Stora Enso Oyj

OMXH:STERV

Earnings Call Transcript 2018-Q4

[Operator]

Hello, everyone, and a warm welcome to Stora Enso's Q4 and Full Year 2018 Financial Results Presentation. A special welcome also to those of you who are joining us via the webcast. My name is Ulrika Lilja, I'm Head of Communications, and today's presentation will, as always, be given by our CEO, Karl-Henrik Sundström; and our CFO, Seppo Parvi. And after the presentation we will open up for a Q&A session. And for those of you who are joining us via the web, you can ask your questions online. And with that, I hand over to you Karl.

[Karl-Henrik Sundström]

Thank you, Ulrika, and good morning or maybe good afternoon, depending on where you are in the world. So I will go through the fourth quarter 2018 plus -- which is also the full year 2018. I will start with the headlines, and the headlines describes very well what has happened. We have had 8 consecutive quarters of growth. And this quarter, we grow over 6%, if you exclude the divested Puumerkki. However, the EBIT decreased. And the reason why the EBIT decreased was basically 2 main reasons. We had a bit of a softer market coming in November and December and then we had 6 mills with operational problems, causing EUR 40 million in EBIT loss. All in all, sales volume decline EUR 11 million and EUR 40 million from the 6 mills. But despite that, we are also coming in with an EBIT above 10% for the sixth consecutive quarter. EPS increased 75%, cash flow was a bit on the light side, partly because of built up of working capital. We continue to strengthen the balance sheet and operate a return on capital employed came down slightly below the 13%. The reason why -- what happens in Q4 is these 2 events. Volumes quite a bit softer market towards the November, December and then the 6 mills. The 6 mills or 2 mills in biomaterials, Montes del Plata as well as Skutskär, for various reasons, causing about EUR 20 million of the EUR 40 million. Then we had Nymölla, last year, where you are aware of, we warned because of the water level, plus that we had a problem with the Veitsiluoto pulp mill, that was together, EUR 16 million and then we had EUR 4 million from Fors and Imatra. All these mills are up and running now, but these are things that happens in a process industry. I wish it wouldn't have happened but it happened, but now we need to look forward. The other part that is a very important thing is that we, for the fourth consecutive year, we are increasing the dividends -- we're proposing to increase the dividends, so the board will propose to the AGM a EUR 0.50 per share, which is a proposed increase of 22%. We have been increasing double-digit increase of dividends for 4 consecutive years. One of the parts that I feel very, very proud about is that we managed to take the return on capital employed for the full year well above the targeted level all of 13%. Last time, we were at this level were at year 2000. So it's taken 18 years to get to where we are today. And you can see the develop in the last years in the chart here. We, today, also announced a profit protection program. And the reason for that is that we have seen costs going up. We have seen wood costs going up, chemical going up, cost for chemicals and logistic costs, only wood cost, we estimate, will be around EUR 50 million higher in Q1 2019 versus Q1 2018. On top of that, we have a macro development in the world that is not very favorable at the moment, which might affect trade. So we have decided to make a cost improvement program of EUR 120 million to be conducted during 2019, and we will get the savings during 2019 and 2020. We have also decided to take down our CapEx by EUR 50 million. In the announcement today, we included proposed reductions in Imatra for PM 6, also at Imatra -- in Imatra as well as in Imavere in Estonia and Ala in Sweden. This is regretful, but we need to be proactive to make sure that we keep our competitiveness in a more uncertain world with increased costs. If you look upon some of the major events during the fourth quarter, there was a number of investments announced. We have done the biodegradable straw. We have decided to co-invest with Ikea and H&M in TreeToTextile. We launched a first recyclable RFID tag called ECO. We concluded the environmental impact assessment of Oulu. And we divested June Emballage in Sweden. And as a new important step, we also signed a binding agreement to -- for the restructuring of Bergvik Skog. We are talking here about the sizable plot of land that will be going out from Bergvik and into the balance sheet of Stora Enso. We are talking in total of 1.4 million hectares. And the impact will be around EUR 1 billion in the balance sheet of Stora Enso. We also benefited in the net income from sale of Latvia forest land of about EUR 47 million, and we also got an additional value add through the revaluation of biological assets of EUR 49 million. The journey that we started in 2006 of converting Stora Enso or transforming Stora Enso from a basically paper-dominated company to a company more dominated by the 4 growth divisions continues. Today, we had -- we are presenting a good result for paper for the full year 2018. However, it still is a more balanced part of our portfolio being less than 20% of our profit at the moment. So with that, I would hand over to Seppo to do some presentations of the income statement as well as the divisions.

