Afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's first quarter 2019 Stora Enso 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 wish to ask a question, you will need to press star one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today on Thursday, the 25th of April, 2019. Without further ado, I'd like to hand the conference over to your speaker today, Ulla Paajanen, Head of Investor Relations. Please go ahead.
Thank you, Jenny. Good afternoon, everyone, and welcome to Stora Enso Q1 2019 results conference. I will hand it over now to our CEO, Karl-Henrik Sundström.
Thank you, Ulla, and good morning or good afternoon, depending on where you are in the world. Today we published the first quarter result of 2019. We believe this was a good start of the year, and it was supported by the profit protection program. I will come back to that later on. Sales increased by over 2%, and this is the highest Q1 since 2013 when it comes to sales, and it's a ninth consecutive quarter of growth. The operating EBIT decreased by EUR 45 million to EUR 324 million. We did deliver in the upper end of our guiding range, which was EUR 260 million to EUR 350 million, and we came in with an EBIT margin of 12.3%. This is the seventh consecutive quarter with a double-digit EBIT margin. Cash flow came in basically at the same level as last year.
Net debt to EBITDA increased from 1.3x a year ago to 1.7x, and that is due to mainly two reasons. One reason is that we have implemented IFRS 16, and that is 0.3x. We also paid a dividend this year in the first quarter. Historically, we have always paid the dividend in the second quarter. Return on capital employed came in at 14%, and it's above the targeted strategic target of 13%. Here we have to understand that the IFRS lease impact is about negative 0.4 percentage points or slightly below EUR 300 million. If we go to the next page, this is an attempt to describe what happened in the first quarter. First of all, we have to remember that we have a different maintenance schedule this year for the annual shutdown of the pulp mills. That's an impact of EUR 20 million.
There have been two areas where we've been focusing on. One is obviously the increased variable costs. Here is a total of EUR 68 million, of which fiber, mostly wood cost, but also purchased pulp, stands for EUR 44 million. The other EUR 24 million are everything from increased logistics, chemicals, and other including material. This is the area where we are focusing the profit protection program. This is what we're working on now to secure a profitable future. On the value management, we have been working a lot between sales mix and volumes. That had come back to compensating the increased cost by EUR 43 million. All in all, these two factors had an impact of EUR 25 million in the quarter. Next slide, please. We once again back to a return on capital employed above 13%.
If you remember, we were down at 12.4% in the fourth quarter of 2018. Now we are back above 13%, that is also including the impact of IFRS 16, which is, as I said before, 0.4 percentage points or slightly below EUR 300 million. We have had some interesting events happening in the quarter. One of them is the decision to invest as a startup phase, EUR 5 million in formed fiber production in Hylte mill in Sweden. This is a new line of formed fibers for new products such as inserts, containers, cups, industrial packaging, et cetera. This is a circular product and contains no plastic. It's basically 99.9% wood. Now we are ramping that up in a very fast speed.
Oulu conversion feasibility study was completed in the quarter. The proposal that we have is to convert the paper machine number 7 to kraftliner and close down the paper machine number 6 and the sheeting plant. The decision on the potential conversion is planned to be made by Stora Enso Board of Directors during the first half of 2019 after the co-determination process has been completed. We also started the first deliveries from our new CLT factory in Gruvön in Sweden. It's ramping up according to plan. Last but not least, the investment in the additional drying capacity in Imatra mills has been completed, and we can now start to drive the commercialization of the microfibrillated cellulose, which is a step in the right direction. We announced in Q4, if you remember, that we are also converting one of the paper machines in Imatra mill for production.
The ongoing and fairly long process of restructuring of Bergvik Skog is proceeding as planned. The aim is to complete the transaction in the second quarter. As you know, this is a change from being part owner of 49% in a company to basically increase our forest holdings as well as taking it into our balance sheet. Where we increase the forest holdings by 300,000 hectares, and we will increase also the productive forest land, which is part of the reconstruction of Bergvik. This has been financed with a first green bond made by Stora Enso, which we did during the quarter, as well as an increase of capital employed about EUR 1 billion and a return on capital employed by around 1 percentage point.
The transaction is forecasted to increase the net debt to operational EBITDA temporarily above the strategic target of 2 during Q2 and Q3, then coming back to below 2 by the end of 2019. With that, I would like to hand over to Seppo.
