because we made 140,000 tonnes last year and we delivered about 110,000 tonnes -- 111,000 tonnes. But obviously, if you take that and draw a line from basically nothing in Q2, it's basically happening, most of this run rate is coming in late Q3 and during Q4.

Right. But it must then be sold, because then your sort of run rates are quite high, so that the grades you sell now, so the pricing is much, much lower than what you sort of aim later on because your EBIT run rate is €160 million negative a year.

That's also the ramp-up, the repulp and all that. So, I think when we get into the second half of 2017, this will be more interesting to talk about, because it is -- it has been mostly second grade FBB.

And also you have to remember that in the production with ramp-up phase, you have short production when you're doing production for qualifications and that means that the efficiencies, et cetera, are not necessarily always the best.

But it was in -- December was a special month.

Yes.

I understand it. Probably, some other extra costs related to the ramp-up.

Then, regarding the €50 million cost cutting program, do you -- can you share any other details, sort of what division, what measures and some timelines regarding that?

Everybody is focused on fixed costs and staff functions.

And then, related to CapEx, what is included -- could you sort of -- could you divide that figure you guide for '17 into smaller pieces of the maintenance and growth investments potentially [indiscernible] so we understand what is included in that?

It's basically what you had in Capital Markets Day.

The maintenance CapEx typically is, like we have said, about €200 million plus/minus and therefore, all the new CapEx projects that we have announced, including Heinola Fluting Mill investment this morning, it's all included in the guidance. As you remember from the Capital Markets Day, we still had some unallocated included in the €600 million, €650 million.

So, it's in line with our previous communication.

I was just wondering if you could maybe add some -- can you give us a feel for how big the step-down in CapEx -- in maintenance shut downs is 4Q or 1Q 2017 versus 4Q 2016?

Yes, exactly [indiscernible]. If you look at maintenance CapEx in Q1 2017 versus Q4, it's € 38 million less, but then you have to remember that year-on-year, it's flat.

Yes. I know that, that's fine.

Just to get a few [indiscernible] for the quarter-on quarter aspect.

[Indiscernible] it's a maintenance cycle .

If I may continue on the previous question and your assumptions for your first quarter guidance given the big tailwind that you have on maintenance cost which are the big negative factors that you're assuming Q1 on Q4, please?

So first of all, you have a seasonally, volume-wise, weaker [indiscernible] and then you can see in the volumes year-over-year. Then, we have basically the other negative which is the Enocell which is 5.

And then, you have Beihai minus -- I think, it's 13 year-on-year.

Yes. I mean, sequentially.

Sequentially, down [indiscernible]. And then, you're coming back, what is happening with pulp prices?

I think it's going to take longer before the European where we sell most of our [indiscernible] is going to kick up. But if you look at normal seasonality than previous years, basically, Q4 and Q1 are flat, because we're at the lower level now mainly due to the lower pulp prices--

And the question is when will it pickup?

Okay. But your planning assumption for pulp pricing is flat, it sounds like, if you look sequentially Q1 on Q4 then?

Yes.

So, something -- and then, presumably, I mean, Consumer Board has a stronger seasonality. I would expect better volumes in Consumer Board in the first quarter compared to the fourth quarter?

Yes. And then you have the additional shutdown of Varkaus because of [indiscernible] the equipment that we announced at the Capital Market Day that we couldn't fit in because of the lead times into the maintenance that we have in Q4 for Varkaus.

Okay. And that is not part of the CapEx guidance that you've given, the 38%.

It's inside the 38%?

Yes.

Okay. It looks like a pretty cautious guidance, but are you expecting -- what would you expect for currency differences, do you have any doubt on the currency Q1 and Q4?

So, looking at the total picture in Q4 year-on-year, the positive from currencies was about €20 million. And if you look at the full year '17, we expect some €60 million better sort of improvement coming from the currencies.

So, the positive on the result. So, if there is some in Q1, nothing significant--?

But if you look at what had happened in the recent days, it's quite volatile.

Yes.

And are you planning for lower paper prices Q1 on Q4?

So, we believe -- we're in negotiations which means that we expect them to be stable. And I think it's also -- we're basically non-existing in the [indiscernible] mechanical grades after what had happened with [indiscernible]?

Right. Okay.

Just on Varkaus, finally if I may, how much potential is there still left in Varkaus, what was the contribution in the fourth quarter and what -- how much better can it get gradually during 2017 you think?

So, we have said the following, we were EBITDA breakeven in Q3, we had a maintenance in Q4, we're changing some equipment and we're expecting to be EBIT breakeven in Q2 and then, you will get towards what we announced previously [indiscernible].

Okay. But there is still quite a bit of differential there?

Yes.

Just looking at Varkaus kraftliner, will you be able to give a rough estimate of the split between sales going into the European market versus export out of the European market? And then, just given your expectations around where kraftliner prices in Europe are going, would you expect to see or to move some of their products that you currently export back into Europe in 2017?

We don't disclose, but what we think is the demand will be stable and we see slightly higher prices for kraftliner. The only thing, as I said to previous, was that we don't really know the impact of the Pensacola 500,000 tonnes of mill.

Okay. So then, we will close the call here and thank you everybody for listening in.

And Karl, do you want to say some [indiscernible]?

I would like to thank you all. We feel that we're well prepared for 2017 and beyond.

And even though it's a rough macro, I think we're a lot better prepared for 2017 than we were for 2016. Thank you very much, appreciate you spending the time with us.