[Seppo Parvi, CFO, Deputy CEO & Country Manager of Finland]

Thank you, Karl. And I start by looking at the figures that we have just published today in our announcement. First of all, top line for sales for the quarter increased by 0.8% year-on-year. On full year, sales figure was EUR 10.5 billion, that is increase of 4.4% year-on-year. Operational EBITDA margin was 15.3% and operational EBIT EUR 271 million or 10.2%. Full year operational EBIT was EUR 1,325,000,000 and that is increase of 32% compared to year before. And net profit for the period was EUR 988 and that is an increase of 61% compared to 2017. Earnings per share, EUR 1.28 and operational return on capital employed for the full year 15.5%, above the 13% target that we have for return on capital employed. Then moving to our divisions, and I start with Consumer Board where challenging market conditions continued, and we have to increase and achieve price increases. This is now actually second quarter in a row, we already started to increase prices going to Q3. Sales increased slightly to record high Q4. And that was EUR 637 million, that's thanks to higher local prices, having EUR 10 million positive effect but that was offset by lower volumes. Operational EBIT decreased EUR 45 million to EUR 24 million that was negatively affected by seasonality higher variable costs, especially it comes to wood, pulp and chemicals, like we already have mentioned earlier last year. Carton board production was lower and we have some operational issues and challenges at Imatra and Fors mills and those had negative impact on profitability. Return on capital employed was 5% during the quarter. Then going to packaging solutions, where we continue with record sales and profitability. Sales increased 5% to all-time high of EUR 352 million. Their improved prices and active sales mix management in European-based operations had positive effect on the result and sales wise. Total containerboard deliveries were stable. Operational EBIT increased to record high for Q4 and that was for EUR 59 million. We have clearly higher sales prices and good mix at the European-based operations, but that was offset by lower sales volumes in China. Also higher raw material costs overall had some negative effect as well as some spare part write-offs that we taken. Operational return on capital was at 25.7% and that is significantly above the long-term target of 20%, this is driven by improved profitability in our packaging solutions business. Then going to Biomaterials Division. The good market continues despite signs of price pressure. Sales increased 14% to another all-time high of EUR 415 million, and that's thanks to higher sales prices, even though that were slightly lower. Operational EBIT was at record high for Q4 at EUR 91 million, that's an increase of EUR 30 million. The higher pulp prices were partly offset by higher variable costs, especially wood and energy costs. And we have some production issues at Montes del Plata mill and Skutskär mills during the quarter. Operational return on capital at the strategic target level of 15% for the quarter. And our Lineo by Stora Enso was awarded for Innovative Product Award 2018 by Institution of Chemical Engineers, another proof point for the success for R&D work that we have been doing in Stora Enso during the past years. Then moving to wood products division where we had another record quarter. Sales, excluding divested Puumerkki, increased 3.5%, that is thanks to improved sales prices in classic sawn, and operational EBIT was up 66% to record high Q4 of EUR 42 million. Clearly, higher and better prices improved mix partly offset by higher fixed cost related to increase in operations. Operational return on capital continued at record level at 27.1%, also clearly above the strategic target of 20%. And our latest investment in CLT at Gruvön sawmill is being completed at the moment, and we expect to start the commercial production during the quarter that has just started. Then moving to our paper division, where we had solid quarter impacted by some operational challenges. Sales increased 5% to EUR 761 million. Clearly, higher sales prices in all grades and a better mix were partly offset by lower sales volumes. Operational EBIT was stable at EUR 45 million, that seem to activate higher sales prices in all grades, they were partly offset by higher variable costs especially in wood, pulp and chemicals. And like Karl mentioned already, we had production reductions caused by water shortage at Nymölla Mill in Sweden and we had some technical issues and problems at Veitsiluoto water pulp mill and those had made a EUR 16 million negative effect on the result. Also we have to take some market curtailments at Oulu Mill due to softness of the coated woodfree market. Cash flow after investing activities to sales ratio was 2.5%, that was negatively impacted by temporary working capital challenges. Here, it's good to remember that Q3 cash flow was very strong, that was 8.3% of net sales, so the 2 quarters together were above 5%, but still behind the targeted 7% level. Then to summarize our strategic targets where we stand there, and we can still see some more potential even though that most of the targets are on green. We still have 3, 4 that are red or yellow. We still need to work on the fixed cost to sales ratio to bring it to targeted 20% level or below. We were at the full year figures at 23.6%. It's moving to right direction year-over-year at 25.1%, but we need to put focus there, and today announced profit protection program is one way to address this also going forward. But of course, we also, we need to work on the top line growth. Operational return on capital for the quarter that we reported today was 12.4% below the 13% level, we target, not much, but still below, but full year, as said already, at 15.5%. We got the divisions and division targets consumer board for the quarter at 5% and for full year at 11.9%, below the targeted level, mainly because of the reasons we have also mentioned earlier, we still need more time to increase prices to match the cost increases that we have faced during the past year. Packaging Solutions, clearly above the targeted level at 27% for the full year, 25.7% for the quarter, also biomaterials for the quarter at 15%, exactly at the targeted level and full year at 17.9%. And wood products continues the strong performance, having reached now 27.1% level for the quarter and 28.1% for the full year result. And that's clearly also above the 20% targeted level. And paper cash flow like, I already mentioned, 2.5% for the quarter and full year at 5.7%, slightly better than year before, but like said, slightly also below the targeted 7% level still. But like we mentioned -- I mentioned earlier, now, we believe that this is a temporary hiccup in Q4 and we are confident that now during the year that has started, the cash flow in paper division will be back on track. With that, I hand back to you, Karl.

