Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Quarter Two twenty nineteen Stora Enzo 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. I must advise you that this conference is being recorded today on Friday, 07/19/2019.
I would now like to hand the conference over to your host today, Head of Investor Relations, Ula Pinan. Please go ahead.
Thank you, Nicole. Good afternoon, everyone, from sunny Helsinki, and welcome to Stora Enso's Q2 twenty nineteen earnings call. And I will hand this call now over to our CEO, Karl Sundstrom. Karl, please.
Thank you, and good morning or good afternoon, depending on where you are in the world. And I will go through some of the highlights of the second quarter twenty nineteen, and Seppo will go into some more details on the financial and the divisions, and then we end up with a Q and A session. So we have been focusing a lot in this quarter on cash flow and costs. And we have also increased the profit protection program to EUR 200,000,000. I will come back to that.
So sales decreased. This is the first time in a long time. And we came in with an operating margin of 11% versus 12.3% a year ago. This is a decrease by 12% versus twelve months ago. We actually had a very, very strong cash flow.
It's up over 50% versus a year ago. And net debt to EBITDA increased temporarily to 2.2 times due to the Bergvik 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 Bergvik deal. So what really happened in the quarter?
And when we left Q1, we were a bit more aggressive on volumes. That was the plan. But we figured out pretty soon that the market was very mixed. As you can see here, we have EUR 48,000,000 negative in a combination of sales price mix and volume. And we have a cost increase of EUR 26,000,000, which the biggest one is fiber.
So 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. So at the end of the quarter, we managed to have a cost savings of EUR 45,000,000. On top of that, we had a negative development of EUR 13,000,000 in associates, of which EUR 9,000,000 relates to onetime cost in conjunction with the acquisition of Dyvik Skunk, our part of it. So that's €9,000,000 Another way of expressing it is that we will probably have been down 26% in profitability if we haven't started with a profit protection program in time. So with the success of the speed and the value reaching EUR 60,000,000 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 200,000,000. So we have reached EUR 60,000,000 in the first six months, of which 45,000,000 in the second quarter. And this program includes some of the restructuring that you have seen being announced in our sawmilling business. During the quarter, we're concluding the very complicated restructuring of Bergvik Skog. And it's basically an increase from 1,100,000 of hectares in indirect holdings to EUR 1 point four million indirect holding, of which EUR 1,150,000.00 are productive.
We have financed that with a green bond, And we have basically, when all this is over, we will have an impact in our capital employed of about 1,000,000,000. And in conjunction with this, we did have some items affecting comparability, which amounted to EUR 88,000,000. This is a technicality how you actually back out something from equity. So you lose in the income statement when you gain in the equity, and that's how you back out the accumulative translations adjustments. But the more simple way to describe the deal is actually that having an indirect ownership of one slightly more than 1,100,000 hectares, where we had a value in our books in Sweden of per hectare of about EUR 2,000 per hectare.
We actually increased it by EUR 250,000 at the price of €2,400 per hectare. And with the translation or currency effects between the beginning of this year and the 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 foreign holdings of EUR 2,800,000,000.0. But just as an example, another owner of Barevic, Biller Korsch, has announced that they are going to sell their holdings for a value of EUR 3,700 per hectare. And you have to remember, in that value, it's 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 any commitment or taking forest out of that holding over X number of years.
And if you look on the LRF statistics, the smaller lots in Sweden are being sold for around EUR 5,700. So 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 start we plan to start up the kraftliner production by the 2020, and we will end the paper production in by September 2020.
We also launched a number of new products like Natura Solo, which is a new way of providing foodservice board without drafting coating layers. And we also launched Duracells White, which is a biocomposite for full 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 Upps in Austria. Those two projects together are estimated to have a CapEx of about 90,000,000 Last but not least, before handing over to Sefo, I would like just to make you aware of that this morning, we actually announced that we had to do an investment for EUR 10,000,000 in Sunnila.
