Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Quarter Two 2019 Stora Enso Earnings Conference Call. At this time, all participants are in listen only mode. There'll be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone keypad and wait for your name to be announced. I must advise you that this conference is being recorded today on Friday the 19th of July, 2019. I would now like to hand the conference over to your host today, Head of Investor Relations, Ulla Paajanen. Please go ahead.
Thank you, Nicole. Good afternoon, everyone from sunny Helsinki, and welcome to Stora Enso's Q2 2019 earnings call. I will hand this call now over to our CEO, Kalle Sundström. Kalle, please.
Thank you. Good morning or good afternoon, depending on where you are in the world. I will go through some of the highlights of the second quarter 2019. Seppo will go into some more details on the financial and the divisions. We end up with the Q&A session. We have been focusing a lot in this quarter on cash flow and costs. We have also increased the profit protection program to EUR 200 million. I will come back to that. Sales decreased. This is the first time in a long time. We came in with an operating margin of 11% versus 12.3% a year ago. This is a decrease by 12% versus 12 months ago. We actually had a very strong cash flow.
It's up over 50% versus a year ago. Net debt to EBITDA increased temporarily to 2.2x due to the Beihai transaction as well as the new lease accounting regulations. Return on capital employed came in at 11.3% versus 15.5% a year ago, which is below the strategic target of 13%. 1.2 are explained by the lease rules and the Beihai deal. What really happened in the quarter? When we left Q1, we were a bit more aggressive on volumes. That was the plan. We figured out pretty soon that the market was very mixed. As you can see here, we have EUR 48 million negative in a combination of sales price mix and volume. We have a cost increase of EUR 26 million, which the biggest one is fiber.
During the quarter, we increased the focus on the profit protection program and started to accelerate it to be able to compensate from the headwinds, both in cost but also in the market. At the end of the quarter, we managed to have cost savings of EUR 45 million. On top of that, we had a negative development of EUR 13 million in associates, of which EUR 9 million relates to one-time cost in conjunction with the acquisition of Bergvik Skog, our part of it. That's EUR 9 million. Another way of expressing it is that we would probably have been down 26% in profitability if we hadn't started with a profit protection program in time. With the success of the speed and the value reaching EUR 60 million year to date, that is basically what we thought originally going to be the full outcome for the full year.
We are now increasing that to EUR 200 million. We have reached EUR 60 million in the first six months, of which EUR 45 in the second quarter. This program includes some of the restructuring that you have seen being announced in our sawmilling business. During the quarter, we concluding the very complicated restructuring of Bergvik Skog, and it's basically an increase from 1.1 million hectares in indirect holdings to 1.4 million in direct holding, of which 1.15 million are productive. We have financed that with a green bond, and basically when all this is over, we will have an impact in our capital employed of about EUR 1 billion. In conjunction with this, we did have some items affecting comparability, which amounted to EUR 88 million. This is a technicality, how you actually back out something from equity.
You lose in the income statement when you gain in the equity, and that's how you back out the cumulative translations adjustments. A more simple way to describe the deal is actually that having an indirect ownership of slightly more than 1.1 million hectares, where we had a value in our books in Sweden of per hectare, about EUR 2,000 per hectare. We actually increased it by 250,000 hectares at the price of EUR 2,400 per hectare. With the translation or currency effects between the beginning of this year and the end of June, we actually ended up with a value in our books of EUR 2,000 per hectare, giving it a total value for the Swedish forest holdings of EUR 2.8 billion.
Just as an example, another owner of Bergvik, BillerudKorsnäs, has announced that they are going to sell their holdings for a value of EUR 3,700 per hectare. You have to remember, in that value is also included a wood supply agreement for X number of years, which means that it's not a pure sell of forest. It's actually including taking a commitment or taking a forest out of that holding over X number of years. If you look on the LRF statistics, the smaller lots in Sweden are being sold for around EUR 5,700. With this, I would like to say that we are very happy with this deal, and we feel that we have done a good deal. During the quarter, we also decided to convert Oulu paper mill and replace the two paper machines with one board machine of 450,000 tons.