Thank you, Kalle. I start by going through some of the key figures from the report that we have published earlier today. First of all, top line sales increased 2.2% and reached EUR 2,635 million. Operational EBIT was EUR 324 million and operational EBIT margin 12.3%. Operational return on capital employed was 14% and about 13% targeted level. Cash from operations was EUR 223 million, approximately at the same level as a year ago. Net debt to last 12 months operational EBITDA was 1.7. Here it's worth to remember and notice that this includes impact of 0.3 negative impact from IFRS 16 leasing standard change, as well as good to remember, we paid dividend this year in Q1 instead of Q2 as in the previous years. That had, of course, an effect on the net debt when it comes to the quarter.
Moving forward and a bit more details on IFRS 16 leasing standard change on the figures. This is now quarterly figures effect during the Q1. Operational EBITDA increased by EUR 19 million because of the standard change and operational EBIT by EUR 2 million. The difference is increase in the depreciation. Net financial items increased EUR 6 million and effect on net profit level was EUR 4 million negative. Operational return on capital employed down 0.4 percentage points and net debt increased by EUR 526 million. Going through our divisions, I start with Consumer Board, where price increases continue to come through gradually. Sales decreased slightly during the quarter to EUR 634 million. Lower board deliveries were partly offset by higher pulp deliveries. Local sales prices had a slight positive impact when it comes to sales line development.
Operational EBIT decreased EUR 37 million to EUR 54 million. That is due to significantly higher variable costs, especially for wood. Also, negative total volume development had negative impact on the result. Operational return on capital decreased to 10.3%. This is due to lower profitability as mentioned earlier, and impact of IFRS 16 leasing standard. In China, we launched premium quality folding boxboard, new grade Arctic Deer, and this is suitable for applications in food and pharmaceutical packaging as well as publications. At the Imatra mill, co-de termination negotiations related to close of PM6 were finalized, and it will be shut down by the end of 2019. This will increase annual sales by approximately EUR 70 million after the closure. Moving forward to Packaging Solutions division, where we had record first quarter sales. Sales increased 2% to record high EUR 338 million.
We had higher prices in corrugated and fluting businesses. Operational EBIT decreased EUR 10 million to EUR 51 million level. Higher sales prices were offset by overall higher costs and lower China packaging sales margin. In Packaging Solutions, changed maintenance schedule compared to a year ago, Fors mill's PM5 decreased production and increased maintenance costs during the quarter. Operational return on capital remained about 20% targeted level and was at 21.8%. At the Heinola fluting mill here in Finland, industrial scale pilot plant will be built to turn sludge from the mill's water treatment plant into renewable fuel. This plant will test new energy efficient technology, and these new biofuels will reduce carbon dioxide emissions at the mill's power plant going forward. Moving to biomaterials, where good performance continues. They had record quarter. Sales up 1% to record high EUR 398 million.
We had there slightly higher sales prices supported by foreign exchange rates. Deliveries were somewhat lower, mainly due to the changed maintenance schedule in Veracel mill in Brazil. Operational EBIT was record high as well for Q1 at EUR 103 million. Higher sales prices were partly offset by higher variable and fixed costs. Operational return on capital was about the 15% targeted level and was at 16.2%. Moving then forward to wood products, where also performance continues on record level. Sales increased 3%, slightly higher sales prices and favorable mix changes, partly offset by lower deliveries during the quarter. Operational EBIT was at record high Q1 level of EUR 29 million and higher sales prices were offset by higher fixed costs, mainly related to startup preparation of strategic investments. There was also negative impact from the volumes. Operational return on capital decreased to 17.7%.
This is partly due to seasonality of the business, but also good to remember and notice that capital in wood products division has been increased now when Gruvön new CLT plant has been finalized and is in the ramp-up phase. This is of course also affecting return on capital, as well as negative impact on IFRS 16 leasing standard that is 0.6 percentage points negative. Moving to paper division, where we also had record high Q1 profitability. Sales down 2% to EUR 760 million level. There we had clearly higher sales prices and a better product mix and sales mix. Lower sales volumes were having an effect on the top line. Operational EBIT was stable at EUR 69 million. EBIT margin increased to 9.1%, which is highest in 10 years. We had significantly higher sales prices and slightly lower fixed costs during the quarter.
Higher variable costs, especially in wood, pulp, and energy, had an effect on the profitability as well as lower volumes. Cash flow after investing activities to sales ratio was 6.1%, somewhat below the 7% targeted level. Finally, to summarize where we are with the strategic targets that we have set for the company and different divisions and businesses that we are in. As already earlier noticed, we will start to be on green on most of the targets and remain there. Fixed cost to sales ratio is still on red, coming down to 22.4% now compared to 22.6% a year ago.
Consumer Board remains below the targeted 20% level at 10.3%, and there we continue to improve the cost structure efficiencies as well as to increase prices also going forward in order to compensate for the higher raw material costs that we have been facing during the past year or so. Wood Products, like mentioned, also a bit short of the targeted 20% level, but this is due to seasonality mainly. Paper cash flow 6.1% of the net sales, slightly below the 7% targeted level. Others are on green. With that, I hand over back to you, Kalle.
Thank you, Seppo. The outlook for 2019 remains unchanged compared to the outlook that we gave in conjunction with the Q4 2018. There is no change here. Exactly the same text. Moving to the guidance for the second quarter of 2019. Operational EBIT is expected to be in the range of EUR 270 million-EUR 350 million. During the second quarter of 2019, there will be an annual maintenance shutdown at the Nymölla paper mill. The total negative impact of maintenance is estimated to be EUR 35 million less, I repeat, less than in Q2 2018. One of the main reason is that we had six mills with annual maintenance shutdown in the second quarter of 2018. In this quarter that we are in now, the second quarter 2019, we have only one mill.
By summarizing the first quarter of 2019, basically, we managed to focus on the value management as well as the profit protection program on reducing our costs, ending up that we ended up in the higher range of our guidance, and that's the reason. Sales continue to grow ninth consecutive quarter, seven consecutive quarter with double-digit EBIT margin. We are back 13% return on capital employed despite additional capital coming from IFRS 16. The balance sheet is strong. The value management or the price versus volume is working, and profit protection is addressing the cost structure going forward, securing the future. With that, I would like to hand over for Q&A. Ulla?
Okay. Thank you, Kalle. We are ready now for the Q&A.
Thank you very much. Ladies and gentlemen, just to remind you, if you would like to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you need to cancel your request, you can press the hash key at any point. Once again, that's star and one to ask a question. Our first question today comes from the line of Justin Jordan from Exane. Please go ahead.
Good afternoon, everyone. Well done on a good Q1. Two quick questions if I could, please. Firstly, on the Biomaterials division. You talk about, in your outlook comments, slightly stronger demand in Q1 compared to Q4 2018 for hardwood pulp in China. Can you elaborate on that? Secondly, similarly so in Packaging Solutions, in kraftliner or sort of virgin-based containerboard, you talk about slightly weaker demand in Q1 2019 compared to Q4 2018. Again, can you elaborate on what you're seeing, what you saw in Q1, and perhaps what you can see or tell us about Q2 in both areas, please?
The first question was regarding hardwood-
Hardwood pulp, China.
Yeah.
Specifically China.
Yes. What we have seen there is that in China we are seeing that it's stabilizing, Pulp in China is being a bit more stable and we are getting a little bit more, so to say, feed through in the supply chain because you have seen a lot of the inventories, but that has been the producer's inventory. Now we see that a lot of the chain all the way to the customers is actually stabilizing.
Okay. As far as I can see, the port inventories in China are still quite elevated.
Yes. We also see there is very little in the customer premises, and they are still selling out.
Got it.
You have also to remember that all these inventory things is not really applying to us because we have such a broad portfolio, which means that that might be for just bulk hardwood or just bulk softwoods. We are very big in dissolving pulp and fluff and other specialty pulp. You have to have that in mind.
Yeah. Okay. Thank you for that. Sorry, just moving to Packaging Solutions then, and your comments regarding slightly weaker demand for kraftliner.
Yes. That what we saw. Going forward for Packaging Solutions, we see a stable demand, but a little bit coming down in the prices. That is especially in testliner. I think the virgin boards are holding up slightly better. All in all, for the Packaging Solutions, we see prices coming down into the next quarter.
Okay. In your comments, you're talking about slightly weaker demand in Q1 for-
Yes
virgin-based containerboard. I'm just-
Yes
wondering where is that coming from. Is that particular geographies or particular industries that you're referencing there?
It's been a little bit all over the place.
Okay. All right.
Most of what we sell is global. The only one is testliner, which is around the 1,000 km around the Ostrołęka mill. The rest is global when it comes to kraftliner and fluting.
