Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's full- year and Q4 2018 earnings conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you do wish to ask a question, you will need to press star and one on your telephone keypad and wait for your name to be announced. I must advise you, the conference is being recorded today, Friday, the 1st of February, 2019. I would now like to hand the conference over to your speaker today, Ulla Paajanen. Thank you very much. Please go ahead.
Thank you, Rosie. Good afternoon, everyone, and welcome to Stora Enso's full- year and fourth quarter 2018 conference call. We will start with the presentation. Then we will have a Q&A session. Please, Kalle, go ahead, our CEO, Karl-Henrik Sundström.
Thank you, Ulla. Good morning or good afternoon, depending on where you are in the world. We are here to briefly present the Q4 2018. We have had the eighth consecutive quarter of sales growth, excluding the divested Puumerkki, it's 6.4%. Operational EBIT decreased with some EUR 9 million compared to the year ago period and came in at EUR 271 on an EBIT margin of 10.2%, which is the sixth consecutive quarter with double-digit EBIT margins. Unfortunately, we had operational issues at six of the mills, and I will come back to that. We had some softness in the market. There was negative impact across basically all divisions of less volume, which had an impact of EBIT of EUR 11 million. EPS increased by 75%. Cash flow after investing activities came in a little bit on the low side at EUR 148 million.
We continue to improve the balance sheet. Net debt to EBITDA ended up 1.1 times. Operational return on capital employed came in at 12.4%. If you look what happened in the fourth quarter was that, as I said, we had lower volumes. That was basically happening towards the end of November, beginning of December. There were less possibility to get customers to take volumes. That was an impact of around EUR 11 million. That was signaling for me a bit of a slowness in the market. The bigger issue was the EUR 40 million in temporary operational challenges. That is basically six mills. In Biomaterials, we had a problem in Skutskär starting up after the first annual shutdown after the conversion to fluff. We also had some issues in Montes del Plata. The Biomaterials impact was about EUR 20 million.
The challenge that we already talked about in Q3 of Nymölla and the lack of water in the nearby lake continued longer than the expected time, plus that we had an issue with the pulp mill in Veitsiluoto, totaling a loss of EBIT of EUR 16 million. Last but not least, we had both small hiccups in Imatra and Fors, totaling EUR 4 million. All of these operation issues are now cleared, and we are ramping up production again. Unfortunately, in this kind of process industry, this happens. I'm very unhappy with having six mills basically towards the end of the year. The board of Stora Enso are proposing to the AGM to increase the dividend from EUR 0.41 a year ago to EUR 0.50, which is the fourth consecutive year where we are having increased dividends.
This time it's by 22%, and that I would say is a vote of confidence from the board to propose to the AGM on the future of Stora Enso. We also passed well above for the first time of 13% on return on capital employed for the total company for a full- year. We actually ended up at 15.5%. This is the first time since 2000 where we are at this level. I'm very happy to say that we now, after 18 years, are back to a good level. Now the challenge we have is to continue to make sure that we continue to deliver good return on capital employed.
In conjunction with the fourth quarter report, we also issued a press release, it's referred to in the report, and that is what we call a profit protection program to strengthen the competitiveness of Stora Enso that has been launched. The reason for it is that we have seen cost increases, and we see cost increases in the fourth quarter, especially continuing to the first quarter, especially in the areas of wood, chemicals, and logistics. Just to take one number here, the wood costs are EUR 50 million higher we expect in Q1 2019 versus Q1 2018.
We are also reducing the CapEx by EUR 50 million from the previously announced guidance of CapEx for the full- year of 2019. The reason is also that we are entering into a more unsecure future, and we want to be proactive, first of all, to get the competitiveness back and fighting back the cost. Secondly, be prepared if unexpected events are happening, because right now the macro situation is quite unpredictable. This, in the first phase, includes that we are planning to close down the PM6 in Imatra, that's a 90,000 ton paper machine, and we are also doing adjustments at Ala sawmill in Sweden, at Imavere sawmill in Estonia. This is just the beginning.
The total program is EUR 120 million in cost reductions of fixed and variable costs, and we expect that we will get some 40%-50% of the program during 2019, and the full effect of EUR 120 million program will become by the end of 2020. There was a number of important events during Q4, and one of them is obviously the partnering with H&M and IKEA to be a fourth partner to industrial tree to textile. We also launched the RFID, the only sustainable RFID tag in the market. We actually completed the environmental impact assessment for Oulu. We divested June Emballage in Sweden, and then there was a number of investments that we have announced during the fourth quarter. Also, we entered a binding agreement about the restructuring of Bergvik Skog.
