UPM-Kymmene's (UPMKF) CEO Jussi Pesonen on Q2 2016 Results - Earnings Call Transcript

| About: UPM-Kymmene Corp. (UPMKF)

UPM-Kymmene Corp. (OTC:UPMKF) Q2 2016 Earnings Conference Call July 26, 2016 7:15 AM ET

Executives

Jussi Pesonen – President and Chief Executive Officer

Tapio Korpeinen – Executive Vice President and Chief Financial Officer

Analysts

Mikael Jafs – Kepler Cheuvreux

Justin Jordan – Jefferies

Harri Taittonen – Nordea

Linus Larsson – SEB

Mikko Ervasti – DNB Markets

Henri Parkkinen – OP Corporate Bank

Mikael Doepel – Handelsbanken Capital Markets

Jussi Pesonen

Ladies and gentlemen, welcome to UPM’s Second Quarter 2016 Result Webcast. My name is Jussi Pesonen; I’m the CEO of UPM. And I’m here with our CFO, Tapio Korpeinen.

Tapio Korpeinen

Hi, everyone.

Jussi Pesonen

Ladies and gentlemen, let’s move on to the Page 2. Comparable EBIT increased by 21%. We continued on a strong improvement track. Two main factors for contributing to our good performance in Q2. First, cost-efficiency measures continued to deliver, resulting a significantly lower variable and fixed cost compared with that of last year. And second topic, market demand continued to be developing favorably in most of our businesses, and we were able to serve the demand growth with the growth investment projects in biorefining, paper Asia, and raflatac.

As a result, as I said, both EBITDA and our comparable EBIT grew by 21% from that of last year. Improved earnings was also visible in our cash flow. Our operating cash flow was a record strong, whether we are looking at Q2, the first half of 2016, or the last or latest 12 months. Finally, our net debt decreased by €759 million from last year reaching €1.876 million by the end of Q2. In UPM, we have a strong business model with six agile businesses, efficient capital allocation and industry leading balance sheet. For the future, this ensures good opportunity for focused investments in growth, continued strong cash flow and attractive dividend.

Let’s move to the Page 3. As you know, most of UPM’s businesses operate in a growing market. Also, Q2, we were enjoying mostly favorable demand development. Let’s start with the biorefining where we have several growth projects ramping up or under implementation. Pulp demand continued strong in Q2; about 3% demand growth globally. Growth was again strongest in Asia, but demand grew also in Europe. Strong demand continued also for advanced renewable diesel.

Looking at raflatac, the global consumption-driven growth for self-adhesive labels, and for those materials continued compared with the last-year growth rates, moderated slightly in Europe, remained stable in North America, and increased in Asia. Let’s look at paper Asia which enjoyed healthy demand growth for label, pack and release materials in all markets, as well as for high-quality office papers in China. Plywood demand grew both in industrial applications as well as construction-related end uses. So demand continued to decline only in graphic papers in Europe and North America. The decline rate in Europe totaled 3% in Q2, and for the whole six months minus 4%.

Slide 4 summarizes our latest actions. The pulp mill debottlenecking projects have been a success and enabled us to grow pulp deliveries by 6% from last year. The first expansion at the Kymi pulp mill in particular has been a great experience. After the successful startup of the new pulp drying machine in late 2015, Kymi’s efficiency has been on the high level, and we have been identifying further expansion potential at the mill. This potential we aim to capture with the second expansion project that we have announced earlier this month. We are investing €98 million to increase Kymi pulp mill’s capacity to 870,000 tonnes. After the Kaukas investment is completed later this year and the second Kymi mill expansion phase next year, we will have – we have grown our pulp production capacity more than 500,000 tonnes, or 15% since 2013, with a very low investment cost.

Lappeenranta biorefinery had a scheduled maintenance stop in Q2. During this stop we opened certain debottlenecks and bottlenecks; made some improvements that we had identified during the refinery’s first operating year. After this stop, we can now continue to ramp up our production towards full capacity and targeted profitability. So that is on a good track. The ramp up of the new specialty paper machine at our Changshu Mill in China is proceeding well and according to all our plans. As a result, paper Asia grew its delivery volumes by 13% in Q2. The ramp up continues, offering further potential for both volume growth and earnings.