That project is going according to plan, and we plan to start up the Kraftliner production by the end of 2020, and we will end the paper production by September 2020. We also launched a number of new products like Natura Solo, which is a new way of providing food service board without plastic coating layers. We also launched DuraSense White, which is a biocomposite for food contact applications. We are also considering expansions in wood products. So we have started a feasibility study to see if it's possible to build a new CLT factory with a capacity of 120,000 cubes, and also a feasibility study for a line for construction beams in Ybbs in Austria. Those two projects together are estimated to have a CapEx of about EUR 90 million.
Last but not least, before handing over to Seppo, I would like us to make you aware of that this morning, we actually announced that we are going to do an investment of EUR 10 million in Sunila. Sunila is the world's biggest place to make lignin production based on pure LignoBoost production of 50,000 tons. Now we are going to invest in a demo plant where you can actually, from the lignin, process it further and actually getting a graphite out, which is graphite, not the normal synthetic graphite based on fossil-based material, but from lignin. With that, I hand over to Seppo.
Thank you, Kalle. I will start to go through some of the key figures from the report that we have published earlier today. First of all, looking at the top line, our sales line decreased by 2.1%. That is a reflection of lower volumes and sales prices, as Kalle already mentioned earlier. Operational EBIT margin remains double digit and was 11%, and operational EBIT was EUR 287 million for the second quarter. Operational return on capital employed was 11.3%. That is below the targeted 13% level. But here we have to notice that the combined effect of the new IFRS 16 standard and the Bergvik Skog assets in the balance sheet is about 1.2 percentage points on return on capital employed. Very strong cash flow for the quarter.
Cash flow increased from EUR 357 million a year ago to EUR 548 million this quarter, mainly driven by a reduction of the working capital during the quarter. Net debt to last 12 months operational EBITDA is at 2.2 and above the targeted 2.0 maximum level due to the fact that all the steps related to cash flow are not finalized yet in the case of Bergvik Skog transaction. After all those steps have been finalized, we will be coming back to levels below the targeted 2.0. Moving to divisions, I start by Consumer Board, where Value Management continues. Sales decreased slightly and was EUR 675 million. There, lower carton board deliveries were having an effect. Very positive news is naturally that price increases are coming through in Europe.
Work has continued already for some time to increase the selling prices, and the work will continue also going forward. Operational EBIT increased EUR 7 million and was EUR 72 million. That was a reflection of lower variable costs and the mentioned price increases. We have some production issues in Fors mill, and lower board volumes also had an effect. Operational return on capital, stable at 12.8%. In the Packaging Solutions division, there we are focusing on cost management. Sales decreased 4% to EUR 360 million, and there, clearly lower RCP container board and Kraftliner prices had an effect, and the deliveries grew slightly. Operational EBIT decreased EUR 18 million, but it should be noticed that Q2 a year ago was record high, and this quarter we were at EUR 39 million level when it comes to operational EBIT. There are clearly lower RCP container board and Kraftliner prices had an effect.
The lower fixed cost related to altered maintenance schedule and lower cost in corrugated units had some positive effect as well. Operational return on capital at 16.3%. That was decreased due to lower profitability due to the reasons mentioned earlier. Old conversion that we announced during the quarter, and that Kalle already explained as well, is proceeding according to plan. Moving to Biomaterials, where stable performance in a rocky environment describes the quarter quite well. Sales decreased 5% from record high Q2 last year to EUR 394 million. That is a reflection of higher deliveries and clearly lower pulp prices. Operational EBIT decreased only EUR 6 million from record high Q2 level last year and was at EUR 103 million. Clearly lower pulp prices had an effect there, and a positive effect coming from higher volumes and lower fixed costs related to altered maintenance schedule in Enocell mill.
Operational return on capital remained above strategic target level and was 15.6%. Like Kalle mentioned, we announced earlier today investment in bio-based carbon materials at the Sunila mill in Finland. Moving to Wood Products, where we are focusing on value management. Sales - 4% to EUR 412 million, reflection of lower sales prices and deliveries. Operational EBIT decreased EUR 12 million from record high Q2 last year and was at EUR 35 million level. Lower sales prices, especially in classic sawn products, had an effect on the profitability. The negative impact from volumes mainly due to the decreased overseas sales. Here it should be noticed, especially Wood Products, but in also other divisions, we are focusing on margin and selling price protection instead of going for the volumes. Operational return on capital was at 20.3%, and that is above the strategic target level of 20%.