Just one final question from me. Sorry. Just on the EUR 120 million of cost saving, how much benefit could we expect to flow through into calendar 2019? I appreciate most of this will be-
I will repeat that I said last time, I expected 40% in the last call.
Yeah.
That I'm very sure about.
Okay. Thank you.
Just, yes, you have to understand, we were a bit on a ramp-up on the cost. First of all, you have to get down. That's why I've stayed quite comfortable because there's a lot of action going, and there's a lot of things happening.
Yes. I appreciate that. Okay. Thank you.
Thank you very much. The next question is from the line of Antti Koskivuori from Danske Bank. Please go ahead.
Yes. Thank you. The first question would be on your board volumes. You mentioned deliveries being lower, 5% year-over-year, if you look at the production numbers, they are even lower, 10% year-over-year down, and you had no maintenance either this year or last year. Could you explain a bit? Sorry if I missed this in the presentation. If you could give us a bit more color on what's happening.
That was actually my slide number two.
We have been playing what we call the value management game. We have been making sure that we get as good prices as possible, and even if that meant that we lost volume.
Mm-hmm. Should we expect you to continue to produce less also in the coming quarters?
No, I think in the coming quarter, volumes will go up.
Okay. Back to the normal levels, or was this a only Q1 related?
At this point in time, we do not expect to play the same kind of game in Q2 that we played in Q1.
Okay. Could you give us an idea of which product categories this was affecting?
Obviously, this happened in paper, it happens in Packaging Solutions, and it happened in Consumer Board.
Also to a certain extent in wood products. They have been doing it for a longer period.
Yeah. Okay. Thanks. The second question would be about the kraftliner supply-demand outlook. There has been news on the recent days from Klabin adding more than 900,000 tons of kraftliner capacity in Brazil. I realize that it is a bit of a different market, but how do you view the kraftliner capacity?
I am very curious because maybe there's a lot of experts online here. That's Eucalyptus kraftliner.
I haven't seen that in the market. I don't know if it's a new development or anything, because all others are using the more traditional Nordic species.
That has to do with the pure functionality of it. Because if you want to transport bananas or fruit or things that have to be in food containing or more strength, you need to have a kraftliner where either a new generation, but a pure Eucalyptus, I have not heard about before. Because I read the same thing, I'm very curious about that.
Yeah.
If you hear anything about it, please tell me because I want to know more about it.
Absolutely. All right. Thank you very much.
If you take the whole kraftliner capacity of the world, it's a growing business, and I think it's about 35 million tons per year.
Of which a lot is with old technology and very little is with the new ones.
They probably use some of that volume internally for their own corrugated business as well.
Yes.
All right. Thank you very much.
Thank you. The next question comes from the line of Alexander Berglund from Bank of America Merrill Lynch. Please go ahead.
Thank you very much. Two questions from me. First, just to follow up on the value over volume game you did in Q1. Given that the inventories are quite high in the pulp, is there any possibility to do that in the pulp, or it just doesn't make any sense from a fixed cost observation point of view? My second question is more about on your outlook statement of 2019 being largely in line with 2018, given that the current trading conditions do not significantly change. I just wondered if we should read that you're confident achieving this even if the prices stay at the current April spot levels, or if you factor in any rebound in either pulp or containerboard prices into the second half of 2019. Those were my questions.
When it comes to pulp, it's not that easy, and we are a niche supplier in all the niches. It's not that easy to play this. You have to remember when it comes to high-quality packaging solution grades, such as our testliner or a fluting or kraftliner, we play a role there because we are quite strong in certain end-user segments. The same is in certain end-user segment Consumer Board, and definitely in wood products, where we are by far the biggest supplier of construction material made by wood. In biomaterials, it's a bit trickier to do it.
You have to remember to make pulp is a continuous process.
Yes.
Also like Kalle mentioned in the previous reply, we are 2 million tons long, yes, but it is split over quite many grades.
Yes.
Again, if we would start to do something in one grade, it does not really turn the needle a lot on the market.
Here we are more a follower in many grades.
Okay. On the outlook?
The reason why we have that there. If normal volatility will be there, then we are confident. The thing we are a bit worried about is, will there be a solution of the trade war between China and U.S.? Will U.S. turn on the European Union after it's ready with China? Even though, fortunately, the break decision was delayed, and we got more time to solve it, will that be solved? If all these three things happen at the same time, I think the trading condition for most of us will be very different.
Okay. Just on, try to quantify that. Given where most prices have come down a little bit, at least into Q2 versus what you've done in Q1. If things stay at around the Q2 level, on the price level, is your cost protection program enough for you to still be able to have a 2019 result on a full year in line with 2018? Do we need to do something on prices?
Let me say. Basically, it's about where we are today
Where we did, yes. Obviously what we see for Q2 is included there. Okay, thank you.
Thank you. The next question is from the line of Harri Taittonen from Nordea. Please go ahead.
Yes, good afternoon.
Good afternoon.
One question on the, if you look at the wood cost on a sequential basis, I know that it's sort of easing compared to last year, but where do you see? It seems that some of the unit prices have come down late last year and during this year. If you look at the kind of average price for wood on Q1 versus Q4 and going forward, what do you see there?
Well, I would say wood cost has stabilized, and you could say that they might be going forward, coming down slightly. It's quite stable market at the moment if you look at sequentially.
Okay. The other question is about the maintenance cost, and I can't remember if you have indicated the total level of maintenance. Is it going to be about the same level this year compared to last year? I know when you take into account all this rescheduling or a different schedule by quarter, on a full year basis, do you think it's going to be roughly the same amount of maintenance costs?
No, we don't guide maintenance cost on annual basis, looking at the annual schedules that we have or maintenance cycles we have. I think it's fair to assume similar level roughly as previous year.
Okay.
Sometimes this, with the changes in the maintenance schedule, it's not really done by us. It's actually done by the permits. If you take Nymölla, they need to have every 18 months, which means that that rolls all the time, and then others are coming in and out, and also the age of the mill. We are trying that to be more specific in the quarter and coming to the next quarter as well. As Seppo said, broadly in line with last year.
Very good. The final quick question about the wood products, I think there's been a notion of slightly declining price trend overall. If I look at this quarter, your average prices went up quite a lot, of course it's dangerous to look at just one three-month period and make many big conclusions from there. Is there something, was the mix somehow very different from the usual?
It was mix. It was also this, what we call the value management.
Yeah.
That's one of the reason, they've been doing this since 2012 or something. That's one of the reason that we don't have so much volatility in our wood product compared to others. There are two differences. We manage on value. Secondly, we are not using so many resellers. We only want to sell to customers who own the inventory to avoid volatility and channel stuffing.
Okay. Very good. Many thanks.
Thank you, Harri.
Thank you. The next question comes from the line of Linus Larsson from SEB. Please go ahead.
Thank you very much, good day to everyone. Looking at your operational EBIT across most of your division, it's actually remarkably stable year-on-year, with one exception being Consumer Board. We touched a bit upon the reasons. Could you possibly elaborate a bit further on that big year-on-year decline in Consumer Board? Volume was one, but then presumably you should have got some price back on that price volume gain. For instance on, could you talk a bit about the pulp dynamics? That division is short. How short and what's the pulp impact on that EBIT line, please?
You have to remember that Q1 last year was the last good quarter for Consumer Board. Right?
Yes, because of the decline. The long contracts and some of the long contracts we have started to work with, and we had some price increases in the first quarter on FBB. We will get some continuing to the second quarter, but when we come to the big liquid customers, that negotiation is ongoing and with the new prices will come in 2020, first of first. Our main competitors in this area, they are one year ahead of us, which means that we are one year after them. There has not been any big or movement at all in liquid.
In the pulp. Yeah. On the pulp side, in Consumer Board, like we said earlier, what has changed in the position is that earlier they used to be slightly even long in pulp. Yeah. Now after the start of Beihai, as well as increasing volumes and utilization of the own pulp at the European mills, they are actually short by some 450,000 tons annually. Which is of course change the dynamics of the development. If you look at the result, that they are more sensitive to higher pulp prices than earlier. They were benefiting from that rather than suffering. That's part of the work they're doing now to compensate for the increased costs.
Yes.
It's not wood cost only anymore for them.
Right. That 450,000 tons that you've been talking about before, that still holds now that there's no-
That's still valid, yes
there's no wood shortage any longer, I assume.
No. We are not having any wood shortage. Not at all.
Yeah.
Harvesting conditions have been normal, market is good, there's a lot of wood available. That's not a dilemma.
Okay. What's the magnitude or potential for price in Consumer Board in the second quarter?
On FBB it will go up a little bit. We expect prices to continue to go up. The big-ticket item is coming in 2020 with some of the big liquid customers.
Mm-hmm. Okay, great. Just one final question on wood products. The EUR 29 million of EBIT is spot on where you were one year earlier. Second quarter typically has a strong seasonal uplift. Q2 of last year was EUR 47 million. Now the base is the same, as we look into the second quarter 2019, should we expect the same kind of favorable seasonality as we had last year?
No, not as much. Wood products demand and prices are coming down in Europe. We see a bit of worrying signs, especially in the construction sector. There are two factors here. Wood is becoming more and more popular to build in, the total construction sector in Europe is actually holding back.
Even if we take market share from other materials, that will not be able to compensate the downward trends.
Right. That's very clear. Thank you very much. That's helpful.
Thank you very much. The next question is from the line of Robin Santavirta from Carnegie. Please go ahead.
Thank you very much. In terms of Consumer Board, can you talk a little bit about the Chinese market? I assume, a fairly big part of the volumes you sell from Beihai, perhaps half of those are sold on the commodity spot market, folding boxboard market, where prices have gone down by pretty much. The prices are quite low at the moment. How do you expect those to develop this year?
You're absolutely right. With the tension between the U.S. and China, a lot of the tonnage that were going into packaging of electronics has been suffering quite a bit. Prices have year-over-year gone down. What we see now going into Q2 is actually more a stable demand and increased prices. Yeah. We just launched a new board type, and that is the Arctic Deer, which is basically on a very high-end use, pharmaceutical and other things. We are looking stable but also increasing prices. That's also that we are phasing out a lot of these, what you call these commodity boards that we had to train up the people and continue to get the right products in and the right market channel.
Okay. The Beihai mix improvement is progressing nicely-
Yes
this year.
Yes, sir.
All right. In terms of the pulp market, you were spot on last quarter, where you expected a bit of a rebound in February, March. Based on what you now said that we know producer inventories are fairly high, but as I understood you said that the buyer inventories are fairly low. Would that sort of translate to a stable market going into early summer in your view in China?
If I take China, I would say that I think we expect small fluctuation on pulp prices on a high level. We do not see any drop, but it will be small fluctuations stabilizing over that. Maybe we could see a little bit of even more stable prices towards the end of Q2.
All right. Thanks. That is clear. In terms of the supply-demand situation in paper in Europe, obviously Q1 was a strong quarter you delivered. What do you expect now for the next few quarters as demand has been soft?
The demand will continue to decline.
Prices we believe are going to be stable.
All right. Then finally, in terms of the guidance range, it's again very broad and you delivered better in the upper end of the range now in Q1. Is it still the trade situation and Brexit?
It is the trade, it's also if something happens or up and down and what really happens to the pulp because you have fluid effects into Packaging Solutions virgin boards, you have fluid effects into FBB. We chose this time, we narrowed the range by EUR 10 million. You can give us credit for that. I agree it's a wide range, I rather have that, not to disappoint given the market circumstances.
I understand. Regarding the full year guidance, when you talk about roughly in line, I assume you must be talking about earnings roughly in line with-
Yes, absolutely
2018. All right. Thank you very much.
Thank you.
Thank you. The next question is from the line of Cole Hathorn from Jefferies. Please go ahead.
Good afternoon. In your Packaging Solutions business, could you give some color on your China packaging business?
Packaging Solutions, okay. Give color what's happening. Was that the question?
Yes. In your China packaging business within Packaging Solutions, could you give us some color on what you're seeing on the ground there in the Chinese market?
We see a bit of a challenge, especially the part that goes to the electronic industry. The part who supplies the growing middle class in China, no change. Within electronic industry, there are certain exceptions. In general, that's what we see.
Staying with Packaging Solutions on containerboard, you mentioned that you expect to see some softer recycled containerboard pricing in 2Q versus 1Q. Are you referring to average pricing in the second quarter versus the first quarter? Are you saying that you expect pricing to-
Yes
decrease from here?
Average pricing.
Average pricing.
Average pricing, yes.
Okay, great. The final question is on your profit improvement program, would you mind just giving us an example of one or two of the items that you're actually doing in that profit protection program?
There are, of course, number of things that we are working on. We are addressing both variable and fixed costs. Like in any typical profit protection program, we are looking at more process related things like improving digitalization using robotics, RPAs as an example to cut costs from the system. Good example there is that we have recently insourced earlier outsourced financial delivery services to our own center, reducing cost at the same time, thanks to automatization. Other typical things is, of course, that you look at the usage of consultancy services. You look at the traveling cost cutting, especially expenditure on internal meetings and traveling for that being more efficiently using Skype and other modern tools for the meetings. Of course, one important thing is to work on operational improvement of the efficiencies at the mills to improve the output of the mills.
That may be more cost efficient also. It is not only cutting costs, but also how to be more efficient and better. As well as one important point is this Imatra PM6 close by end of the year. This kind of actions also, we have been having similar, not closures, but headcount reduction at some wood products mills also in Sweden and in Baltics.
More things will come, whenever it is turning to personnel, we would rather have the discussion according to the legislation, especially in the Nordic countries, that we have to inform them first, then we make it public in the financials.
I can say that there is good sense of urgency in the organization to implement the program. We are quite happy with Kalle, how it is moving forward, and we are confident that we can reach EUR 120 million.
Yes.
Great. Thank you.
the other thing we are canceling, like management as conferences. We used to have a conference for the 300 top people in. That's canceled.
Yeah, that's a good example. Yeah.
Great. Thank you.
Thank you. The next question is from the line of Kevin Hellegård from Goldman Sachs. Please go ahead.
Good afternoon. Most of my question has been answered, but maybe you can help a little bit more color on the cost saving impact in 2019. You said you expect sort of around 40% of that to be achieved. How much of that is in the first half versus the second half? will it already start to impact from 2Q onwards?
You have to remember that we started the program only the beginning of February, and it takes time to build the momentum. it is, of course, this year more back-loaded, as you can imagine. There is some positive effect, of course, already now, thanks to sense of urgency built into organization and sort of quick wins, low-hanging fruits that you can take and capture. I cannot give you exact figure how much it would be in Q2 or going forward exactly, but it is more back-loaded. already being confident that we can minimum deliver this year this 40% that Kalle said.
Okay.
I think this gives you a good touch on where we are heading.
Yeah, that's very helpful. just to clarify, is the 40% the run rate, or is it actual cost savings in 2019?
It is what we expect to see visible this year in profit and loss.
Okay. Perfect. Thank you very much.
I can tell you one thing, I have no doubt whatsoever that we will achieve the cost savings. This is an industry that has been under cost savings for the last 10, 15 years. This we know.
Thanks.
Thank you. The next question is from the line of Mikael Turtula from UBS. Please go ahead.
Thank you very much. Still a couple of questions left here. First of all, if we think about the Packaging Solutions division, and you talked about the pressure that we see in the container board market, but when do you expect this to start to impact your corrugated pricing?
We have seen a little bit in the corrugated, but corrugated might come, if it continues to be really tough in a certain market, it's probably going to come later on, maybe a quarter later. so far, we haven't seen any of it yet.
No, prices are holding pretty well.
Yeah. Prices are holding pretty well. Because at the same time, there is also a big change in, especially Europe, but also in countries like Australia and elsewhere, to replace fossil-based materials. Especially driven by the big retailers and brand owners because of the Single-Use Plastics Directive which will be implemented in 2021. we have certain things helping us, and that's basically a good starting point for the corrugated units.
Okay. That's very clear. A follow-up on the pulp market. We talked about the Chinese market, but maybe just you could give us a few words on how you see the current market environment in Europe and what's your expectations going forward there.
Europe is a bit more challenging. Here we also believe that there will be fluctuations on the high level, but a bit more challenging than China.
In terms of demand right now, how is that trending in Europe, pulp demand?
It's stable.
Okay. Good. On the costs, we talked about wood cost and the cost program, but is there any other cost items that are moving in any direction right now to any significant extent, be it logistics or energy or chemical?
Logistics, we are working on, and we probably get something. Some of the chemical suppliers are actually coming down in price, we see now. Because it's probably some other industries that are not buying as much. A lot of the savings in the 120 is actually coming from renegotiating and changing suppliers to be able to drive cost savings.
There are some price increases, like Kalle also mentioned and commented, but nothing else would speak like the wood cost.
Yeah, the wood cost, that's-
That speaks from the
Yeah
crowd, so to speak.
You have to remember it was pretty exceptional year last year. We started with problems in the traditional high season for wood supply with too much snow in the middle of Sweden, and you couldn't harvest in Finland. We went without any spring into summer, and suddenly you got fire hazards and fires, especially in Sweden. It was pretty unusual. Our response to that was actually to increase capacity, both in harvesting, but also in logistics, to be able to cope with a greater flexibility.
Okay. Just a final question on the CapEx. I was just wondering if you decide to go ahead with the conversion in Oulu, would that have an impact on your CapEx for this year?
Seppo here. You have to remember it's already mid-year before we are ready to make any decisions. The effect on CapEx this year will be quite limited, if any.
If any.
Okay.
We had also said earlier that we believe that we can manage within the CapEx range that we are giving. Of course, now we have to keep in mind that we are, due to the profit protection program, lower that by EUR 50 million. We need to revisit that once we are getting there.
Okay. That's clear. Thank you very much.
Thank you.
Thank you. Our final question for today's conference is from the line of Lars Kjellberg from Credit Suisse. Please go ahead.
Thank you. I just want to stay a bit with Oulu, appreciating you haven't made a formal decision as of yet. Just a bit on how you deliberated about the decision not to go ahead with the CUK, the second conversion, and also how you think a bit about the I guess the transition from absorbing eucalyptus pulp from Veracel and losing the revenue from the machines and et cetera. How we should think about a potential conversion in terms of the near-term revenue impact and the P&L impact if, and when you went with the project. In particular, keen to understand why you opted not to do the CUK, if you have any comments on that.
Yes, I have. First of all, I would like to tell you that doing both the machines and CTMP pulp mill and going into a brown pulp mill production would have been the biggest conversion ever made in this industry. I felt like that was a too big risk. It's rather to have an optionality to do the second conversion later on, because the permits allows for both. We have permits allowing for both. That was one. The other one was that the Single-Use Plastics Directive is challenging some of the composite boards, and now it looks like it's probably going to be okay. We have to watch how this is implemented in all the local countries of the EU.
Because what we would have been done, we would have liberated a lot of liquid capacity on Imatra and Skoghall, and taking all the CUK capacity to Oulu. With that unknown, how this would be actually played out when the national states implement the Single-Use Plastics Directive on composite materials, it was a too big risk for me.
That makes sense. If you stay on that theme, what does that do to liquid packaging board? Because that's obviously composite material as your buyers buy and then combine with various other substrates.
In many countries, it's already cleared that you can collect or circulate it. You
Recycle.
Recycle it.
Right.
In some countries, what they're going to do is not known yet.
Okay.
The association for liquid are working hard and have a system that they think will work. But if you don't know how this will be in the local legislation in a big market like France, for example, Germany will not be a problem. In the U.K., it's a little bit too much to have the biggest conversion ever made, and then you have uncertainties of the local legislation that will be implemented between 2021 and 2023, if I remember right.
All right.
When it comes to financial effects of the project, we will naturally come back to those after the decision is made.
Yes. Understood. No, and that decision makes a ton of sense now in that perspective. Final question from me. Of course, one of your major competitors for liquid packaging board, it's in the startup process now with a significant new addition. How do you see that impact in the market? Do you see there is demand for incremental significant tons in Europe, or is that just a, people may need find more export markets to move tons into-
I don't know because if I remember that competitor, I think the net capacity that they're going to bring to the market, if I remember right, is 100 to 150,000 tons. Right?
It's a consolidation, of course, from other grades.
Yeah, because they're going to consolidate the smaller machines to a big machine. I think the net capacity is not that much. On this machine, you can run some other boards, not only liquid. You can also run CUK.
Right. Okay. Yeah, that's it from me. Good luck in the next quarter.
Thank you.
Thank you. Cheers.
Thank you. There are no further questions. Please continue.
Okay. Thank you everyone for attending our Q1 conference call, and thank you for the good discussions and questions. We will be announcing our second quarter result on 19th of July. I will hand it over now for final words to our CEO, Karl-Henrik Sundström.
I just want to say that I come back to, we felt that this was a promising start of 2019, better than expected. We have been able to manage the value management on one hand with pricing, and the other one that we are driving all the costs, which will secure us for the future. We feel confident that we are doing absolutely the right thing right now. Thank you for joining this call.
Thank you.
Thank you.
Thank you, ladies and gentlemen. That does conclude the conference for today. You may all disconnect.