Stora Enso's (SEOJF) CEO Karl-Henrik Sundstrom on Q4 2015 Results - Earnings Call Transcript

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Stora Enso Oyj (OTC:SEOJF) Q4 2015 Earnings Conference Call February 20, 2016 9:00 AM ET

Executives

Ulla Paajanen - IR

Karl-Henrik Sundström - CEO

Seppo Parvi - CFO and Deputy to the CEO, Country Manager Finland

Analysts

Antti Koskivuori - Danske Bank

Lars Kjellberg - Credit Suisse

Mikael Doepel - Handelsbanken

Mikael Jåfs - Cheuvreux​

Linus Larsson - Enskilda Securities

Justin Jordan - Jefferies

Stephen Benson - Goldman Sachs

Operator

Good day, and welcome to the Fourth Quarter 2015 Stora Enso Earnings Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Ulla Paajanen, Head of Investor Relations. Please go ahead.

Ulla Paajanen

Hello. Good afternoon, everybody, and we have a sunny day here in Helsinki. I hope you have too, wherever you are. And we will start now presenting our Q4 2015 and full year 2015 results.

Please go ahead, Karl.

Karl-Henrik Sundström

Thank you. A very welcome and good morning, good afternoon, or wherever you are in the world.

So, I would like to start with a statement that we continue to deliver a very solid result in the fourth quarter of 2015. We have a dividend proposal that we're taking to the AGM, which is an increase of 10% to €0.33.

Sales in the quarter declined nominally and that is due to the structural decline in paper, but if you deduct both the paper as well as divested businesses, you have seen an increase. Operational EBIT has improved. Cash flow has continued to be strong. A 412 operating cash flow and 75 million on net cash flow in the quarter were ticking investments in CapEx. Net debt to EBITDA has improved from 2.6 times a year ago to 2.4 times and the annual EPS increases from €0.13 a year ago €1.02 by the end of Q4.

If you look upon the sales, you can actually see that we declined in total terms 2.5% for the quarter as well as 1.7 for the full year, but if you deduct the structural decline in paper Corenso, Barcelona; we actually for the fourth quarter in a row increased sales by 5.4%, and if you do the same for the full year, you can say it’s almost 5% increase. And that is obviously driven by the strong performance of biomaterial with the ramp up of Montes del Plata, but also in most other divisions we have had some growth, but the big ticket item is the biomaterials addition.

If you look upon the operating margin, it has increased by 16.8% between the fourth quarter of 2014 and the fourth quarter of 2015. And I think it's important to recognize these events [ph] in these numbers, which has actually increased at 1.5 percentage times, they are also included a maintenance increase into fourth quarter of 16 million higher in the fourth quarter 2015 versus the fourth quarter of 2014.

We have the Corenso, which is included in the number by 4 million, and we have the startup of Varkaus which is an additional nine. That is another 1.1 percentage points increased in operating margins, that is - it's in the underlying business. The increased profitability and the strong focus on working capital has actually taken the operating - a return on the operating capital to the different level.

And as you can see in the growth here, we have continuously improved this, both including the strategic investment and excluding. So, for the second time in about a year, we have actually passed the magical 13% and that is for the fourth quarter of 2015 when you exclude the very high investment at a strategic targets.

We have completed a number of transformation steps, and as I mentioned earlier on, one of the recent while we have a growth this year and improved profitability, it's actually the very successful startup and ramp up on the Montes del Plata pulp mill. We have also in the biomaterials during 2015, in the early part started out the leading production at Sunila mill. And we made an acquisition in the early part of 2014, which is Virdia.

We have started up with sawmill in Murow in Poland to benefit from the competitive situation in Poland. We have debottled Imatra to get even more out of the mill in Imatra producing consumer boards, and we had final in the fourth quarter concluded a conversion of the 280,000 ton paper machine to 319,000 kraftliner machine and these are the reasons why we would continue to grow.

During 2015, we have also continued to streamline and focusing on the core of the business, which I meant that we have made a number of divestments on non-core assets. The Uetersen, the Barcelona, Komárom and the recently announced a sale of Arapoti mill that will be concluded in the Q1 of 2016. We closed down the corrugated unit in Chennai, in India and closed down a production unit within wood product pellet in the second quarter of 2015.