We also earlier today announced a feasibility study for a possible CLT unit at Ždírec mill in Czech Republic and a new construction beam unit at the Ybbs mill in Austria. We are also planning and looking into possible close of Kitee sawmill, and this is in connection to consolidating our saw milling in that region area to Varkaus, where we also have integrated operation, integrated to pulp mill locally, as well as to LVL element mill at producing products for the building solutions there. Moving to Paper division. Their stable performance in a declining market describes the quarter quite well, and sales were down 6% and reached EUR 712 million level. That is a reflection of clearly lower deliveries, but worth to notice, prices were higher in all segments during the quarter.
Operational EBIT decreased slightly to EUR 50 million, that is a reflection of higher sales prices and lower fixed costs, volumes were clearly lower. Higher variable cost, especially wood cost year-on-year had negative effect on profitability. Cash flow after investing activities, slightly below the targeted 7% level at 6.6%. There we had very good positive working capital development improving the cash flow. Relating to our conversion to Kraftliner, that means that we will reduce paper capacity by over 1 million tons or 20% of our paper capacity after the conversion next year. Look at the strategic targets before handing over back to Kalle. There you can see that it's becoming a bit more colorful, still quite many of them are on green.
In addition to dividend, net debt to equity ratio is below the targeted 60% level, the net debt to operating EBITDA is slightly above the targeted 2.0, as I explained earlier. Fixed cost to sales is slowly coming down towards the targeted maximum 20% level, there the work continues. Of course, naturally, for instance, profit protection program that we increased today from EUR 120 million to EUR 200 million includes also fixed cost related actions and that way will help us to bring down this ratio on top of the other things that we are working on. Look at the divisions and the targets there. Like mentioned earlier, Biomaterials and wood products are about the targeted return on capital levels.
Consumer board still behind, as said, price increases on the European market are coming through, we are confident that we will continue our positive trend here going forward and will come closer to 20% level and closing the gap. Packaging solutions at 16.3% level, paper slightly below the targeted 7%. Back to you, Kalle.
Thank you, Seppo. We have a new outlook for 2019, that's a reflection of the unknown and the very mixed picture we're getting. We believe that there are a full deterioration in the trading conditions, a likelihood today higher than before of a hard Brexit. We also see an accelerating demand decline for European paper. Cost, as you are aware of, has been rising in the whole of 2019, that is something that we stand with. Therefore, we are only focusing on a guidance for the second quarter, we are focusing on making sure the things we can address, which is cost. That's the reason why we are increasing the profit protection program. The guidance for the third quarter of 2019 is that an operational EBIT is expected to be in the range of EUR 200 million -EUR 280 million.
During the quarter, there will be annual maintenance shutdown at the Beihai, Imatra, Heinola, Ostrołęka, Enocell and Veitsiluoto mills. The total maintenance impact is estimated to be on the same level as in the third quarter 2018 and EUR 30 million more than in the second quarter of 2019. Before going into the Q&A session, I just want to make sure that the focus in the second quarter has been actually to prepare us to be fit for the future, protecting the profit and the cash flow. We have had eight consecutive quarters of double-digit operational EBIT margin, and in this quarter that we have published today, the reason is that we actually accelerated the implementation of the profit protection. Strong cash flow up over 50%. However, further deterioration in the trading conditions, which means that we are accelerating and increasing the profit protection program.
We believe that well over half of the EUR 200 million will be in the P&L of 2019. We've had EUR 60 so far. With that, I hand over to you, Ulla.
Okay. Thank you, Kalle. Before we go to the Q&A, I just want to remind you all that we will be talking more about forest and wood product during this coming autumn by hosting Investor Day in Sweden on the 19th, and then a site visit on the 20th of September. We hope to be a bit more transparent about our forest reporting. Now, please, can we get the instructions for the Q&A session?
Thank you. Ladies and gentlemen, as a reminder, if you do wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel that request, please press the hash key. Once again, that's star one to ask a question. You have a few questions that have come through, the first is from the line of Antti Koskivuori at Danske Bank. Please go ahead. Your line is now open.
Yes, thank you. I would have few questions. Maybe I will kick off with the demand growth and the expected slowdown in 2019 that you mentioned. I was just wondering, is this only a result of weaker trading conditions, or do you see any more structural issues behind the slowing growth?
We were already out with this in the end of the fourth quarter when we published that early this year. We saw that when the geopolitical situation is deteriorating, sooner or later it will hit the economic environment. That's what we've done. I think what you've heard from most of the companies reporting this week, it's actually happening. I'm happy we were out a bit early. There are very interesting facts. By end of May, that's forest I have, pulp shipped into China, not the ones sitting in the inventories of the big producers in the Chinese port, but who's actually been shipped into China, is down 7%, while at the same time, the growth of GDP in China has been around 6%. For me, that's very strange.
Obviously with the whole chain of levies coming on, especially consumer electronics, which usually have a fiber box packaging around that has been changing quite a bit. That is obviously a reflection of the trade wars. Obviously people are getting nervous. We see that also in the number of housing starts in the buildings sector where we are a big supplier with our wood products, that people are a bit worried. You see the statistics, I think German core industry is down 6%.
Yeah.
That's the end, you know the European economy.
Absolutely. Thanks. The second question would be on the pulp market and the current price levels. We hear comments from the market for a few months now that the highest cost producers are not making money at current price levels. After that, pulp prices have fallen further. I would be curious to hear what are your thoughts about the current price and the cost curve and the implications to any potential market dynamics going forward.
I think some of the marginal players, Asian players, are probably being challenged right now.
It is basically every week you have a new signal on the pulp market.
In the same week you might have two different signals, up or down. If I look upon in going into the next quarter, I would say that the European demand is stable. I believe the Chinese demand is slightly stronger. The prices are under pressure in both those markets. Remember, we are a smaller player. We are not a Suzano, when it comes with our 2.1 million tons being long. It is hard to read, actually.
Lastly, on a European Paper and especially on the price levels going into H2, I don't know how much you want to comment, but the situation has been quite difficult or challenging with the volumes as you described as well, while the prices have remained at the high levels. What should we expect for H2 on the prices?
I would probably more talk about next quarter. I don't want to stretch myself out because on paper and most of my products, everything except the liquid and some of the consumer board, we have short contracts. Quarter I feel comfortable to talk about. If I look upon the quarters coming, it's basically we see significantly weaker demand year-over-year.
Yeah.
The prices will be slightly lower.
All right.
This is how I see it.
Yeah.
Yeah. The price is quarter on quarter.
Yeah. Absolutely. All right. Those would be my questions. Thank you very much.
Thank you.
Thank you. Your next question comes from the line of Linus Larsson at SEB. Please go ahead. Your line is now open.
Thank you very much, a good day to everyone. I'd like to start with the wood cost. If you could just please update us on where you see wood costs trending and maybe in particular whether we should hope for any easing on the wood costs bill in the third versus the second quarter.
We remember last year, in the first quarter we started with a shortage, continued in the second, which means that we went up quite a bit in pricing during that period, especially towards the end of Q1. We still see the prices going forward now into next quarters. We see that they are still on a high level, but probably turning down a little bit, because I don't think I'm alone in this industry of facing the demand situation. However, when you are slowing down your wood intake because you have already been out partly contracting some of it's not that fast. It takes some time.
Certainly, I could add that of course, year-over-year we see wood cost going up, but sequentially pressure is often maybe a bit down, yeah.
For it to hit your P&L, are you suggesting that in the third quarter we shouldn't expect any material change compared to the second quarter in terms of realized-
Yeah. No material change. That was saying, when you start to take down your wood supply, usually I've contracted it out for a longer period. You have usually to stop harvesting on the cheapest, which is the land you control, which means that you keep the high contract you might have contracted six months ago. That's how it works in the short period.
As you can see also, if you look at back into wintertime and now this summer harvesting conditions have been back to normal.
Yeah.
compared to last year.
Right. Excellent. I just wanted to check this Fors mill production issues. Do you quantify that? How much of an impact might that have been in the second quarter?
It has not been anything huge. Those are over already. They talk about some single millions.
Okay. Great.
Just finally on your forest land strategy, Kalle, you are very clear in your advocating for the backward integration and the fact that you bought forest land in Sweden at a very attractive price, I agree with that. I'm just thinking, you have a very clear message and strategy on your Bergvik strategy and BillerudKorsnäs as kind of the opposite almost when they are cashing on the asset. I'm just a bit curious now, in hindsight, when you think about Tornator and the strategy around the Finnish forest land integration strategy, that's somewhat smaller, of course, in terms of strategic importance. Nevertheless, you're not cashing, you're not realizing the value the way BillerudKorsnäs did, yet you're not fully controlling it. It's kind of stuck somewhere in the middle. What's your thinking and response to that?
First of all, there is a fundamental difference. Tornator is about 10% of the wood supply in Finland. It is important, but not as big as Bergvik, because Bergvik is probably 70% of all mills except Nymölla and Hylte.
It's slightly different, the other one is we don't have the money at the moment.
Right. Got you. Thank you very much.
Thank you. Linus.
Your next question comes from the line of Alexander Berglund at Bank of America. Please go ahead. Your line is now open.
Thank you. Two questions from me. First of all, on the cost savings, and the profit protection program and the increase to 200, can you just talk a little bit about should we expect a similar pace or is it a bit more tricky to generate the cost savings from here? Also, I guess a lot of the players in the market are trying to save on cost in this environment. What gives you the confidence that you will be able to retain the whole 200 at the end of 2020? My second question was just regarding this news on the Legionella Investigation in Belgium, and just the potential link of the outbreak to one of your mills. If you have any comments on that. Thank you.
On the first one, if there's one thing I'm sure about, that is that we will deliver on the 200. Taking out costs in our industry, we've been doing it in the 2012 program, the 2014, many before that. We know how to do that, we need to build a stronger platform for the future. It's going to be both fixed as Seppo said, also variable costs. In this business environment, you can work quite a bit on your purchasing. When it comes to Legionella, we are being investigated. We don't know if we are the guilty one or not. We are doing all the precautions and all the tests in cooperation with the authorities in there. We don't know. It can be us, it can be I think they investigated 17 cooling towers.
Okay, thanks. Just maybe a follow-up on the first question on the cost savings. I guess a lot of your competitors as well are quite confident that they're able to take out costs, especially larger players. Isn't there a risk that is just in the end, just passed on to your customers and then by lower prices?
I think, as I mentioned earlier in the divisional review, we are clearly put focus on margin and price protection over the volume. I think that's exactly why we are doing it, that we don't pass on the benefits from the program to our customers. Secondly, if you look at the space, we are already in two quarters in the pocket EUR 60 million out of the originally announced EUR 120, and now we re-increased that to EUR 200. Having in place, like Kalle said, a well-functioning organization that is used to cutting costs, and there is also good sense of urgency to organization to reach the targets. We are very confident to reach a EUR 200 million level. I'm extremely happy and proud of our organization about the speed.
If you think that we are already in two quarters reached actually more than we originally thought that we reach in 2019 alone. We said originally 40% of EUR 120 in 2019, we are already at EUR 60. When we revised the target upwards at EUR 200, we are now saying that over EUR 100 will be already visible this year. Almost EUR 120 that we originally targeted.
Okay. Thank you very much.
Thank you. Your next question comes from the line of Justin Jordan at Exane. Please go ahead. Your line is now open.
Thank you, and good day to everyone. Just firstly, can I just start on Biomaterials? I'm just trying to understand, can you help us with perhaps what was the average pulp price decline that you saw year-over-year? Clearly you've had a very strong performance in deliveries. I'm just trying to understand, we can see clearly, benchmark European pulp prices are down some 20% year-over-year. Benchmark Chinese prices are down some 30% year-over-year. The Chief Stora Enso price is substantially more robust than that, shall we say, it would appear like. I'm trying to understand, is that a time delay impact, or is that a product mix impact, or how should we think about that?
It's partly a product mix. It's also a bit of a time delay when the prices are coming in.
Okay. Just circling back to your earlier comments, you talked about Chinese demand potentially stronger in Q3 than Q2. Can you just sort of elaborate perhaps a bit more on that, specifically for pulp, clearly?
That is when we speak to our customers in China, that's what we're feeling. However, can I write that in blood? No. No, you see what I mean. It is a thing, but that's what we see. If they are down, I think China last year probably used 90 million tons of chemical pulp. In May, they were down, if you annualize that by month, down by 7%. In May, there actually was increasing the usage, and I haven't got the June figures yet, but that indicate if they will keep that, which is in line with many external forecasts, they were talking about 19.4 million tons. That means that they are accelerating, because something doesn't square. If you're down 7% on a commodity and your economy, according to the officials, are growing by 6%, which is the GDP.
Sure. Just again, just a boring factual clarification. I take it, given your production volumes, you have no plans for any sort of commercial downtime in pulp production at Stora Enso?
Yeah. We will do it in connection with annual maintenance shutdowns.
Okay. Understood. Okay, just switching to packaging solutions, if I may, for a second. Clearly, it's obvious you've been impacted by lower benchmark pricing for both virgin and recycled container board. Can you talk to us a little bit about corrugated prices? Are you being impacted there by lower corrugated prices as yet in Q2?
In the second quarter, the corrugated packaging was not down so much. That's why we, as you can see in our material, we switched over to sell more of the board internally because that was a better value creation.
Understood.
Going into the third quarter, we believe that the demand year-over-year will be slightly stronger. However, for the corrugated prices, slightly lower. On the containerboard, we see in the third quarter, year-over-year, stable volumes and prices lower, a bit more when it comes to Testliner than to Kraftliner.
Just so I'm clear, incremental declines then in Q3 on Testliner and Kraftliner from what you achieved in Q2?
Yes.
Okay. Thank you.
Even though last week there was a very minor decline in the statistics, but that's what we expect.
Sure. Okay. Thank you.
Thank you. Your next question comes from the line of Mikael Doepel at UBS. Please go ahead. Your line is now open.
Thank you. Good afternoon, everybody. A couple of questions from me. First of all, could you talk a bit about the sawn timber market? What kind of demand trends are you seeing there right now? Also in terms of pricing, it seems that the pricing is a bit under pressure there. What do you expect on that front going forward?
When it came to wood product demand in the third quarter, we expect them to be slightly weaker. There are signals that the building starts are holding back, and we've seen that for a while. Obviously that also means slightly lower prices quarter-on-quarter for wood products in Europe. When you look upon the Asia and the Middle East, we say basically everything outside Europe, there we see the demand also year-over-year in the third quarter be slightly weaker, but the prices are stable.
Okay. Got it. In terms of the Chinese carton board market and maybe Beihai in particular, can you give us an update on what is happening in that market right now in terms of demand, in terms of pricing, and then particularly on Beihai, if there is any progress on the mix there?
In Beihai, we continue to get up in the value chain to more advanced boards. In general, we see that in China it's a stable demand, but we are a bit questioning about the prices. We probably believe that in the third quarter we'll have slightly lower price over quarter on the FBB market in China.
Seppo. Just to remind that, of course, if you look at the wood products, that CLT, LVL pellets, these building solutions products are less volatile than some goods in general, if you look at the cycles.
Okay. Great. Thank you very much.
Thank you. Your next question comes from the line of Robin Santavirta at Carnegie. Please go ahead. Your line is now open.
Thank you. Now, first of all, in terms of what you said about Chinese pulp deliveries and deliveries to China, your comments about them being down quite significantly over the past eight months.
I said five months.
If you look at eight months, they're down as well.
Yes, I know that. I didn't say that.
The economy rate is still growing. Is this sort of a reflection that what we actually have been seeing is a quite significant inventory destocking of pulp buyers in China? Or is this a reflection that the end product of pulp are not growing? What is your opinion?
This is a very good question because the visibility of what our Chinese customers are having in inventories is very low. We know what's in the ports by the producers, and that you also know. What is in the warehouses owned by the customers or the merchant, we don't know. If the economy is still going at 6%, as the Chinese saying, there's something strange going on. It's a destocking. They've been destocking for quite a while. Of the 19 million tons, if I remember right, that they used in 2018, probably somewhere between 0.5 million and 1 million is actually for the export-oriented consumer electronic business to be used virgin fiber around. That is not all gone. I can't really say. I think it's a combination of a slightly lower economic level than what's in the numbers plus a destocking.
I don't think it's one. I think it's both of them, but I don't know.
Sure, thanks. In terms of your biomaterials division, could you just provide an update on Enocell closing down on the bleached softwood pulp sales and changing the mix to dissolving pulp? Where do we stand in terms of that project? When will that happen? What about, you've been talking extensively about 2020 or 2021 quite significantly change sales mix in that division going from less bleached softwood to dissolving and fluff. Will that improve the mix already 2020 or is that 2021?
Seppo here. Maybe I take and Kalle can complement. First of all, the investment at Enocell is coming to final stages, so it should be finalized now during the second half of this year. We move to dissolving pulp. When it comes to dissolving pulp change in the mix, also as you know, we did the changes already in Skutskär earlier, where we already more or less in fluff some standard pulps also produced there, but it should start to be visible already next year. We have been doing this exactly for the reason to have less volatile portfolio when it comes to our pulp portfolio. That a strategic decision made already some time ago, I think if you look at the volatility of the market recently, it just shows and proves that this is the right way to go.
Also profitability in general is quite good in those pulp grades.
What is the amount of softwood you have been producing in Enocell that you would terminate or?
It will be total in dissolving pulp after the conversion. It was originally 600,000-700,000 tons. 500, yes.
Okay, thanks. In terms of the Bergvik Skog transaction, what is the earnings impact? You have more forest on your balance sheet and you, in fact, now own more than 50% of that entity. I guess there must be a positive impact on the operating profit from either Q3 or Q4 forward. What is that number roughly?
In the second quarter, because I think we have earlier mentioned a still positive impact of EUR 20 million-EUR 30 million. Let's save this for the Forest Day in Stockholm. We will tell more there about the figures and effects on P&L, and how we plan to report it as well.
Okay. For now, EUR 20-EUR 30 on the EBIT line, and I guess it's reported in the other segment.
Yes. That is a good working figure for your modeling at this stage. Like I said.
If.
You have to join our investor day in Stockholm, so you will learn more.
Sure. Is this for as of Q3, or is it as of Q4?
Let's say that is sort of annual effect. On rough terms, you can take half of it based for this year.
Okay, good. Thanks. Finally, just on the Consumer Board division, what is the net short position in pulp for that division?
It's some 400,000 tons.
Good. Thank you very much.
Of which EUR 250 is coming from Veracel.
To pay high.
To pay high.
Yep. Good. Thanks.
Thank you. Your next question comes from the line of Lars Kjellberg at Credit Suisse. Please go ahead. Your line is now open.
Thank you very much. I just want to come back to the profit improvement program. Can you walk us through what steps you're taking in that incremental EUR 80 million that you've accelerated now? Let's just take one at a time. Maybe we can start that with the profit improvement, if you can walk us through what you're doing.
Yeah. Of course, you have to remember we have been building the program. It's not so that we have done EUR 120 million program and then we have additional EUR 80 million program. It's done in one go, sort of ongoing as a total. As I said earlier, the organization has had very good sense of urgency and very much focused and on top of the things. There are a number of different actions, as you can imagine, typical things like cutting, traveling, consulting, et cetera, but also very much focusing on changes in the processes and simplification of the processes and streamlining the processes. Good example is, for instance, that we have recently insourced, earlier outsourced finance delivery services from a third-party service provider from India. We added actually people in Tallinn to do the job, but we are saving millions there compared to what we paid earlier.
That is one good example what we are doing. Then we have been also announcing, as you have noticed, different kind of restructurings at the mills, Consumer Board and Wood Products, consolidating production to more one location instead of running separate satellites, if you wish.
Obviously for labor legislation, we cannot tell all the things we can do. We need to talk to our employees first. We have a very solid plan.
Very good. The Oulu decision is, of course, makes directional sense given how markets are. One particular question, though, arises when you announce a substantial shutdown like this one, how do you protect your own deliveries until you actually shut down? What measures are you taking with your customers to ensure you continue to operate as opposed to giving those orders to someone else?
What are you referring to?
Effectively, you've taken the decision, of course, to shut down 1.1 million tons of coated paper production.
Okay. Now I understand.
If I were a customer, I'd reorganize my purchases effectively fairly quickly.
Yes. That was part of the reason why we also accelerated the buildup of it. We saw that while we were doing the feasibility study, some customers got a bit worried about the supply. That happens. At the same time, they also don't want to be in the hands of only one supplier on the wood-free uncoated. We are balancing that off. That is a challenge. It's a huge challenge.
You're not taking any particular actions to try to mitigate and lock in those customers? I don't know if you can.
Yeah. Selling a wood-free uncoated, you don't have that many tricks in the book.
I don't know if you mean. We are not cutting prices.
No.
To give customers. That we are not doing if that's what you suspect or after.
No, I'm not suspecting anything. I'm just interested.
Delivery security to the customers and good customer service. Like Kalle said, they of course want to have several suppliers as long as they can.
Yes.
In terms of the Oulu, as you approach the close down, I understand that you're already starting to sell a bit more pulp from Veracel as you slow down production at Oulu. How should we think about the change in profitability as you move out of paper into more selling more pulp? Is that a meaningful delta in a negative way, given the margin differential between pulp and I guess Oulu?