We are expected to finalize this during the first half of 2019. It's totaling a direct ownership of 1.4 million hectares of forest land, of which 1.15 is productive forest land. This is an increase of the Stora Enso balance sheet, totaling about approximately EUR 1 billion. I also want to say that in the fourth quarter, we had two Items Affecting Comparability. One was the Latvian land sales, which gave us a gain of EUR 47 million. The other one was the increased fair value of the biological assets in Stora Enso, EUR 49. Before handing over to Seppo, I would like to say that the transformation journey that started in 2006 from basically a paper company to a company more balanced and more focused towards the four growth divisions is continuing.
Paper had a good 2018. Now the portfolio is more balanced. 83% of the profit are coming from the four growth divisions. With that, I would like to hand over to Seppo.
Thank you, Kalle. I start with some of the key figures from the report that we came out with earlier today. First of all, top line sales for the quarter grew 5.8% year-over-year. Full- year sales reached almost EUR 10.5 billion. That is an increase of 4.4% compared to 2017. Operational EBITDA margin was 15.3% for the quarter that we are reporting at the moment. Operational EBIT was EUR 271 million or 10.2%. Full- year operational EBIT reached EUR 1,325,000 million. That is an increase of 32% compared to 2017. Our net profit for the period, looking at the full -year 2018, was EUR 988 million. Earnings per share was EUR 1.28.
Operational return on capital employed for the quarter four was 12.4%, slightly below the 13% target level, the full- year figure reached 15.5% and was higher than the targeted 13%. Moving to the divisions, I start with Consumer Board, where challenging market conditions continued, first price increases have been achieved. This was actually a second quarter now that we are pushing through price increases that started in Q3 already. Sales increased slightly to record high Q4, EUR 637 million, that's thanks to higher local sales prices that had EUR 10 million positive effect, but those were offset by lower volumes. Operational EBIT decreased EUR 45 million and was EUR 24 million. Significantly higher variable cost, especially for wood pulp and chemicals. Those that we have been talking also about earlier last year in the reporting, they were partly offset by improved sales prices.
Consumer Board production was lower and operational challenges at Imatra and Fors mills had a slight negative impact on the profitability. Operational return on capital was 5%. Packaging Solutions, their record sales and profitability continues. Sales were up 5% to all-time high EUR 352 million. We had improved prices and active sales mix management in European-based operations, increasing the sales. Total containerboard deliveries remained stable. Operational EBIT also increased to a record high Q4 of EUR 59 million. Clearly, higher sales prices and good mix management in the European-based units was offset by lower sales volumes in China, as well as higher raw material costs overall and some spare part write-offs. Operational return on capital was at 25.7% level. That is significantly above the long-term target of 20%. This is driven by improved profitability in that division.
Moving to Biomaterials division, where good market continues despite signs of price pressure. Sales were up 14% to another all-time high of EUR 415 million. Sales prices were higher, but delivery slightly lower. Operational EBIT was also at record high Q4 level of EUR 91 million. That is increase of EUR 30 million. Higher pulp prices were partly offset by higher variable costs, especially for wood and energy. We also had some production problems at Montes del Plata and Skutskär pulp mills during the quarter. Operational return on capital reached the strategic target of 15%. Also, Lineo by Stora Enso was awarded for Innovative Product Award 2018 by Institution of Chemical Engineers. This is another proof point for the R&D and innovation work that we have been investing in over the past years. Moving to Wood Products, where we had another record quarter.
Sales, excluding the divested Puumerkki increased 3.5%. That's very much thanks to improved sales prices in classic sawn business. Operational EBIT was up 66% to record high Q4 of EUR 42 million. Clearly, better prices and improved mix, partly offset by higher fixed costs related to increase in operations. Return on capital continued at record high level of 27.1%, that is clearly above the strategic target of 20%. Our investment at Gruvön sawmill to new CLT unit is being completed. We expect to start commercial production now during the Q1 that has been starting now. This is according to the plan. Moving to Paper division, where we had solid quarter, but impacted by operational challenges. Sales increased 5% to EUR 761 million. Clearly higher sales prices in all grades, a better mix was partly offset by lower sales volumes.