UPM’s plywood delivery increased by 7% in Q2, already before the expansion at our Otepaa mill, which will start up actually end of this year. At the same time, we have been implementing the various growth projects. We have taken steps to further improve our competitiveness in European and North American graphic paper business. In May, we closed down Madison mill in the U.S., removing 195,000 tonnes of SC paper capacity. In the beginning of July, we sold our Schwedt mill in Germany with a newsprint capacity of 280,000 tonnes to be converted into liner production by the new owner. The transaction price of the Schwedt mill was €70 million, and we are currently in process of selling the hydro assets at our Madison mill in the U.S.

But, ladies and gentlemen, I will now hand over to Tapio for more analysis of our results. Tapio, please.

Tapio Korpeinen

Jussi, thank you. On Page 5, we have the usual waterfall chart showing the EBITDA development by earnings driver and by business. In the second quarter 2016, our EBITDA was €68 million, or 21% higher than in the same period last year. And as you can see on the left-hand side of the slide, our second quarter EBITDA benefited from much lower variable and fixed costs as compared to last year. All of the fixed cost reduction and more than half of the variable cost reduction shown here on this slide comes from our own internal cost-efficiency measures that we have taken.

Delivery volumes were also giving a positive contribution to our EBITDA. Delivery growth from the various growth projects Jussi mentioned were more than compensating for the lower graphic paper deliveries in paper ENA. The impact of currency hedges in the second quarter was neutral, whereas last year in the comparison period, we had a negative impact from realized currency hedges. You can see that we were still operating in a deflationary environment. Changes in the sales prices for UPM’s product range had a negative net impact on our EBITDA, while changes in raw material and energy prices had a positive impact on variable costs in the similar magnitude.

Obviously, pulp energy prices were negative for the pulp and energy business, but again, largely we gained that back in the pulp and energy-consuming businesses. On the right-hand side, you can see changes in the business area results as compared to last year’s second quarter. Cost-efficiency measures were contributing to the result in all businesses, with the biggest impacts visible in paper ENA and biorefining. Growing deliveries were contributing, particularly in biorefining, raflatac, paper Asia and in plywood.

The following Page 6 shows the development of comparable EBIT by business area. EBIT decreased in biorefining and energy, and increased in all the other businesses compared to last year. The fall in pulp prices, as we saw during the spring, is now fully reflected in our second-quarter earnings, both in biorefining and in the paper businesses. In the second quarter, our realized average pulp sales price was 12% lower than last year, and about 7% lower than sequentially in the first quarter this year. Despite this, the EBITDA of the biorefining business only decreased by €30 million, thanks to the cost-efficiency improvements and the higher delivery volumes.

In the second quarter, we also had the maintenance stop at the Lappeenranta biorefinery, which had a negative impact on the biorefining Q2 figures. Going forward in the second half of this year, we will have two pulp mill maintenance stops. First, the maintenance and the investment stop at the Kaukas mill in the third quarter; and then, the usual annual maintenance stop at the Fray Bentos mill in the fourth quarter. In energy, the advantageous energy hedges from early previous years have now largely rolled over, and the profitability of the energy business area now closely reflects the current market fundamentals.

EBIT was lower than last year, but nevertheless shows the competitiveness of our energy business, which even in the current depressed energy market conditions had an EBIT margin of close to 28%. Raflatac continued on its strong improvement track. Deliveries continued to grow, and cost-efficiency measures and a more favorable product mix improved sales margins. And then, paper Asia’s EBITDA showed a positive impact from higher delivery volumes, as well as from lower variable costs. Paper Asia’s returns recovered to the targeted range, even though the ramp up of the new specialty machine in Changshu is still ongoing. Including this new paper machine investment, the return on capital employed was 11.6% in the second quarter.

Paper ENA continued on the same good profitability level that we reported already for Q1. Average paper price in €o terms in the second quarter was 2% lower, and paper delivery is 5% lower than last year. But comparable EBIT improved by €53 million. The volumes for the first half year-to-date for paper ENA were about 4% lower as compared to the volume during the first half of last year, in line with the paper market in Europe in general. The paper ENA result shows the impact of the cost-efficiency measures, capacity closures, and also the neutral currency hedging result in this quarter. Finally, plywood reported another strong quarter driven by 7% higher deliveries and lower cost, and showing very attractive returns in terms of return on capital employed.

The following page shows our cash flow performance on a trailing 12-month basis. And as Jussi mentioned, our operating cash flow was record strong in the second quarter. Q2 operating cash flow totaled €434 million, including a small €10 million release in working capital. Over the past 12 months, our operating cash flow totaled €1.5 billion or €2.86 per share.

And then in the following page, we can see that net debt at the end of the second quarter was €1,876 million. It decreased by €759 million from last year and remained unchanged from the first quarter, while we did during the quarter pay the dividend of €400 million. At the end of the quarter, the net debt to EBITDA ratio was 1.25 times and gearing was down to 24%.

At this point, I’d like to hand over to Jussi for some further comments on our growth projects.

Jussi Pesonen

Thank you, Tapio. Ladies and gentlemen, let’s actually then move on to the final part of the presentation. Page 9 shows the updated summary of our current growth projects. The Pietarsaari and Fray Bentos pulp mill expansions from 2014 are full in speed, and hence we have dropped them out of this slide. Like I already mentioned, the first expansion at Kymi pulp mill has also been a great success, already contributing to our earnings and volumes.

Raflatac has clearly benefited from the expansion projects in Poland and in China, and they enable the business to continue to grow in a cost competitive way. The new specialty paper machine in Changshu, as well as in the Lappeenranta biorefinery, are processing and progressing well with their ramp ups, and we are looking forward these two projects offering further earnings potential for us as the ramp ups continue and the processes and product mixes are then fully optimized. In the pipeline, we have Kaukas pulp mill investment and the Otepaa plywood expansion to be completed in this year, later this year, as well as the second phase of the Kymi pulp mill investment to be completed next year.

Ladies and gentlemen, then looking forward, our outlook for 2016 is unchanged. We expect our profitability to improve in 2016 from 2015. The main drivers for the improvement were already visible in the first half of the year. The growth projects are contributing to our earnings. The cost-efficiency measures have continued to deliver and currency hedges are no longer burdening our result like they did last year.

Ladies and gentlemen, now I would like to summarize our presentation for today, UPM’s second quarter result. So 21% EBIT growth as well as record strong cash flow and balance sheet. Our cost-efficiency measures and growth projects were both contributing to the results. UPM’s business model consists of six agile businesses, efficient capital allocation and industry-leading balance sheet. Our model has a strong focus on competitiveness and performance of the ongoing businesses. This way, we continue to generate strong cash flow and are able to pay attractive dividend. We have several growing and well-performing businesses which offers us a range of growth options and opportunities. In this then, our task is to select the best projects and the right timing to implement them. The second expansion of Kymi pulp mill is the latest example of the focused attractive growth investments. There will be also others when the time is right.

Before we are starting our Q&A session, I would like to spend a moment to welcome you all to UPM’s upcoming Capital Markets Day in London. We will start the dinner on August 31, and we have a great pleasure to say that our Chairman of the Board, Mr. Bjorn Wahlroos, will be giving the keynote speech. And then, on the second day, we will continue with the presentations of the business’s various topics, and there we have also opportunity to have a networking lunch so that you will have many options and opportunities for further discussions with the UPM management team after the presentation. So August 31 and September 1, I would be so – great to see you all in London.

And now this is the end of the prepared part of the presentation and we are definitely ready for your questions. Dear operator, I hand over to you for the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Mikael Jafs from Kepler Cheuvreux. Please go ahead. Your line is open.

Mikael Jafs

Yes. Hello everybody. I have a first question regarding a statement in the report. You speak about considering long-term development prospects in Uruguay. Could you please give us some more color and flavor and details on what you’re looking at in Uruguay, please?

Jussi Pesonen

Now this is pretty clear to say that what we have done at this stage. UPM will commence discussions with the Government of Uruguay on development on the logistics and infrastructure in Uruguay. So these discussions will include railroad, roads, which are the critical challenge for establishing large scale industrial operations in Uruguay. So it’s very much of the government and us to look are there any opportunities to grow in Uruguay.

Mikael Jafs

Okay. And then a second question. Your cash flow was very strong for the first half, as you point out. Now – and we all know that dividend is to a high degree linked to your cash flow development. Do you see any clouds on the horizon for the second half regarding the cash low development? I know that you don’t give forecasts, but if you could just give some color and flavor, please.

Jussi Pesonen

We don’t, actually. That is for sure. But looking backwards, the last 12 months has been pretty strong when it comes to cash flow, as you can see from the presentation. And our guidance for the rest of the year is unchanged, so nothing to actually add on that.

Mikael Jafs

Okay. Thank you very much.

Jussi Pesonen

Thank you.

Operator

Our next question comes from the line of Justin Jordan from Jefferies. Please go ahead. Your line is open.

Justin Jordan

Thank you and good afternoon everyone. I’m just trying to understand something slightly minutiae perhaps of your statement; the €16 million gain in eliminations and just how that derived in Q2 and whether we should be thinking about that as a recurring feature going forward. I’m just wondering if this is related to hedges unwinding or something unique going on in pulp prices.

Tapio Korpeinen

Well, that is a timing component that has been in our accounts since 2008 when we started to report and actually also to run the business segments that we have on a market basis. So, again, as you remember surely, is that the businesses in UPM always report the results based on market prices, whether it’s purchase costs or inputs, or whether it’s sales price of products that the businesses sell; whether it’s outside customers or inside customers or suppliers. But then let’s say at UPM level the consolidated result recognizes the profitability of external sales only. So that’s an example when we in our paper business consume pulp that is coming from our own internal pulp business, then actually, at the UPM Group level, that gets recognized in the consolidated result at the time when that paper is actually sold to an outside customer.

So therefore, there is this timing difference there where most part of it or more important part of it is related to pulp. So, again, when pulp is sold internally, it’s going first to paper making and into inventory in the paper business. Then, it’s reflected in the UPM result when the paper is sold out. So that’s why you have this elimination line there which again is a timing issue. Over time, it balances out. So for instance, now we had €16 million in this second quarter, but if you look at the last four quarters, it’s actually only €5 million. So it’s just a normal timing issue coming from the point that businesses are always reporting profitability on market price basis, and then when it’s consolidated into a UPM level Group result, there are from time to time these timing items which get evened out over the quarters.

Justin Jordan

And, Tapio, just thinking about that in relation to your sensitivity guidance that you give in your annual report of a 10% pulp price change impacting operating profit by €21 million, is that part of that sensitivity? Or when we think about the impact of declining pulp prices on reported profitability, should we think about the – obviously, offsetting benefit within paper ENA and paper Asia when we’re trying to estimate that €21 million benefit – sorry, change to EBIT from a 10% change in pulp prices?

Tapio Korpeinen

Yes. It’s elimination line; in a sense it’s not related to that sensitivity. The sensitivity is just related to pulp balance that we have in a sense and what would be the impact over the year in total.

Justin Jordan

But across all divisions. So obviously, you’d have a negative in biorefining, but obviously a positive in both the paper businesses.

Tapio Korpeinen

That’s right. Yes.

Justin Jordan

Yes. Okay. And just one final question. Just on the phase 2 Kymi ramp up – sorry, CapEx project, can you give us just some idea of the returns that you may expect from that project, or remind us just from UPM generally on CapEx projects such as this what sort of returns criteria do you have?

Tapio Korpeinen

Well, we have as a target for the biorefining business let’s say a 12% return on capital employed. And this project will be clearly better than that, because as we have I think discussed earlier, and as you can see in the biorefining result, this kind of investment was the first phase in Kymi where you’re debottlenecking. You’re not adding any fixed cost and the CapEx per additional capacity tonne is low. The returns are quite attractive on those ones. So, clearly, let’s say attractive investments from a return point of view.

Justin Jordan

Sure. And just, sorry. One final thing just on I guess potential future investment. Assuming you have successful discussions with the Uruguayan Government on the infrastructure, can you give us some idea of a potential timeline to future investment in terms of CapEx and the cash flow on potentially a further mill expansion in Uruguay?

Jussi Pesonen

No. We are not at all on that stage where we are today. We are opening the discussions with the Uruguayan Government and those will take some time before we are even on that stage that we would actually start to put a timeline on it.

Tapio Korpeinen

Thank you. Jussi.

Justin Jordan

Thank you.

Operator

Our next question comes from the line of Harri Taittonen from Nordea. Please go ahead. Your line is open.

Harri Taittonen

Thank you. Yes this is Taittonen from Nordea. A couple of short-term, market-related questions, and then maybe a follow-up on the Uruguay issue. In the biorefining business area, will you see the maintenance costs in the third quarter at about the same level as in the second quarter, or higher or lower, just to get a feel? And then the other question is about the market situation in China, fine paper. You mentioned earlier that the market picked up after the New Year there and just that the orders situation got significantly better. Has it stayed that way? And then the third question was about Uruguay and so just wondering about the wood availability and the resource availability issue. Is that setting some sort of a framework for the potential timeline for the investments? How is the wood availability in that part of the world?

Jussi Pesonen

I guess that if I understood, Harri, you’re right. You were asking that whether there was maintenance stoppages in biorefining in Q1/Q2. We did not have.

Tapio Korpeinen

We had the Lappeenranta maintenance.

Jussi Pesonen

Sorry. Yes.

Tapio Korpeinen

Stop in the biofuels plant.

Jussi Pesonen

So it was a bio – you were talking about the biofuels, not.

Harri Taittonen

Sorry. Yes.

Jussi Pesonen

Not the biorefining business. I misunderstood you. I thought you were talking about the pulp. Sure. We did have the Q2 – we had the biorefinery stoppage in Q2.

Harri Taittonen

Yes. And there will be the – one of the pulp mills will be stopped, at least for a while in the third quarter. Just wondering if that difference is going to be meaningful between the two quarters in terms of costs, or --

Tapio Korpeinen

Yes. There will be a difference because, again, let’s say we have third quarter Kaukas and fourth quarter Fray Bentos, we did not have any pulp mill maintenance stops in the first half. And also then the Kaukas stop will be somewhat, let’s say, bigger than normal because we have the investment ongoing there. So to do the installation work there, it means a bit larger stop than just your regular maintenance shut.

Jussi Pesonen

And. Harri, for your second question about fine paper and Changshu kind of development, yes, it has stayed very strong. We are running flat out our mill, both through fine papers, and as well label, pack and release demand has been very positive on that region. And then the wood availability, like I said that we have now – we are in the face of infrastructure. Of course, the wood availability is always a kind of question. But like I have said many times, we do have already more woodland than what we need for the one line. That has been quite openly stated for many times. But today, we are focusing on the infrastructure issues.

Harri Taittonen

Exactly. Okay. Many thanks.

Operator

Our next question comes from the line of Linus Larsson from SEB. Please go ahead. Your line is open.

Linus Larsson

Thank you, very much and good afternoon to everyone. My first question is relating to your ongoing investments and ramp ups. You were targeting €200 million, at least that’s what you targeted when you initiated this program. Would it be possible for you to give any idea how far you’ve come, what the run rate is in the second quarter of 2016?

Tapio Korpeinen

Well, let’s say no more definite figure or guidance on that except that as we have said, this €200 million target is to be achieved as a run rate by the end of this year, and I would say that we are well on our way towards that. Obviously, good evidence of that is that Kymi startup has gone so well and we are so far along there that we were already now able to announce the next step in Kymi.

Linus Larsson

Okay. And looking ahead, obviously, you had a very strong cash flow in the first half of this year. You have a strong balance sheet, and it looks as if these type of investments have indeed paid off. At the same time, looking at biorefining Uruguay, it sounds as if that is some time away. You’ve done a round of successful debottlenecking. What is there really to invest in? Could you do another round in raflatac which has been pretty value accretive, as it seems? Where could you allocate capital in your current structure?

Jussi Pesonen

I guess that we are not only allocating but trying to find a lot of new growth options. Like we have been saying that the industry-leading balance sheet focused CapEx, and attractive dividend is our main target. Kymi is a great example that as we did the first phase and it opened us for a second phase which will be as profitable as the first phase. So I guess that there will be plentiful of this kind of things that will actually be possible for us to further improve, whether it’s in raflatac, whether it’s in biorefining business, whether it’s in paper Asia, whether it’s in all our fiber growth businesses.

So that is in a way a beauty of UPM that we don’t have to spend money and allocate capital on maintenance and replacement investments. And that’s the kind of where the cash flow and the free cash flow comes very strong. Out of that €400 million, roughly what we have been spending over these last three or four years, the maturity almost two-thirds are going to growth investments rather than we don’t have to put a lot of money to replacement investments. So I guess there will be more to come, but with the asset quality that we have, we are – we can hold the very strong balance sheet and pay a very attractive dividend.

Linus Larsson

Okay. But just to follow up on that, if you look now compared to let’s say three years ago, do you see the same scope or size opportunities today as you did three years ago in terms of investment opportunities?

Jussi Pesonen

No. Obviously, we will tell when things are ready for that. But, obviously, as I said that Kymi is a great example of it. We make €160 million investment, ramp it up in two or three quarters, and then we are prepared to move on already. So this platform, this asset quality, this asset platform gives us a lot of opportunities for the future as well.

Linus Larsson

Great.

Tapio Korpeinen

And I think maybe just to point out that again, the Kymi is good example in a sense that this €98 million investment, 120,000 tonnes of additional capacity, would not have been possible without the first step. So the first step means that then it opened the door for the next step, and that’s the way we can look at the other businesses as well.

Linus Larsson

Okay. Great. And in your waterfall graph, you showed how variable cost deflation had been a tailwind in Q2 this year compared to Q2 last year. On a general note, when you look ahead, where do you see variable cost trends moving? And particularly maybe if you could comment upon recycled fiber costs if you see that trending anywhere.

Tapio Korpeinen

Well, maybe general speaking, obviously, as said, we have been in a deflationary environment for a while now which has been visible in many of the commodity prices globally and locally. And, obviously, now looking at those commodity prices, they are sort of bottoming out. So in that sense, going forward, perhaps there will be more stable environment also on the cost side. Which direction the curve will move going forward then, let’s say it’s early to say. At the same time, also as said earlier, more than half of that variable cost reduction is coming from our own actions, and obviously there the track continues as it has so far. I think year-to-date this year, we have shown that we can continue on the same track in the same order of magnitude in terms of improving on variable cost efficiency through our own actions, as we have done during the past couple of years.

Linus Larsson

Great. And specifically on recycled fiber costs?

Tapio Korpeinen

I don’t have anything particular to sort of comment on that.

Linus Larsson

Okay. Those were my questions. Thank you.

Operator

Our next question comes from the line of Mikko Ervasti from DNB Markets. Please go ahead. Your line is open.

Mikko Ervasti

Thank you very much and good afternoon. On the biorefining business and – well, actually, the first question about the Netlon pulp situation. So can you give an update on the Netlon pulp situation you have at the moment and also in the future? Because in the first quarter, you said that you’re some 400 kt long. And so with these pulp investments now and the paper portfolio changes, what’s your target pulp exposure? And if that’s increasing, is that because you perhaps see better opportunities for pulp prices? And then, I can also say the second question here. So on the biorefining business, can you comment on the profitability of pulp within biorefining? Because you mentioned about this biofuel maintenance and I also want to know if there are any future expansion-related OpEx costs already taken now in the second quarter in that division. Thank you.

Jussi Pesonen

Well, maybe first of all on the pulp question, obviously, we don’t have any sort of target exposure other than to produce as much pulp as is profitable, and no more than what is profitable in the future. So, obviously, again, more seriously the point there is that we look at pulp as a business that is profitable business for us, and we will invest to expand that business as long as there profitable investments to do so.

And this sort of exposure question is not an issue there. And then similarly on the pulp consuming side, we will take these investments, or in the European side capacity reductions as is profitable for the paper business, whether it’s in Asia or in Europe, I would say in round figures, at the moment we are sort of 0.5 million ton, kind of producing more chemical pulp than what we are consuming internally in round figures. But it will be after this Kymi expansion ramps up that then we will see at that time. And then in terms of the profitability of the pulp business, we don’t disclose that separately.

Mikko Ervasti

Okay. And then on the balance sheet side, so even stronger again with this cash flow. So what is now the updated plan of getting that balance sheet into action? You mentioned that the growth investments have been quite successful within the Company, so is that going to continue, or are capital returns now more likely. Or do you have something on the M&A side? Some comments there, please.