Sunnila is the world's biggest place to make Ligno production based on fueling Ligno Boost production of 50,000 tons. Now we are going to invest in the demo plant where you can actually, from the lignin, process it further and actually getting 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, Karl. And 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%, and that is a reflection of lower volumes and sales prices, as Karl already mentioned earlier. Operational EBIT margin remains double digit and was 11%. And operational EBIT was EUR $287,000,000 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 periodic 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 $357,000,000 a year ago to EUR $548,000,000 this quarter, mainly driven by reduction of the working capital during the quarter.
And net debt to last twelve months of pressure, EBITDA is at 2.2% and above the targeted two point zero maximum level due to the fact that all the steps related to cash flow are not finalized yet in the case of Berivik's Kug transaction. After all those steps have been finalized, we will be coming back to levels below the targeted EUR
2.
Then moving to divisions, and I start by Consumer Board, where value management continues. Sales decreased slightly and was EUR $675,000,000. Their lower carton board deliveries were having an effect. And very, 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 7,000,000 and was EUR 72,000,000. That was a reflection of lower variable costs and the mentioned price increases. We have some production issues in Forsmill and lower board volumes also had an effect. Operational return on capital, stable at 12.8%. In Packaging Solutions division, there we are focusing on cost management.
Sales decreased 4% to EUR $360,000,000, and they are clearly lower. RCP containerboard and kraftliner prices had an effect and the deliveries grew slightly. Operational EBIT decreased EUR 18,000,000, but it should be noticed that Q2 a year ago was record high. And this quarter, we were at EUR 39,000,000 level when it comes to operational EBIT. They are clearly lower.
RCT containerboard and kraftliner prices had an effect. And the lower fixed costs related to altered maintenance schedule and lower cost in corrugated units had some positive effect as well. Operational return on capital at EUR 16,300,000.0. That was the case due to lower profitability due to the reasons mentioned earlier. And all the conversion that we announced during the quarter and that Karl already explained as well is proceeding according to plan.
Then 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 $394,000,000. That is a reflection of higher deliveries and clearly lower pulp prices. Operational EBIT decreased only EUR 6,000,000 from record high Q2 level last year and was at EUR 103,000,000. Clearly, lower pulp prices had an effect there and positive effect coming from higher volumes and lower fixed costs related to altered maintenance schedule in Enel Sao mill.
Operational return on capital remained above strategic target level and was 15.6%. And like Karl mentioned, we announced earlier today investment in bio based carbon materials at the Sunina mill in Finland. Then moving to Wood Products, where we are focusing on value management. Sales decreased 4% to EUR $412,000,000, reflection of lower sales prices and deliveries. Operational EBIT decreased EUR 12,000,000 from record high Q2 last year and was at EUR 35,000,000 level.
Lower sales prices, especially in classic sawn products, had an effect on the profitability. And the negative impact from volumes, mainly due to a decreased overseas sales. But here, should be noticed, especially Wood Products, but in all sorts 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 Sverax Mill in Czech Republic and the new construction beam unit at the Upps mill in Austria.
And we are also planning and looking into possible close of Kite sawmill, and this is in connection to consolidating our sawmilling milling in that region area to Warkaus, where we also have integrated operation, integrated to pulp mill locally as well as to LVL element mill producing products for the building solutions there. Then moving to Paper division. Their stable performance in a declining market describes the quarter quite well. And sales were down 6% and reached EUR $712,000,000 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 50,000,000, and that is a reflection of higher sales prices and lower fixed costs, but volumes were clearly lower. And higher variable costs, especially wood costs year on year had negative effect on profitability. Cash flow after investing activities, slightly below the targeted 7% level at 6.6%. And there, we had very good positive working capital development, improving the cash flow. And relating to all conversion to kraftliner, that means that we will reduce paper capacity by over 1,000,000 tons or 20% of our paper capacity after the conversion next year.