What is left on the plate that to be continued in this phase of investment that we have been doing for the last five years. We need to conclude the consumer board mill in Beihai and the investment value as you know it was 800 million, that will be up and running during 2016. This is a bit earlier than we thought before when we talked about by the end of the second quarter, and that is because right now we are proceeding ahead of plan.

We will also during Q2 2016, start up the second part of the investment in Varkaus, which is wood and building elements, which is the 43 million new investment. And then we continue with the demonstration plant and the market development plant based on the Virdia acquisition and that is should be ready by early 2017. We have taken a number of important steps in innovations, we have the corporation agreement with NXP on intelligent packaging and we are working on a number of customer projects. We launched MFC products in Q2 2015 and deliveries has started in source reduction and new capabilities of consumer board.

We inaugurated an innovation center for packaging in Helsinki in November, and we inaugurated an innovation center for biomaterials in Stockholm in the middle of December. So, the transformation journey continues, we are now at the end of 2015 in the fourth quarter, we are having two-thirds of the sales coming from the growth areas and one third of the sales coming from paper. We have moved from 38% of the profit coming from the growth areas to 83 in the fourth quarter of 2014. We had a strong performance, seasonal strong performance as usually in the paper business, which now represent 17 of the EBIT.

With that, I would like to hand over to Seppo, to give some insight on the numbers.

Seppo Parvi

Thank you, Karl.

And I start with some of the key figures in addition to what Karl already mentioned. And first, I want to highlight that we have record high annual operational EBITDA margin 13.5% that is a bit one percentage point improvement compared to 2014. For the last quarter, it was 13.7%. Operational EBIT flat for the €242 million, a 16% increase in Q4 compared to a year ago; and 13% for the full year result at €915 million. Operational return on capital employed excluding Beihai project was 13.3% and that is also clear improvement compared to a year ago when EBITDA was 12.2% on a comparable basis. Our strong cash flow has continued, full year cash flow from operations was €1.6 billion that is an increase of almost 37% compared to 2014.

Then moving forward, looking at the currency gains and drivers for the result. And I want to highlight here what we have done in the previous quarters that the currency gains that we had during the quarter and the year, full year 2015 versus the year before, they are the large extent of set by local price declines. So, if you look at the full year figure, FX on sales was €230 million positive and that is more or less offset by local sales price changes above €230 million.

And the similar logic in the Q4 figures, the FX on sales was plus 40 million, a local sales prices mix was 37. And as I said earlier, this is quite natural when we are Europe-based company having manufacturing base in Europe countries, mostly, but saving quite a lot of volume outside Europe and Europe region.

Then some comments on the division starting with consumer board, the sales increased 1.1% during the Q4, but if we exclude divestment of Barcelona mill that we did last year sales actually increased 6.5%. So, of course if you trend continuous step as well. Operational EBIT was up 20.5% driven by higher deliveries and foreign exchange. And operational return on capital excluding Beihai Mill project was 24%, clearly above our strategic target of 20%.

And like Karl already mentioned, Beihai Mill operation already during Q2, this is a bit earlier than we have earlier communicated, earlier we said [indiscernible] 2016, so we are moving ahead there very well.

Just to notice that cost per quarter now going forward during the first half of 2016, [indiscernible] to €10 million to €15 million, you might remember, I recall that last year 2015 closely about €10 million in third quarter.

Then packaging solutions, their sales were down about 8.7%, but that is driven by currency divestment down a year ago. And if we exclude that sales were actually up 5%. Operational EBIT excluding again divested Corenso was down 4 million, but here we had to remember Varkaus Kraftliner start up during the Q4 had an impact of €9 million in the operational EBIT of packaging solutions.

So, taking that into account actually, the underlying performance was improving. Couple of comments on the Varkaus project, kraftliner production ramp up. We are proud to say and comment, the quality is good. We are moving ahead with customer qualifications according to our plan and we expect to reach full production early 2017. So roughly a year from now.

Biomaterials continued strong performance also during the last quarter of last year, and sales increased by 19.1%, trailing very much by Montes del Plata ramp up and positive foreign exchange impact. Operational EBIT more than doubled and improved by €47 million to €81 million in Q4 and thanks to Montes del Plata volumes ramping up, good sales price level of Varkaus [indiscernible] has made impact of lower wood cost at the Nordic mills.