Tapio Korpeinen

Well, I would say that the basic business model and capital allocation model that we have talked about earlier is very much valid and I think continuing going forward, meaning that we do see that we can continue to grow as a baseline through focused growth investments that we can fund from cash flow. And this latest Kymi next phase investment is a good example of that that we can continue on that track. But again, as said, this model means that those scale investments we can fund from operating cash flow, and that will improve our balance sheet further. Of course, as these investments are profitable and cash accretive, it creates room for dividends to grow as well. So that’s obviously a use for capital that is important for us, an attractive dividend going forward.

Then we will see. M&A opportunities obviously are always a kind of a two-way deal. We will look at those in the businesses where we have invested in organic growth as well. And that is one place where we can put our balance sheet into use as well. But, obviously, time will tell whether the right opportunities in a sense then actually lead to M&A deals and when that might take place.

Jussi Pesonen

And maybe to add on that that the money doesn’t burn in our pockets. And as you said yourself that efficient use of balance sheet, and that’s what we are aiming at that it will be efficiently used.

Mikko Ervasti

All right. Very helpful. Thank you very much.

Operator

Our next question comes from the line of Henri Parkkinen from OP Corporate Bank. Please go ahead. Your line is open.

Henri Parkkinen

Yes. First of all, good afternoon for everyone. I have three questions. First of all, about your outlook comments, you say that the currencies are expected to contribute positively effects all over, assuming relevant currencies stay at about same level as at the end of 2015. But when taking into account what happened during the first part of this year, and if currencies stay at the level where they are now, what kind of rough number we should expect from currency side on 2016?

And second question is about paper ENA. If I remember right, you have an internal target for that division that cash flow per capital employed should be roughly 12%. How close you were to that number during the first half of this year? That’s my second question. And then third question is about power prices and power hedges. We have seen the forward curve on the Nord Pool has increased during the last couple of months. What kind of hedges do you have for the next 12 months or for longer periods? So have you been active on the Nord Pool side, during the last couple of months? That’s my questions. Thank you very much.

Tapio Korpeinen

Yes. Well, let’s say first of all on the currencies, I think the only point to say which we have said in the first quarter and second quarter that let’s say from a kind of hedging results point of view, so far this year has been more or less neutral. So the currency changes have not been so significant from that point of view. So in that sense, the delta is coming still as we have indicated in the outlook in the beginning of the year from the fact that we did have a negative hedging result from costs by currencies last year which we don’t expect to have this year, at least let’s say where we are right now.

And then in terms of paper ENA, we have had now two quarters where just the conventional return on capital employed has been close to 9%, and this cash return over the 12 months has been around 17% now. So cash returns are very good. And then the question around energy forward curves and hedging. There, we are obviously developing our hedging portfolio on a continuous basis as a kind of a baseline, as has been discussed earlier times as well around three years when there is liquidity in the market. And so in that sense, that sort of hedging position is evolving continuously, but further detail we don’t disclose of the coming position at the moment.

Henri Parkkinen

Okay. Thank you very much. Very helpful, thank you.

Operator

Our next question comes from the line of Mikael Doepel from Handelsbanken Capital Markets. Please go ahead. Your line is open.

Mikael Doepel

Thank you. Two quick questions. First of all, on CapEx, you increased your CapEx guidance of this year. Is this solely due to the announced pulp investment in Kymi, or is there something else reflecting that as well? And secondly, what do you expect in terms of paper pricing in Europe and in the US going into the second half of this year?

Jussi Pesonen

First of all, actually, the CapEx guidance now is €400 million, which is €60 million more mainly coming from the Kymi. But also, there are some smaller items as well on top of that; but mainly coming from the pulp investment. Paper prices we do not guide for the future, but as you have seen that they have been quite stable in the past. But we are not guiding that for the future.

Mikael Doepel

Okay.

Operator

[Operator Instructions] There are no further questions at this time. Please go ahead, speakers.

Jussi Pesonen

Thank you, everybody. It has been a good afternoon. And have a very nice day from my part, and I think that from Tapio’s part as well. Thank you. Bye now.

Tapio Korpeinen

Thank you.

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