Then look at the strategic targets before handing over back to Karl. There you can see that it's becoming a bit more colorful, but still quite many of them are on green. In addition to dividend, net debt to equity ratio is below the targeted 60% level, but the net debt to EBITDA is slightly above the targeted two point zero, as I explained earlier. And fixed cost to sales is slowly coming down towards a targeted maximum 20% level and debt to work continues. And then of course, naturally, for instance, profit protection program that we increased today from 120,000,000 to EUR 200,000,000 increase 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. Then look at the divisions and the targets there. Like mentioned earlier, Biomaterials and Wood Products, about the targeted return on capital levels. Consumer Board still behind, but as said, price increases on the European market are coming through, and we are confident that we will continue a positive trend here going forward and will come to closer to 20% level and closing the gap. Packaging Solutions at 16.3% level.
And Paper slightly below the targeted 7%. Then back to you, Karl.
Thank you, Sappo. And we have a new outlook for 2019, and that's a reflection of the unknown and the very mixed picture we're getting. We believe that there are further deterioration in the trading conditions and a likely hold today higher than before of a hard Brexit. And we also see an accelerating demand decline for European paper. Cost, as you're aware of, has been rising in the whole of 2019, and that is something that we stand with.
And therefore, we are only focusing on a guidance for the second quarter, and we are focusing on making sure the things we can address, which is cost. And that's the reason why we are increasing the profit protection program. The guidance for the 2019 is that an operational EBIT is expected to be in the range of EUR 200,000,000 to EUR $280,000,000. During the quarter, there will be annual maintenance shutdown at the Beihai, Imatra, Hainola, Ostroleka, Enocell and Weizsulotomirs. The total maintenance impact is estimated to be on the same level as in the third quarter twenty eighteen and EUR 30,000,000 more than in the 2019.
Before going into the Q and 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 the and increasing the profit protection program.
And we believe that well over half of the EUR 200,000,000 will be in the P and L of 2019. We've had EUR 60,000,000 so far. So with that, I hand over to you, Ola.
Okay. Thank you, Karl. And before we go to the Q and A, just want to remind you all that we will be talking more about forest and wood products during this coming autumn by hosting Investor Day in Sweden on the nineteenth and then a site visit on the September 20. So then we hope to be a bit more transparent about our forest reporting. So now please, can we get the instructions for the Q
And you have a few questions that have come through. And the first is from the line of Antti Koskivari at Danske Bank. Please go ahead. Your line is now open.
Yes, thank you. I would have a 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 monoclonal structural issues behind the slowing 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. And that's what we've done. And I think what you have heard from most of the companies reporting this week is actually happening. So I'm happy we were out a bit early.
But there are very interesting facts. So by May, that's far as I have, pulp shipped into China out not only not the one sitting in the inventories of the big producers in the Chinese port, but it was 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, very strange. So and obviously, a 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.
And 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, but people are a bit worried. And you see the statistics, I think German core industry is down 6%. That's the end of 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 already not making money at current price levels. And 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?
So I think some of the marginal players Asian players are probably being challenged right now. And it is basically, you have every week, you have a new signal on the pulp market. And in the same week, you might have two different signals, up or down. But 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, but the prices are under pressure in both those markets.
And you remember, we are a smaller player. We are not a Susanoo when it comes with our 2,100,000 tons being long. So it is hard to read actually.
Yes. Okay. Okay. Then lastly, on European paper and especially on the price levels going to 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. So 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. So quarter, I feel comfortable to talk about. So if I look upon the quarters coming, it's basically we see significantly weaker weaker demand year over year and the prices will be slightly lower. This is how I And see the prices is quarter on quarter.
Yes, yes, 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 and good day to everyone. I'd like to start with 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 build 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. So 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, it's not that fast. So it takes some time.
Maybe, Sepe, I could add that, of course, year on year, we see wood cost going up. But sequentially, pressure is often maybe a bit down here.
But for it to hit your P and 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 No
material change. That was saying, when you start to take down your wood supply, usually have contracted it out for a longer period. So 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
a short period. And as you can see also, if you look at back to the wintertime and now this summer harvesting conditions have been back to normal compared to last year.
Right.
Excellent. Then I just wanted to check this Forsch 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, and those are overall already. They are talking about some single millions.
Okay, okay. Great. And then just finally on your Forestland strategy and, Kalle, you are very clear in your advocating for the backward integration and the fact that you bought Forestland in Sweden at a very attractive price, and I agree with that. I'm just thinking like so you have a very clear message and strategy on your very big strategy, and Belukarseness has 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 Tonator and the strategy around the Finnish forest land integration strategy.
And I mean that's somewhat smaller, of course, in terms of strategic importance. But nevertheless, it's kind of you're not cashing, you're not realizing the value the way Vilhud Korsnas did and yet you're not fully controlling it. So it's kind of stuck somewhere in the middle. What's your thinking and response to that?
So first of all, there is a fundamental difference. Tonotor is about 10% of the wood supply in Finland. It is important, but not as big as Bergvik or because Bergvik is probably 70% of all mills except Neymarle and Hylton. So it's slightly different. And the other one is we would like we don't have the money at the moment.
Right, 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, kind of on the cost savings and kind of the profit protection program and the increase to 200,000,000 Can you just talk a little bit about should we expect kind of a similar pace? Or like is it a bit more tricky to generate cost savings from here? And then also, I guess, lot of the players in the market are trying to save on cost in this environment.
So what gives you the confidence that you will be able to retain the whole 200,000,000 2020? And then my second question was just regarding, I mean, this news on the Legionella investigation in Belgium and just kind of the potential link of the outbreak to one of your mills. So if you have any comments on that. Thank you.
So on the first one, if there's one thing I'm sure about, and that is that we will deliver on the EUR 200,000,000. Taking out costs in our industry, and we've been doing it in the 2012 program, the 2014 and many before that, that we know how to do that. And we need to build a stronger platform for the future. And it's going to be both fixed, Sappo said, but also variable costs. And in this business environment, you can work quite a bit on your purchasing.
When it comes to Legionella, so 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. So we don't know. It can be us and it can be, I think, the investigated 17 cooling towers.
Okay. Thanks. Just maybe a follow-up on the first question on the cost savings. I mean, I guess a lot of your competitors as well are quite confident that they're able to take out costs, especially larger players. Why isn't there a risk
that, that is just kind of
in the end just passed on to your customers and then by lower prices?
Think as I mentioned earlier in the divisional review, we have clearly put focus on margin and price protection over the volume. And I think that's exactly why we are doing that we don't pass on the benefits from the program to our customers. Secondly, if you look at the space, we have already in two quarters in the pocket EUR 60,000,000 out of the originally around EUR 120,000,000. And now we increased that to EUR 200 And having in place, like Karl said, well functioning organization that is used to cutting costs, and there is also a good sense of urgency in the organization to reach the targets. We are very confident to reach the EUR 200,000,000 level.
And 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 reached in 2019 alone. We said originally 40% of EUR120 million in 2019, and we're already at EUR60 million. And when we revise the target upwards to 200, we are now saying that over 100 will be already visible this year. So almost 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? Because clearly, you've had a very strong performance in deliveries. And I'm just trying to understand, we can see clearly benchmark European pulp prices are down 20% year over year, benchmark Chinese prices are down some 30% year over year.
The achieved store Enzo price is substantially more robust than that, shall we say, it would appear like. And 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?
So it's partly a product mix. And it's also a bit of a time delay when the prices are coming in.
Okay. And 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?
So 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 thing, but that's what we see.
Because if they are down, I think China last year probably used 19,000,000 tons of chemical pulp. And in May, they were down by if you annualize that by month, down by 7%. But in May, they 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 nine point four million nineteen point four million tons. And 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, sure. And 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 Storrenso?
Yes. 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 containerboard. Can you talk to us a little bit about corrugated prices?
Are you being impacted there by lower corrugated prices as yet in Q2?
JEAN So 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 the best value creation. 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.
So 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 Mikhail Duopat, 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?
And 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?
So when it came to wood product demand in the third quarter, we expect them to be slightly weaker. There are signals that their building starts are holding back, and we've seen that for a while. And 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, which is basic or say basically everything outside Europe, there we see the demand also year over year in the third quarter being slightly weaker, but the prices are stable.
Okay.
Got it. And then in terms of the Chinese carton board market and maybe then 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?
So 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. So we probably believe that in the third quarter, we'll have slightly lower pricing quarter over quarter on the SPD market in China.
Stefan, just to remind that, of course, if you look at the wood products, that CLPL, we are pellets, these building solutions products are less volatile than sawn goods in general, if you look at the cycles.
Great. Thank you very much.
Thank you. Your next question comes from the line of Rogin Santavirta, 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 guess.
I said five months.
But if you look at
eight months,
they're down as well.
Yes, I know that. I didn't say that.
So and then the economy and retail sales are 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 sort of a reflection that the end part 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, very low. We know what's in the ports by the producers, and that you also know. But what is in the warehouses owned by the customers or the merchant, we don't know. But if the economy is still going at 6%, as the Chinese saying, then there's something strange going on. Then it's a destocking.
But they've been destocking for quite a while. And all the 19,000,000 tons, if I remember right, that they used in 2018, probably somewhere between zero point five million and one million is actually for the export oriented consumer electronic business to be used virgin fiber around. And that is not all gone. So I can't really say. I think it's a combination of slightly lower economic level than what's in the numbers plus a destocking.
So I don't think it's one. I think it's both of them, but I don't know.
Sure. Thanks. And then in terms of your Biomaterials division, could you just provide an update on Nocell closing down on the bleach softwood pulp sales and changing the mix to this? I mean, do we stand in terms of that project? When will that happen?
And then what about you've been talking extensively about 2020 or 2021 quite significantly changed sales mix in that division going from less softwood to dissolving and fluff. Will that improve the mix already 2020? Or is that 2021?
Seth, maybe I take and Kalek can complement. First of all, the investment at Enosar is coming to final stages. So it should be finalized now during the second half of this year and then we move to dissolving pulp. When it comes to dissolving pulp change in the mix and also, as you know, the change is already in good scenario where we are already more or less in fluff. Some standard bulks also produced there.
But it should start to be visible already next year. And we have been doing this exactly for the reason to have less volatile portfolio when it comes to our portfolio. And that's a strategic decision made already some time ago. And I think if you look at the volatility of the market recently, it shows a proof that this is the right way to go. And also profitability in general is quite good in those both grades.
What is the amount of softwood you have been producing in Nocell that you would terminate or
It will be total in dissolving pulp after the conversion. It was originally some was 600,000, 700,000 tons, 500, yes.
Okay. Then in terms of the Badrivikskuk transaction, what is the earnings impact? So 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
in the second quarter,
Because of I think we have earlier mentioned that it will have positive impact sort of as East basis, some EUR 20,000,000, 30,000,000. But let's say this for the Forest Day in Stockholm. So we will tell more there about the figures and FX on profit and loss. And how we plan to report it as well.
Okay. But for now, EUR 20% to 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. But like I to you join our Investor Day in Stockholm, so we will learn more.
Sure. But is this for as of Q3 or is it as of Q4?
You can let's say that, that is sort of annual effect and on rough terms, you can take care of it based for this year.
Okay, good. Thanks. And finally, just on the Consumer Board division, what is the net sharp position in pulp for that division?
It's some 400,000 tons.
Good. Thank you very much.
Of which two fifty is coming from Veracel to Beihai. To Beihai.
Yes. 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 are taken in that incremental €80,000,000 that you've accelerated now? And let's just take one at a time. Maybe we can start there with the profit improvement, if you can walk us through what you're doing.
Yes. Of course, you have to remember, we building the program, not so that we have done EUR 120,000,000 program and then we have additional EUR 80,000,000 program. It's done in one go sort of ongoing as a total. And as I said earlier, the organization has had very good sense of urgency and very much focused on top of the things. So there are a number of different actions, as you can imagine, typical things like cutting, traveling, consulting, etcetera, 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. And 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. And obviously, for labor legislation,
we cannot tell what the things we can do. We need to talk to our employees first, but we have a very solid plan.
Very good. The order decision is, of course, well, makes directional sense given how markets are. One particular question that 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? The
Well, effectively, you've taken a decision, of course, to shut down 1,100,000 tons of coated paper production.
Okay. Now I understand.
If I were a customer, I reorganized my purchases effectively fairly quickly.
Yes. And that was part of the reason why we also accelerated the buildup of it. And we saw that while we were doing the feasibility study, some customers got a bit worried about the supply. And that happens. But at the same time, they also don't want to be in the hands of only one supplier on the wood free uncoated.
So we are balancing that off. But that is a challenge. It's a huge challenge.
But you're not taking any particular actions to try to mitigate and lock in those customers. I don't know if you can, but
Selling a Woodfree on coated, you don't have that many tricks in the book. I mean, I
don't know if you mean that we are not cutting prices to these customers. That we are not doing, if that's what you suspect or after.
No, no, no, I'm not suspecting anything. I'm just suggesting.
Delivery security to the customers and good customer service. And like Karl said, they, of course, want to have several suppliers as long as they can. Yes.
And 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 Olo. 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. So you Now
if you sell the pulp, which is Veracel pulp from to another customers, you have a transportation gain and you can sell it into Europe or into Asia and you get you you earn more money because Verasel is the lowest cost producer probably in the world.
That's exactly what I meant. So 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, I think No, no, no. Not the answer. Okay.
Then we're the same page, George.
You.
Yes. Yes, very well. Final point for me was in Consumer Board, of course, you are not where you want to be in terms of your profitability. And Seppo, you mentioned that you think you're on target to achieve that. How was that going to be achieved?
I mean, you're well behind your targets and pricing moves very slowly. So what other potential actions can you take to bring it back up to where you need to be?
So 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. And the third one is actually when we're getting into renewal of some of
the really big clients, which we haven't done yet. And on top of that, they have very, very much focus and are running program to improve production efficiencies. And that's quite a big opportunity.
And a very final moment for me then relating to that. Liquid paperboard, where do you see demand trends specifically for that specialty at this moment We in your
see that demand trend being positive. And you see it's a bit on the backside of the single use plastic directive.
Right. So and it's so 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 Marco Giovannin 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 €45,000,000 in Q2, and you're targeting €200,000,000 sort of overall in the end, which would sort of imply €50,000,000 per quarter. So sequentially, is there sort of more to come and or beyond the sort of €5,000,000 delta between 50,000,000 and 45,000,000 Or how should we sort of
The way you should think about it is that we did 15,000,000 in Q1, 45,000,000 in Q2. Then we said, me and Zepo, it's going to be 100 plus for the whole year. And that's the way you should think about the second half because all of these are not linear because certain things gives we got I shouldn't say we took low hanging fruits, but probably a bit in Q2.
But it gives you a pretty good idea. We are year to date so far at 60%, and we said over 100% for full year. You can do the math.
And then I gave you the 15,000,000 for Q1.
Yes. So you're saying that you got more of an impact in Q2 than you'll necessarily get in Q3 or Q4. Is that the
But we are saying you cannot multiply 45 by four to come to annual or total. It's a bit fluctuating on volumes and activities underlying. That's why we give guidance for full year.
Okay.
So okay, very good. Thank you very much.
Thank you. Your final question comes from the line of Cole Horson 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? And 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?
So they are rolling, but the one we have been talking are the big one, our biggest client. And that is unlike our main competitor who got it by the first of January twenty nineteen, we get it in the January 2020. But that's the big one. And then we have smaller ones on the side and so forth, but it is more towards the end of this year and beginning of next year.
So I mean, 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, and they are professional buyers. So it's going to be a very interesting discussion.
Sure. And 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. And it's not that easy to move because when you move, you're talking mega 100 millions of euros.
Great. Thank you.
There are no further questions. Okay. Thank
you. So thank you for everybody joining us today for this Q2 call, and let's talk again in October.
Thank you very for joining this call. And 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, 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.