I think it's the other way around, to be honest.
Okay.
Because Oulu is not yielding a very, very high EBITDA.
No, that's exactly what I meant.
Yeah, now if you sell the pulp, which is Veracel Pulp to other customers, you have a transportation gain, you can sell it into Europe or into Asia, you earn more money because Veracel is the lowest cost producer probably in the world.
That's exactly what I meant. The step down in earnings isn't meaningful. Effectively, you're just translating to pulp from a lower margin paper business.
Yes. I thought you meant that we were losing. No.
No. Nothing.
Okay. We're on the same page, Lars. Thank you.
Yes. Very well. Final point from me was in consumer board, of course you are not where you want to be in terms of your profitability. Seppo, you mentioned that you think you're on target to achieve that. How is that going to be achieved? You're well behind your targets, pricing moves very slowly. What other potential actions can you take to bring it back up to where you need to be?
Part of that is the profit protection program. Part of that is the value management that you have seen, we have been doing quite successfully. The third one is actually where we're getting into renewal of some of the really big clients, which we haven't done yet. On top of that, they have very much focus and running program to improve production efficiencies. Yes. That's quite a big opportunity.
A very final note from me then relating to that. Liquid paper board, where do you see demand trends specifically for that specialty at this moment in your system?
We see that demand trend being positive, and you see it a bit on the backside of the Single-Use Plastics Directive.
Right. That means it's stronger than the general consumer board, is that fair to say?
Yes.
Thank you.
Thank you. Your next question comes from the line of Markku Järvinen at Handelsbanken. Please go ahead. Your line is now open.
Yes, good afternoon. I just had a further clarification on the profit protection program, which seems to be progressing well. I was just wondering, you now achieved EUR 45 million in Q2, and you're targeting EUR 200 million overall in the end, which would imply EUR 50 million per quarter. Sequentially, is there more to come and, or beyond the EUR 5 million delta between EUR 50 and EUR 45, or how should we sort of
The way you should think about it is that we did EUR 15 in Q1, EUR 45 in Q2. We said, me and Seppo it's going to be EUR 100 plus for the whole year. That's the way you should think about the second half. All of these are not linear, because I shouldn't say we took low-hanging fruits, but probably a bit in Q2. It gives you a pretty good idea if you are year to date so far at EUR 60, and we said over EUR 100 for a full year. You can do the math.
So.
I gave you the EUR 15 for Q1.
Yes. You're saying that you get more of an impact in Q2 than you'll necessarily get in Q3 or Q4, is that the?
What we are saying. You cannot multiply 45 by four to come to annual or total. It's a bit fluctuating on volumes and activities. Yes, underlying. That's why we give the guidance for a full year.
Okay. Very good. Thank you very much.
Thank you. Your final question comes from the line of Cole Hathorn at Jefferies. Please go ahead. Your line is now open.
Thank you. Could you just remind us when your liquid packaging board contracts are up for price renewal? Now that wood prices are starting to stabilize, do you feel like you're in a better position to be able to pass through the full higher wood prices?
They are rolling, the one we have been talking or the big one, our biggest client, that is unlike our main competitor who got it by the 1st of January 2019, we get it in the first week of January 2020. That's the big one, we have smaller ones on the side and so forth, it is more towards the end of this year and beginning of next year.
Does that put you in a better position because now your customer can see the wood prices have gone up, you've got greater evidence to say your costs are higher?
We are working as good as we can on it, they are professional buyers, it's going to be a very interesting discussion.
Sure. Then just on your board business in China, are you seeing any shift in production or any customers moving their production facilities out of China into other regional space, or do you have any color or commentary you can provide on that?
No, not really. It's not that easy to move because when you move, you're talking mega 100 million EUR.
Great. Thank you.
There are no further questions.
Okay, thank you. Thank you for everybody joining us today for this Q2 call, and let's talk again in October.
Thank you very much for joining this call. As a reminder, I just want to make sure that we are focusing on protecting our cash and our profit by increasing the profit protection program. We have had eight quarters of double-digit EBIT margin, and we have also concluded a very important investment in Bergvik Skog. Thank you. Thank you.
That does conclude the conference for today. Thank you for participating. You may all disconnect.