Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's First Quarter twenty nineteen 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 I must advise you that this conference is being recorded today on Thursday, 04/25/2019. Without further ado, I'd like to hand the conference over to your speaker today, Ula Payunen, Head of Investor Relations.
Please go ahead.
Thank you, Jenny. Good afternoon, everyone, and welcome to Stora Enso Q1 twenty nineteen Results Conference. And I will hand it over now to our CEO, Kalle Sustre.
Thank you, Ola, and good morning or good afternoon depending on where you are in the world. So today, we published the first quarter results 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.
And the operating EBIT decreased by $45,000,000 to $324,000,000 We did deliver in the upper end of our guiding range, which was $260,000,000 to €250,000,000 And we came in with an EBIT margin of 12.3%. And 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 1.3 a year ago to 1.7, and that is due to mainly two reasons. One reason is that we have implemented IFRS 16 and that is 0.3 times.
And then 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 €300,000,000 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.
So that's an impact of $20,000,000 Then there have been two areas where we've been focusing on. One is obviously the increased variable costs. And here is a total of $68,000,000 of which fiber mostly wood cost, but also purchased pulp stands for 44,000,000 And the other 24,000,000 are everything from increased logistics, chemicals and under infielding material. To be able to and this is the area where we are focusing the profit protection program. And 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. And that had come back to compensating the increased cost by 43,000,000 So all in all, two factors had an impact of €25,000,000 in the quarter. Next slide, please. So we once again back to a return on capital employed above 13%. If you remember, we were down at 12.4% in the 2018.
Now we are back above 13%, but that is also included in the IFRS impact of IFRS 16, which is, as I said before, euros 400,000.0 or slightly below €300,000,000 We've had some interesting events happening in the quarter. One of them is the decision to invest as a start up phase, 5,000,000 in form fiber production in Hiltemill in Sweden. This is a new line of forming fibers for new products such as inserts, containers, cups, industrial packaging, etcetera. This is a circular product and contains no plastic. It's basically 99.9% wood.
And now we are ramping that up in a very fast speed. Oulu conversion feasibility study was completed in the quarter. And the proposal that we have is to convert the paper machine number seven to kraftliner close down the paper machine number six and the sheeting plant. The decision of the potential conversion is planned to be made by Studer Hansso, Board of Directors during the 2019 after the co determination process has been completed. We also started the first deliveries from our new CLT factory in Gruvern in Sweden, and it's ramping up according to plan.
And last but not least, the investment in the addition drying capacity in Eematra mills has been completed, and we can now start to drive the commercialization of the micro fibrillated 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 eMatthew 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 partly part owner of 49% in a company to basically increase our forest holdings as well as taking it into our balance sheet.
So we will 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. And this has been financed with a first green bond made by Stor Elsin, which we did during the quarter as well as an increase of capital employed about 1,000,000,000 and a return on capital employed by around one percentage point. The transaction is forecasted to increase the net debt to operation EBITDA temporarily above the strategic target of two during Q2 and Q3 and then coming back to below two by the 2019. With that, I would like to hand over to Seppo.
Thank you, Karl. And 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 Operational EBIT was €324,000,000 and operational EBIT margin 12.3%. Operational return on capital employed was 14% and above 13% targeted level. Cash from operations was €223,000,000 approximately at the same level as a year ago.
And net debt to last twelve months of operational EBITA was 1.7. And here, it's worth to remember notice that this includes impact of 0.3% negative impact from IFRS 16 leasing standard change as well as good to remember that we paid dividend this year in Q1 instead of Q2 as in the previous years. And that had, of course, an effect on the net debt when it comes to the quarter. Then moving forward and a bit more details on IFRS 16 leases standard change on the figures. This is now quarterly figures effect during the Q1.
And the operational EBITA increased by €19,000,000 because of the standard change and operational EBIT by €2,000,000 The difference is then increasing the depreciation. Net financial items increased €6,000,000 and effect on net profit level was €4,000,000 negative. And operational return on capital employed, down 0.4 percentage points and net debt increased €526,000,000 Then going through our divisions and I start with Consumer Board, where price increases continue to come through gradually. Sales decreased slightly during the quarter to €634,000,000 and the lower port deliveries were partly offset by higher pulp deliveries. And local sales prices had a slight positive impact when it comes to sales line development.
Operational EBIT decreased €37,000,000 to €54,000,000 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 determination negotiations created to close of PM6 were finalized and it will be shut down by the 2019. This will increase annual sales by approximately €70,000,000 after the closure. Then moving forward to Packaging Solutions division, where we had record first quarter sales. Sales increased 2% to record high €338,000,000 We had higher prices in corrugated and fluting businesses. Operational EBIT decreased €10,000,000 to €51,000,000 level.
The higher sales prices were offset by overall higher costs and lower China Packaging sales margin. In Packaging Solutions, change in maintenance schedule compared to a year ago, Vostrekka mills PM5 decreased production and increased maintenance costs during the quarter. Operational return on capital remained above 20% targeted level and was at 21.8%. At the Heilra Flutti 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 mills power plant going forward.
Then moving to biomaterials, where good performance continues. They had record quarter. Sales up 1% to record high €398,000,000 We had there slightly higher sales prices supported by foreign exchange rates. But 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 €103,000,000 Higher sales prices were partly offset by higher variable and fixed costs.
Operational return on capital was above 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 €29,000,000 and higher sales prices were offset by higher fixed costs mainly related to start up preparation of strategic investments. Then there was also some 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 Gruyver new CLP 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. Then moving to Paper division, where we also had record high Q1 profitability.
Sales down 2% to €760,000,000 level, where there we have clearly higher sales prices and a better product mix and sales mix. And lower sales volumes were having an effect on the top line. Operational EBIT was stable at €69,000,000 EBIT margin increased to 9.1%, which is highest in ten 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. And 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 were continues 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. And 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, Karl.
Thank you, Seppo. And the outlook for 2019 remains unchanged compared to the outlook that we gave in conjunction with the Q4 twenty eighteen. There is no change, exactly the same text. Moving to the guidance for the second quarter of twenty nineteen. Operational EBIT is expected to be in the range of EUR $270,000,000 to EUR $350,000,000.
During the 2019, there will be an annual maintenance shutdown at the new Molla paper mill. The total negative impact of maintenance is estimated to be EUR 35,000,000 less, I repeat, less than in Q2 twenty eighteen. And that's one of the main reason is that we had six mills with annual maintenance shutdown in the 2018. And in this quarter that we are in now, the 2019, we have only one mill. So by summarizing the 2019, basically, we managed to focus on the value management as well as the profit protection program of reducing our costs, ending up that we ended up in the higher range of our guidance.
And that's the reason. And sales continued to grow ninth consecutive quarter, seventh consecutive quarter with double digit EBIT margin. We are back above 13% return on capital employed despite additional capital coming from IFRS 16. And 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 and A. Ula?
Okay. Thank you, Karla. We are ready now for the Q and A.
Thank you very much. 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 talked about in your outlook comments slightly stronger demand in Q1 compared to Q4 twenty eighteen for hardwood pulp in China.
Can you elaborate on that? And secondly, similarly so in Packaging Solutions in kraftliner or sort of virgin based containerboard, you talked about slightly weaker demand in Q1 twenty nineteen compared to Q4 twenty eighteen. Again, 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
Yes. Specifically China.
Yes. What we have seen there is that in China, we are seeing that it's stabilizing going a little bit being pulp in China is being a bit more stable and we are getting a little bit more, sort of say, see through in the supply chain because we you have seen a lot of the inventories, but that has been the producers' inventory. Now we see that a lot of the chain all the way to the customers is actually stabilizing.
Okay. But as far as I can see, the port inventories in China are still quite elevated.
Yes. But we also see there is very little what I meant by that is that it's very little in the customer premises and they are still selling out.
But
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 softwood. We are very big in dissolving pulp and fluff and other specialty pulp. So you have to have that in mind.
Yes. Okay. Thank you for that. And sorry, just moving to Packaging Solutions then and your comments regarding slightly weaker demand for kraftliner?
So yes, that what we saw going forward for Packaging Solutions, we see a stable demand, but a little bit coming down in the prices. And that is especially in test liners. I think the virgin boards are holding up slightly better. But all in all, it's for the packaging solution, we see prices coming down into the next quarter.
Okay. But you in your comments, you're talking about slightly weaker demand in Q1 virgin And based I'm just wondering where is that coming from? Is that particular geographies or particular industries that you're referencing there?
No, it's been a little bit all over the place. Because most of what we say is global. The only one is testliner, which is around 1,000 kilometers around the Australenka Mill. The rest is global when it comes to crossliner and floating.
Yes. And just one final question for me. Sorry, just on the EUR 120,000,000 of cost saving, how much benefit could we expect to flow through into calendar twenty nineteen? I appreciate most
of I this will be will repeat that I said last time, I expected 40% in the last call and that I'm very sure about.
Okay. Thank you.
But yes, you have to understand, we were a bit on a ramp up on the cost. So first of all, you have to get down. So that's why I feel 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. And the next question is from the line of Antti Koskivyori from Danske Bank. Please go ahead.
Yes. Thank you. First question would be on your board volumes. You mentioned deliveries being lower, 5% year over year. But 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 presentation, but if you could give us a bit
So more color on what's what's 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.
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 kind of normal levels or is this was this kind
of Yes. A I would Q1 say that we do not at this point in time, we do not expect to play the same kind of game in Q2 that we played in Q1.
Okay. Okay. Could give us an
idea which product categories this was? Obviously, this happened in paper. It happens in Packaging Solutions and it happened in Consumer Board and also to a certain extent in Wood Products. But they have been doing it for a longer period.
Yes. Okay. And the second question would be about the kraftliner supplydemand outlook. There's been news on the recent days from clubbing adding more than 900,000 tons of kraftliner capacity in Brazil. I realize that it's 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. And I haven't seen that in the market. So I don't if it's a new development or anything because all others are using the more traditional Nordic species. And 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 cross liner where either a new generation, but a pure eucalyptus, I have not heard about before because I read the same thing.
So I'm very curious about that. And if you hear anything about it, please tell me because I want to know more about it.
Absolutely. All right. Thank you very much.
But you have to if you take the whole cross liner capacity of the world, it's a growing business. And I think it's about 35,000,000 tons per year, of which a lot is with old technology and very little is with the new ones.
And they probably use some of that volume internally for their own corrugated vessels as well.
All right. Thank you very much.
Thank you. And 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 a follow-up on kind of the value over volume kind of 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 is it just doesn't make any sense from a fixed cost observation point of view? And then my second question is more about on your outlook statement of 2019 being largely in line with 2018 given that the current trade conditions do not significantly change. So I just wondered if we should read that, that you're confident achieving this even if the prices stay at the current kind of April spot levels or if you factor in kind of any rebound in either pulp or containerboard prices into the 2019? Those were my questions.
So 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 fluting or kraftliner, we play a role there because we are quite strong in certain end user segments. And 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.
It's in biomaterials, it's a bit more tricky to do it.
And to remember, to make pulp is a continuous process. And also like Karl mentioned in the previous reply, we are 2,000,000 tons long, yes, but it's split over quite many grades. So again, if we would start to do something in one grade, it doesn't really turn the needle a lot on the Here,
are more a follower in many grades.
Okay. And on the outlook,
it So the reason why we have that there, so 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? And even though the fortunate the Brexit decision was delayed and we got more time to solve it, will that be solved? So if all these three things happens at the same time, I think the trading condition for most of us will be very different.
Okay. But just I'm trying to quantify that. I mean, given where most prices have come down a little bit in 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 2019 results on a full year in line with 2018? Would you say something on prices?
What we say so what basically, it's about where we see the market where we are today, where we did that. And obviously, what we see for Q2 is included there. Okay. Thank you.
Thank you. And the next question is from the line of Harry Tietonen from Nordea. Please go ahead.
Yes. Good afternoon. One question on the sort of 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. But 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, put cost has stabilized and you could say that they might be going forward coming down slightly. But it's quite stable market at the moment if you look at sequentially.
Okay. Okay. The other question is about the maintenance cost. And if you have I can't remember if you have indicated the total level of maintenance. I mean, is it going to be about the same level this year compared to last year when you sort of take into account all this rescheduling or a different schedule by quarter.
But on a full year basis, do you think it's going to be roughly the same amount of maintenance costs?
Well, we don't guide maintenance costs on annual basis, but looking at annual schedules that we have or maintenance cycles we have. So I think it's fair to assume similar level roughly as previously.
And sometimes this with the changes in the maintenance schedule is not really done by us. It's actually done by the permits. So if you take Nyimoller, they need to have every eighteen months, which means that that rolls all the time and then others are coming in and out and also the age of the mill. So we are trying that to be more specific in the quarter and coming to the next quarter as well. But as Zefer said, broadly in line with last year.
Very good. And final quick question about the Wood Products and I think there's been kind of a notion of slightly kind of declining But then you if I look at this quarter, then your average prices went up quite a lot. And of course, it's dangerous to look at just one sort of a three month period and make many big conclusions from there. But is there something did you sort of was the mix somehow very different from
was mix, but it was also this what we call the value management. And they actually that's one of the reasons and they've been doing this since 2012 or something. That's one of the reasons that we don't have so much volatility in our wood product compared to others. And the two differences, we value we managed 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, Harry.
Thank you. And the next question comes from the line of Linus Larsson from SEB. Please go ahead.
Thank you very much
and 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, and we touched a bit upon the reasons. But could you possibly elaborate a bit further on that big year on year decline in Consumer Board? So volume was one, but then presumably, you should have got some price back on that price volume gain. But 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?
So you have to remember that Q1 last year was the last good quarter for Consumer Board, right? Yes, because of the decline. Then the long contracts and
some of
the long contracts, we started to work with and we had some price increases in the first quarter on FBB. We will get some continue into the second quarter. But when we come to the big liquid customers, that negotiation is ongoing and the new prices will come in 2020, first or first, because our main competitors in this area, are one year ahead of us, which means that we are one year after them. So there has not been any big or movement at all in liquid. And then in the pulp.
Yes. On the pulp side, in Consumer Board, like we have said earlier, so what has changed in their position is that earlier they used to be slightly even long in pulp. But now after the startup of FEIHY as well as increasing volumes and utilization of their own pulp at the European mills, they are actually short by some 450,000 tons annually, which has, of course, changed 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. And that's part of the work they are doing now to compensate for the increased costs.
So it's not wood cost only anymore for them.
Right. And that 450,000 tonnes that you've been talking about before, that still holds now that there's
no wood shortage
any longer, I assume.
No, no. We are not having any wood shortage and not at all.
Yes, harvesting is harvesting conditions have been normal and market is good, so there's a lot of wood available. So that's not the dilemma.
Okay. And what's the magnitude or potential for price in Consumer Board in the second quarter?
On FPV, it will go up a little bit. And somehow, we expect prices to continue to go up. But the big ticket item is coming in 2020 with some of the big liquid customers.
Okay, great. Just one final question on Wood Products. The €29,000,000 of EBIT is spot on where we were one year earlier, then second quarter typically has a strong seasonal uplift. So Q2 of last year was €47,000,000 So now the base is the same as we look into the second quarter twenty nineteen. Should we expect the same kind of favorable seasonality as we had last year?
Not that much because Wood Products demand and prices are coming down in Europe because we see a bit of a worrying signs, especially in the construction sector. There are two factors here. Wood is becoming more and more popular to build in, but the total construction sector in Europe is actually holding back. And 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 Sandovalta from Carnegie. Please go ahead.
Thank you very much. In terms of Consumer Board, can you talk a little bit about the Chinese market? And 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 box ball market, where prices have gone down by pretty much. So how do you the prices are quite low at the moment. How do you expect those to be Yes. A lot
this
if I look more into the you're absolutely right. With the tension between The U. S. And China, a lot of the parts that were going into packaging of electronics have been suffering quite a bit and prices have year over year gone down. What we see now going into Q2 is actually more stable demand and increased prices.
Yes. And 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. So we are looking stable, but also increasing prices. And that's also that we are phasing out a lot of this, what you call this commodity boards that we had to train up the people and continue to get the right products in and the right market channel.
Okay. So the Beihai mix improvement is progressing nicely Yes. This right. In terms of the pulp market, you were spot on last quarter where expected a bit of a rebound in February and March. Now based on what you now said that we know producer inventories are fairly high, but you as I understood you, you said that buyer inventories are fairly low.
Would that sort of translate to a stable market going into early summer in your view in China?
That correct? If I take China, I would say that I think we expect small fluctuation on pulp prices on a high level. We don't see any drop, but it will be small fluctuations stabilizing over that. And maybe we could see a little bit of even more stable prices towards the end of Q2.
All right. Thanks. That is clear. Then 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. And prices, we believe, are going to be stable.
All right. All right. And then finally, in terms of the guidance range, it's again very broad and you delivered better than on the or in the upper end of the range now in Q1. What are is it still this the trade situation
and It that is trade, make but it's also if something happens or up and down and what really happens to the pulp because you have flu on effects into Packaging Solutions version boards, you have flu on effects into SPV. And so we chose this time either we narrowed the range by EUR 10,000,000. So you can give us credit for that. But I agree it's a wide range, but I rather have that not to disappoint given the market I
understand. And 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.
Next question is from the line of Cole Haasorn from Jefferies.
Good afternoon. Your Packaging Solutions business, could you give some color on your Packaging China Packaging
Solutions, okay. Give color what's happening. Yes.
On your 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. But in general, that's what we see.
And then 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? Or are you saying that you expect pricing to increase from here? Average pricing. