Moody's: Expansion plans will drive up capex for Europe's paper and forest companies in 2015

Most European paper and forest product companies will maintain or increase their capital expenditure (capex) in 2015 to meet their expansion plans, says Moody's Investors Service in a sector comment published today. These include Metsa Board Corporation (B1 positive), Mondi Plc (Baa2 stable), Sappi Limited (Ba3 stable), Smurfit Kappa Group Plc (Ba1 stable), Stora Enso Oyj (Ba2 stable) and UPM-Kymmene (Ba1 stable).

Moody's report, titled "2014 Results Show Turnaround Is Gaining Momentum, Albeit Not For All," is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.

"We expect the aggregate operating income of Moody's rated European paper and forest product companies to increase by 1% to 3% over the next 12-18 months," says Matthias Volkmer, a Moody's Vice President -- Senior Analyst and author of the report.

"This reflects our expectation that increased operating earnings from rated packaging companies will outweigh those from paper producers, which continue to face secular declines, which is why our outlook for the sector is stable," observes Mr Volkmer.

Metsa will increase its capex fourfold in 2015, on the back of the expansion of its folding boxboard production capacities. Portucel, S.A. (Ba3 stable) is set to increase its capex significantly in 2015. Smurfit Kappa's growth and acquisition strategy has also been expansive, including the recent acquisition of non-integrated packaging company Grupo CYBSA in central America. Ence Energia y Celulosa, S.A. (Ence; Ba3 negative) is likely to maintain its capex level, albeit at a relatively low level on a historical basis.

Among the nine rated European paper and forest product companies that have reported their preliminary financial results for 2014 so far, the six aforementioned companies recorded single-digit to double-digit percentage EBITDA growth. In Moody's view, the improvements in their financial performance mainly reflects their efforts to reposition or broaden their business profiles away from the mature European paper market through sizeable, ongoing investments in related segments and through cost cutting.

Some companies that have sufficient financial flexibility on account of their profitability improvements have confirmed their progressive dividend policies in the interests of continuity, including Mondi, Smurfit Kappa, Stora Enso, and UPM. Meanwhile, Moody's considers that Norske Skogindustrier ASA (Norske Skog, Caa2 negative) will only selectively allocate capex for necessary maintenance purposes due to the company's continuous efforts to strengthen its cash flow.

Owing to a 3% decline in graphic paper demand in 2014, European paper and forest product companies with narrow product offerings would need to make significant efforts to improve their business prospects in 2015, in Moody's opinion. Ence, Norske Skorg and Portucel all reported EBITDA declines for 2014. Conversely, their more diversified competitors have reported significant profit improvements.

Furthermore, the euro's depreciation is driving up input costs for non (or partly) pulp-integrated producers. The substantial new pulp capacity ramping up in Latin America during 2014, mostly in hardwood pulp, was favourable for non- or partly integrated players, such as Norske Skogindustrier ASA (Caa2 negative) and Lecta S.A. (B2 stable) because it temporarily pushed down prices. However, as the companies' sales are mainly in euros, while their main input material (pulp) is traded in US dollars, we expect them to face increased cost pressure in 2015 as a result of the euro's weakness against the US dollar.