Operational EBIT was stable at the level of EUR 45 million. Slightly higher sales prices on all grades were offset by higher variable costs, especially wood pulp and chemicals. We had production issues like mentioned earlier. Production reductions caused by water shortage at Nymölla mill and some technical problems at Veitsiluoto pulp mill had in total EUR 16 million negative impact on the result. We also had to take some market-related curtailments at the Oulu mill due to softness of the coated wood free market. Cash flow investing activities to sales ratio was down to 2.5%, that was negatively impacted by temporary working capital challenges. Here, we should notice that Q3 cash flow was significantly better at 8.3% to net sales. Now it's the two quarters, or the second half of last year were over 5%, but still below the targeted 7%.
We are confident that this is a temporary reduction in cash flow, paper division will be back on track in the beginning of the year that has now started. Moving to strategic targets before handing back to Kalle. Our targets are progressing, there is still more potential as you can see in the table. Most of the targets are on green, there are still some on red or yellow. When it comes to balance sheet, balance sheet has continued to strengthen. We are growing faster than the relevant market, especially when it comes to fixed cost of sales, there we still have work to do to reach the target to be at 20% or below. For the full- year, we were at 23.6%. That is trending down clearly from 25.1% in 2017.
Return on capital employed, like mentioned earlier, for the quarter, was below 13% target level, full- year was clearly above it at 15.5%. Looking at the divisions and divisional targets, Consumer Board below the 20% level. That is the target for them, that is due to the reasons that we also mentioned earlier. The reason is that the cost increases that Consumer Board has been facing during 2018 have not been recovered through price increases yet. The good positive signals are there. We are now again increasing prices in Q4, like we started to do in Q3, the work continues there. Packaging solutions clearly above the targeted 20% level at 25.7% for the quarter, as well as at 27.2% for the full- year. Also biomaterials at targeted level and above.
Wood products continues the good return on capital, 27.1% for Q4, 28.1% for the full- year. Like mentioned on the previous slide, paper was below the targeted level of 7%. Handing back to you, Kalle.
Thank you, Seppo. As of now, we have also incorporated an outlook for 2019, that's new, we have changed the guidance also. I will come to that. We in Stora Enso believe that 2019 is expected to be largely in line with 2018, provided that the current trading conditions do not significantly change. Demand growth is expected to continue for Stora Enso's full growth divisions. However, we believe that the demand for European paper will continue to decline. Group sales are expected to be higher, costs are also forecasted to increase in 2019. Stora Enso will implement measures to mitigate these costs, that is included in the Profit Protection Program of EUR 120 million, but it's also for the increased uncertainties on the macroeconomics.
When it comes to the guidance, we have stopped giving sales guidance for the following quarter, we have changed the way how we guide operations a little bit. Instead of using adjectives, we will use numerical intervals. I think that's in the spirit of increased transparency and simplification. I would like also to remind everybody that the first quarter of 2018, we did not have any annual maintenance stops. This year, we have changed the schedule, we will have two annual maintenance shutdowns. One at Ostrołęka PM5, the other one, Veracel, Brazil. That will give a total negative impact on maintenance estimated to be EUR 20 million compared to Q1 2018. With that, just before opening up for Q&As, I would like just to give a couple of reflections of Q4 and the full- year of 2018.
We have had eight consecutive quarters of sales growth. We have had six consecutive quarters of double-digit operational EBIT margin. Annually, EBIT grew 32% in 2018. We came out on a return on capital employed for the full year on 15.5%, which is well above the strategic target of 13. We have continued to strengthen the balance sheet, the proposed dividend is an increase by 22%. We are immediately implementing the Profit Protection Program to be better prepared for the increased costs, keeping an open eye for potential market weakness. We believe it's better to act as fast as possible. With that, I hand over to you, Ulla, for the Q&A session.
Okay, thank you, Kalle. Yes, Rosie, please, we are ready for Q&A session.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press star and one on your telephone keypad and wait for your name to be announced. If you wish to cancel the request, please press the hash key. Your first question comes from the line of Mikael Jafs of Kepler Cheuvreux. Please ask your question.
Yes, hello. Good afternoon, everybody. Two questions for me. You mentioned there that wood costs would be EUR 50 million higher in Q1 2019, and then you have a chart also in your presentation pack about the wood costs in Finland. Two questions within that. Is the same wood cost picture valid for Sweden? This wood cost increase, is that something that is temporary, due to weather last year, or is it something that we should expect going forward as well? Secondly, on your potential Oulu investment to convert the paper making into packaging materials, when should we expect some news on that potential decision? Thank you.