Then looking at the wood products division, where sales declined 4.8%, but that was very much due to changes in the business portfolio and product mix. We have been lowering share of the traditional goods and increasing sales and focusing more on higher margin products.

Operational EBIT more than doubled, up 110% and that is thanks to changes in the business portfolio, lower wood cost and some positive FX from there as well.

Then, I want to highlight couple recent announcements, some investments in wood products division, those investment in all assortment in speed and about €16 million, where we are investing in the pellet production and boiler renewal. Then another important project in Honkalahti sawmill in Finland, €10 million investment for boiler renewal.

Then last but not the least, our paper division where sales went down 9.6% driven by disposals we had done with [indiscernible] mill conversion of Varkaus by the kraftliner that I previously already commented and lower sales prices and local currencies. But important to note that actually volumes remain flat, excluding both mentioned divestments to also some conversions.

Operating EBITDA decreased to €74 million and as you know we see paper business as important cash flow generator, it remains so. Cash flow was a bit weaker than normally during the last quarter, but it's fair to notice that there was a cash payment of about €25 million related to renegotiate long-term supply agreement of restructuring payments and also CapEx was seasonally high in Q4. If you look at the full year, cash flow about €200 million for the paper division and if you expect the €25 million, we actually pretty much at the same level as in 2014.

Then maybe couple of comments on [indiscernible] cost that have improved significantly compared to year before, look at the Q4. First of all, we have reduced our excess liquidity. Clearly, we had about €1.6 billion liquidity year for now it has been brought down as planned to about €800 million that you all know this is of course to keep liquidity [indiscernible].

We are also restructured our loan debt portfolio, working on maturity structure and also lowering diverted interest rate of the [indiscernible]. On top of that also foreign exchange gains and losses in net Varkaus, we are down €25 million and also another items there, there is a positive development made in 2014, we had repurchase of some bonds that are causing some capital loses. But in total the [indiscernible] items went down €65 million in Q4 year-on-year.

Then earnings per share that brought significant as Karl already mentioned and was €0.01 and €0.02 and that that is a clear improvement from 2014, when we reached €0.13. There were positive impacts from improved operational results like commentator and [indiscernible] fair variations of above €25 million and €30 million both in Q4. And also lower finance that I just mentioned, the taxes had positive effects there.

The comments on [indiscernible] and just to remind you it’s not really affecting EPS earnings per share starts, but please notice that as it is equity accounted investment, we book results from [indiscernible] net of taxes and that’s why if you look at our tax rate in profit or loss, it might look a bit artificially low, compared to previous barriers, so just keep that in mind.

And also in the quarter, EPS we have negative impact coming from non-recurring items booked about €250 million maybe relating to impairment charges in the paper business. Then capital expenditure going forward in 2016, 2015 we reached about €990 million in capital expenditures and as we have communicated earlier, we expect capital expenditure to come down gradually during the coming years to about the level of depreciation plus about €100 million for the biological assets. For the coming year 2016, we guide capital expenditure about €680 million to €720 million, this is a bit more than what I just mentioned that’s along with the targeted level compared to depreciation that we expect to be €520 to €540 million. Capital expenditure dimension includes about €160 million with the Beihai Mill project still to be baked in 2016.

Then a summary on our strategic targets that will be sent there. Like in the previous quarter looking at the growth - of the growth businesses grew 5.4% year-on-year reaching our target there going faster than the market. Also balance sheet ratio like net debt operating EBITDA remains below 3 and 2.4 and debt-to-equity at 60%. And we are especially happy about the balance sheet strength taking into account the high CapEx level we had last year but this demonstrates the strong cash flow generation capabilities that we have demonstrated during the past year and expect to continue that also going forward.

Operational return on capital employed excluding Beihai was 13.3% like I said earlier reaching the target including the burden of Beihai, the balance sheet that resulted was 11.3% so a bit short of the target. And fixed cost of sales still remains at the 5.25% level above our targeted 20% level but like I said earlier we expect that we are growing and continue to grow and of course keeping close under control and working continuously to improving the structure, we can reach the targeted 20% level.

Then different divisions and consumer board first of all excluding Beihai we have reached the target and remain above the 20% target 24 including Beihai 10.6%. Packaging solutions, a bit short of the targeted 20%, 10.5 but here we have to remember the burden of Varkaus conversion to kraftliner where we are still at the startup phase and like I said earlier that burden the result by €9 million for Q4.

Biomaterials at 12.7%, a bit short of the 15% target level, our wood product for the quarter was at 16.6% compared to targeted 18, I still remember they have been above last 18% level and we expect that to be still reasonable going forward. And paper like I said have big cash flow in Q4 only 1.8% compared to sales, but like I said there was some external items affecting the cash flow in the last quarter of last year.

Then couple of comments on pulp market feel that being some speculation of the market and stock on the softness of the pulp market, which we don’t really see. Looking at the statistics and also what we see in the market, we think it’s fair to say that globally inventories we made on normal level and looking at the Chinese market, which is not so important for us as the supplier, we’re going to see that the inventory levels are at a low than high. On the pulp prices, on the following base there has been some softwood pulp price increases announced in Europe. We are confident that those price increases will be implemented as planned during the coming couple of months, and also we see that the market remain stable particularly [indiscernible].

With these words, I will hand over to you, Karl.

Karl-Henrik Sundström

Thank you, Seppo. And I will here cover the guidance. So, we expect the Q1 2016 sales to be similar to the amount of €2.487 billion. Operationally, this is expected to be in line with the €242 million recorded in Q4 2015 compared to €220 million in Q1 of 2015.

We had no major schedule annual maintenance shutdowns during the period, that doesn’t mean it won’t be maintenance; maintenance will be roughly at the same level as of Q1 2015.

I also would like to talk a little bit about the proposal that we will make to the shareholders at our AGM at the end of the month of April. The policy is to try to pay stable dividends linked to the long term performance and then pay half of the net profit over business cycle. So the dividend proposal drawn still answer to the shareholders is to pay out 0.33 Euro cents per share for 2015, totaling €260 million and that is an increase by 10%.

So, in summary, a strong performance and EBITDA increase of 15.8% year-over-year, a positive annual cash flow of 599 million, despite taking investments of almost 1 billion. CapEx level going down from the €989 million in 2015, to €680 million to €720 million in 2016. EPS improved significantly, dividends increased by €0.03 to €0.33, Board mill investment in Beihai is moving ahead and we are going ahead of plan and the journey and the transformation towards the renewable materials company continues.

With that, I hand over for any Q&As.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. We will now take our first question from Antti Koskivuori from Danske Bank. Please go ahead your line is open.

Antti Koskivuori

Yes. Thank you. Good afternoon. I have had two questions. Firstly, if you could talk a little bit about the pricing outlook in the consumer board segment, you've announced some price increases in folding books board, what should we expect for 2016?

Karl-Henrik Sundström

So, I think you have to be careful, in folding books board; we had talked about a 1 percentage point. It's very stable prices and it’s not all the consumer boards, it’s certain parts of it. Okay.

Antti Koskivuori

Yeah. So, relatively stable pricing outlook for 2016 in total in the consumer board division, is that correct?

Karl-Henrik Sundström

Yes.

Antti Koskivuori

All right, thanks. Then secondly, about the CapEx guidance you gave. Could you confirm is that - has that increased overtime a bit for 2016 and I'm just wondering if that’s a timing issue or have you committed to more CapEx and what should we think about the gradual decline in the CapEx outlook. When should we anticipate the CapEx to come to the level of depreciation, is it already in 2017 or…?

Karl-Henrik Sundström

What we have said over a number of years and we will drive it down towards the level of depreciation yes plus the maintenance CapEx on the illogical assets that we have to do because we have the line-by-line consolidation of Veracel and the Montes del Plata plus the plantation, we have in China, we need to replant the trees, we are shutting down and that's the 100 million. So that we have said over a number of years. We have not said it's going to be from the first of 1st 2016.

Seppo Parvi

And also I would not say that really any significant changes or research in 2016. I also remember that in Beihai mill like we mentioned also here on the previous slides, it's about €160 million still to be spent for the project even though that we have the final stages. So that is more or less what we have communicated those earlier.

Antti Koskivuori

All right, thanks. Then lastly on just as a reminder. Could you give us a number of the maintenance impact you had in Q4 in the biomaterials business? I'm looking for the delta in the Q1. I guess you don't have any maintenance in that division in Q1.

Seppo Parvi

It's Seppo. We had [indiscernible] figures that division but on growth level that was about €35 million positive compared to Q3.

Antti Koskivuori

Yes, okay. Thank you very much.

Operator

Thank you. We will now take our next question from Lars Kjellberg from Credit Suisse. Please go ahead. Your line is open.

Lars Kjellberg

Thank you. Just coming to Beihai it's good to hear that you're starting up this thing slightly ahead of schedule. Could you give us any thoughts how you will account for this thing as it starts up, do you need a sort of a hurdle rate for utilization rate before it actually properly comes on to the books or you sort of starts out the P&L from day one, you press the start button?

Karl-Henrik Sundström

So, first of all as we say in the report in Q1 and Q2, we will have slightly increased cost. We used to say, it's 10 million per quarter, we're now talking about 10 to 15 for the first two quarters of the first half year. Then when we started up, I think it's important today then you will get hit by the capitalization or the depreciation, which if I remember right is about 40 million per quarter. So, then it all comes on board.

Lars Kjellberg

Okay. And you do not consider there is some instances where companies sort of said, we are going to reach a certain utilization rate, before we actually account for the startup before that we sort of capitalized those cost.

Karl-Henrik Sundström

The depreciation usually, you're right way is the way we do it and there was usually some extra startup cost when you do the commissioning and I don't have those details in my head and we had....

Seppo Parvi

Yeah, correct Karl. Like Karl said, depreciation will be started once we see that machine is operationally ready and running and then run up as such.

Lars Kjellberg

And will you capitalize any cost is essentially the question or not really....

Seppo Parvi

And that it's also when you stop capitalization of the cost. But like Karl mentioned, and we have said earlier, the asset territories now going forward €10 million to €15 million operational cost already going through the profit and loss in Q1 and Q2. This is not capitalized. Those are things that we are training people we have operators and payroll, people on payroll et cetera et cetera.

Lars Kjellberg

Understood. And when you sort of look at in this quarter, so obviously going to be recently clean from sort of any major scheduled maintenance work. How should we look at the P&L impact from the balance of the year by quarter if you can share that with us?

Seppo Parvi

Yeah, Seppo. As Karl said, compared to Q1 a year ago in the Q1 this year, the FX on maintenance is roughly the same. Then if you look on the Q4 to Q4 last year, the Q1 this year, it's about €35 million less maintenance CapEx in Q1 this year.

Karl-Henrik Sundström

Maintenance cost.

Seppo Parvi

Maintenance cost. I'm sorry.

Lars Kjellberg

Understood. And then you look in.... then you're being kind enough to give us the various mills that are going down in Q2, Q3, and Q4. Do you have any sense what the average cost are for those quarter versus what you're going to incur in the first?

Seppo Parvi

No, like we said we don't give separate guidance on that the comment of the coming quarter. But I think it's typical in our business as you know. You have followed us a long time Lars that the Q1 and Q2 are normally less than Q3, Q4, especially Q4 is sometimes heavier.

Lars Kjellberg

Yeah, that's clear. Just on the smaller counting, and obviously you will have an extremely tough comp given that you had the [indiscernible] forest gains now in Q4, how should be the actual sort of apples-for-apples numbers I mean Q4 in the current year, if I were to strip out [indiscernible] fair value gains and net out all the non-recurring items, what is the real underlying operational number in EPS terms?

Seppo Parvi

Let us come back to that, big and clean it's just - if you content...

Lars Kjellberg

Yes, it's not going to be looking great otherwise you're going to have a like a massive fall in EPS next year, which makes no sense across that because that's not what's happening to the business. Final point, how should be the tax rates in the current year because that's been all over the place across in this we have.

Seppo Parvi

In the longer-term, like I mentioned, it looks a bit low now in Q4, but if you clean for instance the tax effect from [indiscernible] booking it would be having about 18% for Q4. Going forward, if you take longer-term tax rate, we expect that to be around 20%.

Lars Kjellberg

Got it. And just one question that's - can I say, I was listening to you. You’ve obviously started out FICAs quite well and you talked about how you would last quarter you're finding your customer base. Where do you sell this product now given that there is supply in the market already? How do you - how you're doing what you sort of said, you were going to do high displays in some overseas tons or where do you find the market for the volumes?

Seppo Parvi

So, some of it, we are using internally because that's part of it. But mostly, we have an overlap with over 60% with the customer that we are already selling to in, from Nymölla in this floating [ph] business. And the product is a premium product, and there has been some competition trying to do on price. But the way we sell this one is about light-weighting products. So, which has to do with the quality and the fresh fiber included.

Lars Kjellberg

Understood.

Seppo Parvi

And we feel confident about it.

Lars Kjellberg

Yeah, sounds that way. Good startup. Anyway, thank you so much and good luck.

Seppo Parvi

Thank you, Lars.

Lars Kjellberg

Yes.

Operator

Thank you. We will now take our next question from Mikael Doepel from Handelsbanken capital markets. Please go ahead, your line is open.

Mikael Doepel

Thank you. Good afternoon, everybody. Starting off with packaging, essentially two questions. First of all on pricing, you talked about the consumer board expecting fairly stable pricing. What's your view on corrugated packaging and on the container boards overall. Or if you want to do it grade by grade.

Looking at some statistics in the Europe right now, we are seeing price declines in wide top kraftliner and kraftliners and even floating [ph]. That will be my first question. What's your take on that?

And secondly again, with regards to container board business as I understand it, you are still a net buyer of container board. But what's your net position by grade?

Karl-Henrik Sundström

So, if I start. So, on the container board we see an increase in demand and as I said, stable prices. Kraftliners, we are seeing some increase in demand and a little bit negative pressure on the prices, which we are trying to counter by making sure that we don't go on price, but we go on light-weighting.

And then, if you come to the corrugated. We see increase, a small increase in the demand. But we also see a positive price development.

Seppo Parvi

And that to your question on usage of the container board, we have about 60% integrated to captive raw material at the Beaux plants. That will use about 30% of container board produced, just to give you the big picture. And then to Lars coming back to your question on EPS excluding NRIs and [indiscernible] reevaluation that would have been €0.06 to €0.09 so it's still a clear improvement compared to a year before.

Mikael Doepel

Okay. Can I just have a follow-up question on your comments on the pricing? You mentioned corrugated, you're seeing some small increases in that demand, but also in pricing. While at the same time, we have some of the container board pricing coming off. What's driving the pricing in corrugated right now?

Karl-Henrik Sundström

Yeah. I don't know. You probably look at the total European market, you have to remember where we are active. We are active in the Nordic, the Baltics, around Poland, Eastern Europe, which is slightly different.

Mikael Doepel

Sure. Understood. Okay. Then another question in terms of European paper pricing now I guess early indications point to some price gains in various markets, in various grades. What's your expectations on this?

Karl-Henrik Sundström

We expect prices to go up somewhat moderately. But I don't want to go into the percentage points.

Mikael Doepel

Okay. That's clear. Thank you very much.

Operator

Thank you. We will now take our next question from Mikael Jåfs from Cheuvreux. Please go ahead. Your line is open.

Mikael Jåfs

Yes, hello. Good afternoon, everybody. I would like to go back a little bit to the CapEx and the CapEx treatment of the biological assets. Could you just give us some more sort of explanation there as big sort of the cultural expenses that you're activating and how that does really works?

Seppo Parvi

It works so that and these rate the plantations that we are have in Uruguay and Brazil and China and 35,000 increasing now that we are getting more active in Uruguay and China. And what happens if we go and harvest for the part sort of - sell the wood to the market and then we need to replant and this replanting costs that we are calling as capital expenditure of biological assets. And when we do the harvesting, we don't depreciate that we would normally do for the machinery and buildings but that has been as part of the cost of goods sold and that's the end of profit and loss.

Mikael Jåfs

Okay. Thank you. That was my question. Thanks.

Karl-Henrik Sundström

And it comes back to the day when we started to actually have the line-by-line consolidated it seems there as these we've had any plantations but that's the way you should do according to accounting standards while you do with plantation.

Mikael Jåfs

Okay. Perfect. Many thanks. Very clear.

Operator

Thank you. We will now take our next question from Linus Larsson from SEB. Please go ahead. Your line is open.

Linus Larsson

Yes. Thank you very much, and good afternoon. My first question is on currency, you had some 15 million of currency headwind in your FX segment for 2014 compared for Q4, compared to Q3. I wonder if you could give these how which currencies that contributed to that headwind and secondly what's your expectations for the first quarter given current exchange rates is it more of a flattish development into Q1?

Seppo Parvi

Okay. In Q4 the FX was mainly coming from US dollars, if you look at the FX. Going forward, I would say that sort of carryover FX from 2015 from the H [ph] series very minimal, very small therefore - some millions only. And assuming that the currency rates remain that is around New Year, we expect some in total for the full year about €100 million plus positive FX.

Linus Larsson

Okay.

Seppo Parvi

But we don't know. Assuming that they remain, but they were around New Year, but not to speculate more, but that's a key on - a big feeling on it.

Linus Larsson

That's very helpful. Thank you very much. And I wonder also just coming back to CapEx and you've given a figure for 2016 and you've said that it includes 160 million at - 100 million for biological assets and I guess the maintenance CapEx is round about 225 million, correct me if I am wrong but is that's the case the balance left would be more than 200 million I wonder if you is that do you have some plants for those 200 million or is that something yet to be decided. Could you talk a bit about that please?

Karl-Henrik Sundström

So, you're about right, so the maintenance is about 200 to 250 because then we have the improvement project and I would say that we probably put 80% have plans and 20% on allocated yet that we are evaluating various potentials internally.

Linus Larsson

Okay.

Karl-Henrik Sundström

We don't really hold the CapEx at the same time. We're really in different phases. So today, I would say 80% is being allocated.

Linus Larsson

Interesting. And then coming back earlier questions around paper would you care to give operating rates for the various [indiscernible] segments in your case at this stage.

Karl-Henrik Sundström

So, the operating rate has been very, very good in paper. And as Seppo said when he made - we've been running on high capacity for the full 2015, so we had good operating rates.

Linus Larsson

And is that what you're seeing as you look into the first half of '16 as well?

Karl-Henrik Sundström

I don't comment on that one. Because we - I'll really comment when we talk again in April.

Linus Larsson

Okay, okay. And just one final clarification maybe, what you said about the Varkaus. You mentioned the figure there €9 million.

Karl-Henrik Sundström

In the report. When you startup, you get a cost right, you get the depreciation running in. So the startup costs was basically it was €9 million for the fourth quarter.

Linus Larsson

But the EBIT of that mill, what was that in the fourth quarter?

Karl-Henrik Sundström

That we don't disclose.

Linus Larsson

And when do you expect it to breakeven at this mill?

Karl-Henrik Sundström

So we expect the breakeven to be during Q2.

Linus Larsson

Okay, great. Thank you.

Karl-Henrik Sundström

Thank you.

Operator

Thank you. We will now take our next question from Justin Jordan from Jefferies. Please go ahead. Your line is open.

Justin Jordan

Thank you and good afternoon, everyone. I've got two question first just on Beihai. Can you just remind us, just how long this will take from its earlier than expected commencement in Q2 to fully ramp up. And just to remind us then thereafter just at the timeline on the Board's decision on potentially the Phase II of the project.

Karl-Henrik Sundström

So to ramp up to get the - and because when you saw it because and the gain is actually to get in to basically three grades. One is CUK, the other one liquid packaging board and other is food service board. That to ramp up is going to take between 18 and 24 months. When it comes to phase II - did that answer your question by the way, on the first?

Justin Jordan

Right, yeah. Thank you.

Karl-Henrik Sundström

And then, if you look on the potential investment of the Phase II that we would only consider after we had started. We have no board decision. And we need to work that out. So if you're modeling the early if you can get CapEx is 2017 but we haven't decided to go ahead with the Phase II yet.

Justin Jordan

Of course. Okay. Thank you. And just following on so just a clarification question. Just on your pulp statistics, in your release obviously you have pulp deliveries on a market pulp deliveries of 1.873 million tons in '15 and I'm assuming with the full ramp and to be it will be higher than that in '16. Is that correct?

Seppo Parvi

Yeah see our market pulp position in '16 will be roughly 2 million tons slightly second it up compared to last year.

Justin Jordan

Great. Thank you. And I'm just curious and I'm just want to look at your sensitivity analysis in the slide deck today, you talk about 10% change in pulp price impacting by 105 million and that's actually down from 125 that you’ve disclosed in Q3 deck three months ago. I am just trying to understand why that is the case?

Karl-Henrik Sundström

I can take that one. That was because we were doing from list price and not after rebates.

Justin Jordan

Okay, fantastic. Okay, that's great.

Karl-Henrik Sundström

And sorry but we should have talked about that already in Q3.

Justin Jordan

We're all billionaires as time flies, don't worry. Okay. Just one final thing, obviously pulp prices is a bit of a market concern at the moment. And as we see today, you're talking about softening pulp prices in Europe and expectations of that continue in February. What gives you the confidence that the pulp price increases that you’re announcing will be successful?

Karl-Henrik Sundström

I think if you go a little short that Seppo showed. We believe and we rounded obviously announced the softwood pulp prices increases in Europe because the difference between the hardwood and the softwood asset a very historical low level and that’s the reason. There should be a bigger difference between hardwood and softwood.

Justin Jordan

Okay, good. I wish you success.

Karl-Henrik Sundström

We’re working hard on it.

Justin Jordan

Thank you.

Operator

Thank you. We will now take our next question from Stephen Benson from Goldman Sachs. Please go ahead. Your line is open.

Stephen Benson

Hi there. Thanks. I just wanted to come back firstly on the pulp side so that 2 million tons net long position in pulp this year, am I correct that roughly 60% of that is hardwood, 40% softwood? Or is there any change in that?

Seppo Parvi

It's Seppo, roughly 700,000 tons is hardwood, 800,000 tons softwood, and then the rest is this [indiscernible].

Stephen Benson

Okay. And when is the decision to be made about the pulp mill at Guangxi? What’s the timing on that? I’ve told that it was some decision in ‘16?

Karl-Henrik Sundström

No, it is going to be towards the later part, if we make the decision in 2016, towards the end of 2016.

Stephen Benson

Okay. And the selling price of any, whether it’s holding books order, or liquid packaging board, in the Chinese market would be renminbi-based. So any of your selling prices in country are going to be renminbi, if you don’t go ahead but the pulp move you’d be importing dollar based pulp?

Karl-Henrik Sundström

It’s depending and we are in those negotiations. Some are Euro based and some are renminbi based.

Stephen Benson

Okay.

Seppo Parvi

And remember we have told that we applied the export from China, so that it is of course hard currency based.

Stephen Benson

Okay. And just on the Kraftliner given the price folds that we have seen so far, and I guess you’re still ramping up volumes month-to-month. I'm not sure what the production rate is at the moment and if you could comment on that. But is there any visibility out there that imports from countries like North America have actually started to drop off, is there any data to support that or we’re just going to be competing more and more on price for the next three, four, five months?

Karl-Henrik Sundström

So, we have seen and this just to be very clear the kraftliner imported from the U.S. it’s in the southern part of Europe and we are responding not by price, but we are responding by light-weighting because our product is as an advantage because of its - it's nearly construction and developed as well as it’s fresh fiber which means that this thickness is totally different than the recycle, which means that we can - lightweight product and that’s very much what the customers go after. So, we’re not going and chasing them on price.

Stephen Benson

Okay. And just coming back to pulp, we’ve been pushing an oversupply that we think is, it looks like it’s going to be coming through on the pulp business over the next 12 months also you’re not worried at all about the pulp supply that’s coming on in Latin America. I’d love to hear your views on what you think about all the flat-end low cost pulp that’s ramping up over the next two years?

Karl-Henrik Sundström

So, my view is and I will give you a longer view and pulp will be more and more demand because it’s one of a very few renewable packaging materials and [indiscernible] materials there is. You will have fluctuation when you get a lot of capacity coming on-stream. But longer term, it is a product that we continue to grow. And you’re right, it’s going to be all the time when you get the lot of new capacity coming onboard.

Stephen Benson

Okay. Thanks very much for your time.

Karl-Henrik Sundström

Thank you.

Operator

Thank you. [Operator Instructions]. It appears we have no further questions at this time. So, I’ll hand the call back to the speakers for any additional or closing remarks.

Ulla Paajanen

Okay. Thank Daren. Thank you, everybody for listening into this Q4 results conference call. And we will then speak next time in April, when we are out with the Q1. Thank you.

Karl-Henrik Sundström

Thank you.

Seppo Parvi

Thank you.

Operator

Thank you. That does conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.

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