[Karl-Henrik Sundström]

Thank you, Seppo, for your description of the full status of the company and the divisions. So as of this year, we have decided to give out an outlook, which is our best view how the full year is going to look like. So for 2019, we expect to be largely in line with 2018, providing that the current trading condition do not significantly change. Demand growth is expected to continue for Stora Enso's all other businesses except European paper for which we'd estimated demand decline. So we expect sales to be higher. We also see costs being higher and that's the reason why we are launching the profit protection program. But also to deal with the uncertainties in the macro economic environment. We have also chosen to change the guidance for the next quarter, and not using adjective, but more give a numerical range and we have also eliminated the sales guidance. So operational EBIT is expected to be in the range of EUR 260 million to EUR 350 million for the first quarter of 2019. What is important to remember is that first quarter of 2018 was maintenance free, we had no annual maintenance shutdowns. In this quarter, we will have 2, Ostroleka PM5 as well as Veracel. The impact of that is estimated to be about EUR 20 million compared to 2018 in the first quarter. So before heading into Q&As, I would like to conclude and summarize the fourth quarter of 2018 and also the full year. So we have had 8 consecutive quarters of sales growth. Six consecutive quarters of double-digit EBIT margin. We grow EBIT by 32% in 2018, and we had an annual operating return on capital employed of 15.5%. We have strengthened the balance sheet and the proposed dividend is an increase by 22%, sends a strong signal about how the board feels about the future of Stora Enso. And we are also directly now combating with a profit protection program costs and potential market weakness. With that, I would like to invite Ulrika and Seppo back for the Q&A session.

[Ulrika Lilja, Executive Vice President of Communications]

Thank you, Karl, and thank you, Seppo. Again, for those of you who joined us via the web, please post your questions online. Before I open up for the audience, I have 2 questions for you. So Seppo, what happens now when CapEx will go down with EUR 50 million?

[Seppo Parvi, CFO, Deputy CEO & Country Manager of Finland]

Well, what we need to do first is to revisit our original capital expenditure plan that we made for this year and set our priorities, make sure that where we invest, we get the best possible return on the money we spend. This is also typical way to ensure continues positive development of our cash flow.

[Ulrika Lilja, Executive Vice President of Communications]

And, Karl, how will the profit protection program impact the Oulu investments?

[Karl-Henrik Sundström]

So first of all, we are ready with the environmental impact assessment that was done in December. We are still not ready with the feasibility study. So obviously, we are looking into the impacts of that. And once, if we take a decision, it would be in this environment that we do right now.

[Ulrika Lilja, Executive Vice President of Communications]

Do we have any questions from the audience here in Helsinki? Okay. Then we will take one from the webcast or actually 3. They are coming Tarmo Virki and he is asking, the Q4 EBIT was burdened by EUR 40 million cost from 6 mills, is it safe to call them temporary? How much of that temporary but typical process industry costs do you expect to see in 2019? And how much will wood cost increase in Q1 from year ago? So if we start with, if it's safe to call them temporary?

[Karl-Henrik Sundström]

Yes, I think so. And everybody who works in the process industry are well aware of things happening. And having 6 of these incidents in 1 quarter is quite a lot. One is -- was the water shortage in the lake, supporting Nymölla, that's one of the biggest that's very unusual. It's coming back to the dry summer in Sweden. The other one that was fairly big was the problem in Montes del Plata. It's a fairly new mill. I think it was inaugurated in September 2014, and there was some equipment that we needed to change out and it took longer time. And the third one, which was quite big, was Skutskär. Skutskär has converted into 100% fluff and when they started up the first maintenance stop after the conversion they had programs coming up. So usually you have some of them but not 6 in a very short period. So that, I would call it, temporary. And we are all sorted it out and they are up and running full now. The second question about the wood costs, I actually mentioned that in the call. We are estimating that the wood cost for the totality of Stora Enso would be around EUR 50 million higher in the first quarter of 2019 versus the same quarter in 2018.

[Ulrika Lilja, Executive Vice President of Communications]

As you have actually responded to a question from Mikko Ervasti in SEB, but I will just read it out to recognize his question. How is it possible to experience significant operational issues at 6 mills at a same time, what drives this? And reinvestment lower than design capacity production due to market conditions or what? And this was what you were talking about. Oscar Seidman is asking, when are you going to decide on the proposed dividend?

[Karl-Henrik Sundström]

That would be in the AGM, which is in March. And it's not me who decides. So the board proposed to the AGM, and AGM decides. So this is the proposal from the board to the AGM, to the shareholders in basic. And the shareholders will decide.

[Ulrika Lilja, Executive Vice President of Communications]

No questions in Helsinki. No further questions from the webcast. So then, we conclude this session, and we thank you for your attention. Thank you,

[Karl-Henrik Sundström]

Thank you.

[Seppo Parvi, CFO, Deputy CEO & Country Manager of Finland]

Thank you.