First of all, with the wood cost, if you remember, we did have a challenging first half year when it came to wood supply in general. The wood cost went up quite steadily, and we were actually giving, including in our guidance, the effect during last year. They have gone up a lot less lately compared to the previous. The peak of the increased wood costs, which is now we're talking the whole of Stora Enso, is in the Q1. It's including Sweden as well.
Okay, thank you.
When it comes to Oulu, the environmental impact assessment is ready. The feasibility study is not ready, and it will be in the first half of 2019.
Many thanks.
Thank you.
Thank you. Your next question comes from the line of Mikael Doepel of UBS. Please ask your question.
Thank you. Good afternoon. A couple of questions. Firstly, I was wondering if you could give some comments on what's happening in China, partly related to Beihai. Any progress there in terms of mix, and also, what's the demand situation for that business right now in China? Secondly, on the pulp market, what you are seeing right now in China, what's going on there, in your view, and what's your expectations there going forward?
In China right now, it's quite unstable. We are ramping up still, and we said in Q3 that we were basically halfway, and that's still ramping up. In China, it is a bit wait and see situation regarding a board. It seems to be more virgin board, but at the same time, given that a lot of these boards are used for packaging of electronics equipment that is being shipped elsewhere in the world, and mainly to the U.S., and other goods to the U.S., it's a bit of an uncertain situation that I think will be clarified, hopefully before the 2nd of March, when, hopefully, China and U.S. come to a good trade agreement. It's little bit like a wet blanket over it. It's a little bit uncertain situation right now. We are ramping up.
We are a very small player in China. When it comes to the pulp prices, when I look upon the pulp prices, I think it's too early to say really what's going to happen. The expectation when I speak to our marketing people and read a lot on reports, it seems like we need now to pass the Chinese New Year, then hopefully we believe they will go up after that, because it's not coming a lot of new capacity, and the demand is actually increasing. However, now we will have a week or so of Chinese New Years. You know this better than me, that you've seen the prices on FOEX for China. They went down further the first two weeks, then the last two weeks of January, they started to climb up again.
That's what we know about. I think also when you read about the inventories, yes, the inventories or imports are high. However, we believe the inventories at customers are very low, because it was a lot less buying towards December. I don't think the chain is overfilled. Did that answer your question?
Yeah. Sure did. Thank you. Can I just have one final one?
Sure
If we move over to paper and packaging prices, and perhaps then mainly in Europe. I wonder if you could just give some comments on what you achieved in terms of price gains, in paper and certain packaging grades then in Europe from the beginning of the year, and maybe also give some comments on the grades where we have seen some price declines.
We have seen, and you've seen it as well, that testliner is holding up quite well. It's been marginal decline in prices on kraftliner. FBB, demand is actually quite good, and prices are climbing up in Europe. You have to remember that for us, some 80% of the contracts are a year or longer. We are moving, and we have not moved and done a lot of renegotiation yet on some of the liquid customers. That's coming later.
Okay.
We will compensate for this, because we cannot alone bear all of this. We also have to take down costs, especially on variable. We have to be a little bit tougher on certain areas, but that's why we launched the program.
Okay. Many thanks.
Thank you. Your next question comes from the line of Linus Larsson of SEB. Please ask your question.
Thank you very much, good day to everyone. On maintenance, if you were to put the number on your guidance for the first quarter on a sequential basis, what's the maintenance tailwind, I would guess, in the first versus the fourth quarter?
The maintenance in Q4 2018 was EUR 13 million, less than in Q4 2017. Q1 maintenance impact is estimated to decrease by EUR 54 million due to lower maintenance costs and less lost volumes in Q1 2019, quarter-over-quarter.
In that EUR 54 million sequential improvement, how much of the EUR 40 million is actually included there? You mentioned these six mills where you had production issues in the fourth quarter, which burdened the quarter by EUR 40 million, and-
Nothing.
Nothing. Okay. On a-
We measure the maintenance, and like in Skutskär, when we have startup problems
From the day when the maintenance should be over, then the ramp is something that's not maintenance. That is operational issues.
Seppo, just to be clear, this EUR 40 million was all in Q4?
Yes.
There's no carryover to first quarter.
Exactly.
For example, Nymölla started a week after Christmas to ramp up.
Right. Thank you. All else being equal, if we were to add back the full EUR 40 million impact that we saw in the fourth quarter, that's a EUR 40 million improvement in Q1, and then another EUR 54 million improvement. That's EUR 94 million. You have some price improvement coming through. Which are the big negatives here?
We also have a lot of higher costs. Wood costs, chemicals, pulp.
Right. Yes, you said previously that you see wood costs peaking in the first quarter. How much sequential wood costs increase do you expect sequentially Q1 and Q4?
I don't have that in my head.
Is it cost? Also volumes should be, from a seasonal point of view, volumes should be a positive Q1 on Q4. Is it actually cost that is the big driver offsetting the tailwinds that we just mentioned?
I would say, to be very clear, Linus, on that one, is that we had significantly lower wood cost in the first quarter of 2018. The prices started to go up during Q2 and Q3, and a little bit in Q4, but not so much. That's why I wanted to point out that the wood cost, if you compare the very strong first quarter of 2018, we have a different cost situation, especially on wood.
That's the EUR 50 I gave you, and that's why we need to reduce costs.
Yeah.
Also you have to remember that during the Q4, there was some downside on the pulp prices, but some of the volume was with the higher old prices. Now, of course, even though that has stabilized, of course there is some trade in Q1 with lower prices that are inherited from the previous quarter, which is playing a role as well in the maths.
Mm-hmm. Sure. Thank you very much. Something completely different. You're expecting to include the Bergvik forest land operations into your operations and accounting during the year. How much of operational EBIT contribution would you expect on an annual basis from the Bergvik assets?
Let us come to that when we get there. I would say it's probably in the area of somewhere EUR 20-EUR 30.
You're comparing because you had some kind of contribution before, but this is the additional contribution after completing these transactions.
That's what I believe. Let us take that when we get there, because we also have to decide with transfer pricing and blah, blah, right?
Sure. That's very helpful. EUR 20 million-EUR 30 million on an annual basis.
Yes.
Excellent. Thank you very much.
I would say EUR 20 million-EUR 25 million.
Okay, that's very precise. Excellent, thank you.
Otherwise, you would take the midpoint, and I wanted to be a little bit conservative.
All right. Thank you very much.
I'm very, very happy to get Bergvik.
Yeah
basically back into Stora Enso. It's a huge possibility for us to make sure that we actually control our raw material.
Great. Many thanks.
Thank you.
Thank you. Your next question comes from the line of Justin Jordan of Exane. Please ask your question.
Thank you. Good afternoon, everyone. I've got three very separate questions. Firstly, can we just talk about inventories at the year-end? I guess one for Seppo here. You had EUR 1.57 billion of inventories, which, looking through history, is I think a 9 or 10-year high as a percentage of sales. Were there any particular divisions where inventories in Q4 were particularly elevated? I'm wondering whether in Packaging Solutions or Biomaterials, for example, deliveries were low versus production. Were there particular divisions that were impacted by high inventory levels at year-end and that's symptomatic of weak end market conditions, or is there anything longer- term we should think about here, or should we be expecting, for example, this to normalize, shall we, as we go through 2019?
I think, first of all, we have to remember that end of last year, wood inventory was extremely low. You remember the harvesting challenges started towards the end of the year when weather was so wet, both in Finland and Scandinavia. That is one driver why you see increase now, for instance, compared to a year ago. Towards the end of the year, we also mentioned that we, for instance, were therefore taking some downtime in paper division in Oulu due to market-related reasons. As you know, the pulp market has been a bit more difficult than earlier during the year. I think those were the three main reasons compared to past, if you look at the trends as such. I don't think that we are deliberately increasing stocks as such now or going forward. That's not the reasons.
I would not expect that to be the case. It's more depending a bit on the trading conditions and business situation that might differ a bit from end of the quarter to another.
Sure. Okay. Thank you. Just moving to Consumer Board, you talked about having achieved some price increases from third quarter 2018 onwards. One of your peers talked about price increases for a large global liquid packaging board customer from January 2019 onwards. Can you just give us some help as to when you might be able to achieve price increases in liquid packaging board?
You will see during the year some smaller increases on liquid, and then probably towards the end of 2019, early 2020, because our big customer there is on a different calendar scheduling than that other competitor.
Okay. Thank you. Look forward to it. Just finally, sorry, I just wanted to re-clarify something you said regarding packaging solutions. You talked about testliner prices, and clearly what we are talking about here, I suppose, is production from Ostrołęka. We can see clearly benchmark European testliner prices have fallen, I think it is 35, 40 EUR a ton in Germany. What sort of impact has Stora Enso seen in the last, let us say, quarter in terms of falling prices?
They went down a bit in Q4, but they are holding up okay so far in Q1. You have to remember that recycled paper has not increased as much as virgin fiber.
True. Okay. Thank you for that.
Thank you. Your next question comes from the line of Lars Kjellberg of Credit Suisse. Please ask your question.
Thank you. I just want to start with the profit protection program. You called out a couple of discrete, sawmill, and then the smaller machine at Imavere. Can you walk us through what else you're doing and what you expect in terms of cash and/or other charges related to taking out those EUR 120 million?
Lars, we have the program, and as we said in the press release, we drafted it already. We will not give any more information until we have actually announced what we're going to do internally, because otherwise we might break laws, and also it's not fair with our employees. We will come with it. What I said is we expect to have 40%-50% of the savings in 2019 and the remaining part of the full program in 2020. I can assure you, we have delivered on every single saving programs for many, many years. We know how to do this.
Sure. With reference to cost to achieve this, can you comment at all on that?
It's going to be on fixed and variable costs.
Right. No, what I'm saying is the cost for you to implement the EUR 120 million cost.
We come back to that because.
Okay
It will be cost. That's why we said in the press release that we will collect it under these Items Affecting Comparability.
For sure.
That's where we put it.
You referenced in your prepared remarks challenging market conditions in Consumer Board. I just wanted to understand exactly what that means. Is that in reference to the price cost relationship, or is there anything else that you would call out being challenging?
It's more the fact that we have been, as you know, you cannot say behind in price increases because it's based on the contractual structure. That means that it has been challenging and continues to be challenging, at least for some time. Also we have been facing some volume decline, not slight volume drop, but not so serious, but of course, that is having an effect in the business as well.
The biggest has been that we have had increased chemicals, pulps for the non-integrated, increased wood cost, increased logistics, and we have not been able, due to the contractual situation, to increase prices. We are not alone in this.
Yeah, I think you can see the same from our competitors that have reported already.
For sure. Finally, on the six mills that have operational issues, can you give us any color on what actually happened, what went wrong, and how do we go about ensuring this is not going to happen again?
It's a very unusual situation that you have too little water in a lake in Sweden, in that part of Sweden. That's very unusual. That lasted longer than we expected. We thought four weeks, and then it was basically almost a double. That is unusual. We had Skutskär, which we actually had the first annual shutdown after the conversion, and that means that the people were not that trained because now it's 100% fluff, and certain things went wrong. We had some issues in Montes del Plata when it come to some equipment that we needed to change, and that was more complicated than we thought. Maybe we were a bit surprised that a mill that was inaugurated in September 2014 had to change some equipment and doing that took longer time than we thought. That was a surprise, and that was not good.
Even though now they're up in production and producing a lot better than before. I would say that the possibility of having six mills in basically a month and a half, it's very unlikely and it's not been before. The magnitude of the problem is similar to what some of our competitors had in third quarter. It happens in the process industry, but I would say that if you take away basically more than half of it, these things can happen because we are in the process industry.
For sure. Just one final question. Maybe you have already in the report, and I didn't pick it up. Have you showed the impact from IFRS 16 on what you expect to be on EBITDA depreciation, finance cost, and your debt from that change to lease accounting?
Yeah. We expect that the effect on EBITDA will be some EUR 60 million-EUR 70 million. Of course, we come with the more precise figures as the year goes and moves forward when we start to report accordingly.
Positive?
Positive. Yes. Sorry.
Yes.
On EBIT level, it's also somewhat positive, not big EUR amounts, of course, because some of the things reported earlier about EBIT are moved to financial net, as you know.
Sure.
Net income-wise, it's basically no big change there at all. It's very small.
For the balance sheet?
When it comes to balance sheet, we are talking about roughly half a billion EUR additional liabilities.
Got it. Thank you.
A big part of it is the leased forests.
Especially in China.
In China.
Related to Beihai operation.
Okay. Thank you.
Thank you. Your next question comes from the line of Robin Santavirta from Carnegie. Please ask your question.
Thank you. In Consumer Board, you mentioned you had some price increases in Q3 and also something in Q4. In what grades was that then? Where was it? Was it in China?
No, it was mostly in Europe. China's market is a bit unpredictable right now. In China, we are qualifying new boards, so it's new products coming in. It's not really about raising prices.
Okay. In Europe. Now we've seen pressure actually on the spot carton board prices in China, the heavy ones at the end of last year. Looking at the earnings you're generating in Consumer Board, probably the most important division you have, it's one of the lowest Q4s you have reported in several years. I think it would be fair sort of to open up a little bit what is going on with Beihai in this kind of situation. How much of the volumes are direct to sort of the premium grades and clients that you sort of long-term focus on? How much is sold on the spot market in China? Any sort of timetable, any sort of guidance on when we might see sort of the mix improving in Beihai?
The mix improvement you will see this year. However, we don't want to disclose individual mills more than when you had troubles there, and that's what we've done. I hear what you say.
I just want to add what actually Annika also told in the Capital Markets Day in November last year, that we are sort of halfway through when it comes to working on the mix.
Yes.
All right. Thanks. Regarding the guidance, it's a quite broad range now for Q1, given that we're already almost half into the quarter. Could you just mention the sort of key elements of uncertainty? Is it related to the Chinese pulp market or the Chinese board market, or are there any other elements? What is the key elements?
The key element for the wide range is that it's partly around Brexit and the fallout effects on Europe. Brexit, we don't know. For us, it's less than 5% of our sales, but it's an important part, and we don't know what will happen. That's one. We don't really know.
Sure
how the demand will affect the trade in general if U.S. and China don't come to an agreement. It's around the pulp prices because it's a very interesting situation. Pulp prices has fallen quite a lot in China. Not so much in the rest of the world, but there is increased demand overall statistics, and it's very little new capacity coming, which makes it a very interesting situation. The worry is people stop buying. These are the swing factors that we have used when we brought the range. I don't think in my entire working life I've been in a more uncertain situation, reality, what is really happening.
Yeah, I agree. What I want to add and highlight is that it's clear, and I think you see it in other businesses also, that as the discussions between U.S. and China, for instance, are going on when it comes to different trade war-related issues, people are getting cautious. Even though it is not maybe directly affecting us, but then we are part of the supply chain in many cases, and that's one of the uncertainties when it comes to us needs for industrial packaging and that kind of things, as an example, and can have an effect on pulp demand temporarily if there are hiccups in the economy and flows.
That's also why we are launching this not only to reduce cost, but to be prepared for an uncertain future if it affects trading.
Sure.
Profit protection.
Sure. EUR 350 plus the EUR 20 on extra maintenance Q1 is just a very high number for me in Q1. It's not only risk you're seeing, I guess you're seeing also potential there.
Absolutely.
Two question related to volumes. What are you doing in pulp? Are you producing less this Q1 compared to last year due to the situation we have, including the JVs in South America?
We give a guidance for the totality, by having that range, you see that the risk is a bit higher, we don't give guidance on individual areas.
Okay. Well, I was just trying to ask whether you sort of produce restricted production, perhaps you don't want to guide on that side either.
No.
Oh, okay. Just on the, you mentioned somewhat more cautious clients, customers, in November and December. What is that sort of outlook at the moment? Was that temporary? Has it continued getting worse, getting better?
I think we will see a lot more after Chinese New Year. Right now, January, it's not that the quarter has passed. One third of the quarter passed yesterday, there are two thirds left.
You're absolutely right. Thank you very much, guys. Thanks.
Thank you.
Thank you. Your next question comes from the line of Harri Taittonen of Nordea. Please ask your question.
Yes, good afternoon. One area which we haven't talked about is the wood products, we have heard elsewhere that there's been some pressure on the, at least the sort of the basic sort of standard grade sawn wood. What are you seeing there? Obviously, you have more higher value-added products there to mitigate that. What sort of outlook do you see there in light of the comments on lower pricing for standard grades?
One clue is actually when you saw in the release that we are actually reducing in Ala, that was on components.
Yeah.
Components is basically the wood that goes into windows. There is no surprise that the building starts in the Nordic are coming down a bit. However, we believe also that the substitution effect of replacing concrete with more of wooden mechanical solutions are increasing, and we see that. I think it's a bit of a mixed picture. You have one substitution effect of what you call the higher value, but you also have a bit of lower building starts in many markets.
Yep. You have a number of capacity addition, small ones there, I mean, and also in the engineered wood product side. Are you being sort of able to ramp those up still?
Yeah, we believe so.
Sort of the market, yeah.
Also we are driving hard on automatization, because at the end of the day, the only thing you can control is costs.
Sure. Maybe, I don't know if you want to comment on this. It's partly what Robin was asking about, but if I recall right, in the pulp side, the share of China has been around 20%. Now that the price differential is so wide between the Chinese prices and the European prices, how do you kind of is there a change in the geographical pattern, that you are looking to sort of divert volumes elsewhere or sort of stop selling in China?
We have gone down marginally in China, about 1 percentage point.
Right.
You have to understand that the rebate structure between prices in Europe and China are slightly different
I might add also that in this situation, we are also looking more a bit how much more we could use internally. In some case, for logistics reasons or for other reasons, we have been buying pulp externally and also selling at the same time. In this kind of market situation, we look at the opportunities to be more clever in that sense.
Okay. Thank you very much.
Thank you, Andy.
Thank you. Your next question comes from the line of Gustaf Schwerin, Pareto Securities. Please ask your question.
Good afternoon. I have two questions left. First, on the Consumer Board. Just when you are saying that you had first price increases coming through, how much of that did we see in Q4?
We had some price increases coming through in Q3. You saw some price increases coming through in Q4. Yeah. Actually, one of my slides, I mentioned EUR 10 million in Q4 coming from higher local prices in Consumer Board. Yes.
What I meant is, can you give any sort of guidance on the further effect in Q1 from the implementations you have already made?
No, that's something we cannot comment. What we have said is that we continue hard to increase prices whenever the contract is coming to an end, and those we will then communicate as we move forward what we have achieved. We strongly believe and still remain confident that we can manage- Yes going forward.
Okay, fair enough. Secondly, just looking at your maintenance schedules for this year. If we include Q2 as well, it looks like you're pushing most of it towards H2 versus previous years. Is there anything sort of market related in terms of the risk for a weaker market towards the end of the year?
When it comes to maintenance schedule, it's very much driven by technical needs and maintenance schedules we have. Typically, only thing that is having an effect and a bit different between the years, typically related, some mills are 12 months cycle, others in 18 months cycle, and sometimes a bit depending on investment stocks might be tweaked it a bit. It's very much technical and engineering needs driven than anything else. Taking market curtailments, that's totally different thing.
Okay. Thank you.
Thank you. Your next question comes from the line of Alexander Berglund of Bank of America. Please ask your question.
Thank you very much. I have two questions. First, on the outlook statement, when you are saying that you expect it to be largely in line for 2019. Just wanted to clarify, is that on an EBIT level? Does it include the positive benefit from both the IAC and the small benefit also from the Bergvik Skog transaction? That was my first question.
When we talk about largely, included in it is everything that we know today. The impact of the savings program is not fully in there because that comes as another sentence.
Okay. You get the small benefit from Bergvik Skog and also the EBIT benefit from the new leasing accounting?
Yes. Yeah, all that is, of course, included. I just want to remind that when it comes to Bergvik Skog, of course, effect this year will be limited as the deal is not even closed yet. We have signed the binding agreement.
Okay, thank you. That's very clear. I guess my second question is on the cost saving, we are saying that 40%-50% you're having in 2019. Is that a run rate level, so that's kind of run rate at the end of 2019, or is that the actual benefit you're getting in 2019?
It is the actual benefit that we are getting already in 2019.
Okay. Thank you. That's very clear. That's were my two questions. Thanks.
Thank you. Your last question comes from the line of Cole Hathorn of Jefferies. Please ask your question.
Good afternoon. Could you give us a bit of an update on the coated fine paper market and what you're seeing there, and also the potential impact from Oulu in 2019?
Wood-free coated is actually a bit of a challenge. That's why we took market curtailment. If we would go ahead with the Oulu conversion, which we have not decided yet, I think an annual impact is that sales of paper will be reduced by 5%, about from the 29% to the 22% or something like that. Did that answer your question?
Yes, thank you. On your potential curtailment at the moment, is there any EBIT impact that you're guiding for in Q1 or H1?
No. The curtailment was included in Q4. We have not talked about or announced additional curtailments. If I remember right, if we go ahead, we are running it all into 2020, the paper machines.
Perfect. Very clear. Thank you.
Thank you. I would now like to hand the conference back over to you, Ulla. Please go ahead.
Yes. Thank you, Rosie. Thanks everyone for your attention this afternoon and following us. I will now hand it over to Kalle for final words to this call. Thank you very much for this. We came out towards the end of the year with some challenges that we have now fixed when it comes to operational issues. We are seeing cost increases that we are now combating. We also have a macro or a world situation that is more unstable, that's the reason why we wanted to be proactive and start the cost reduction program in order to protect our profitability and ensure our competitiveness going forward. With that, I would like to thank you.
Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you all for participating. You may now disconnect. Would the speakers please stand by?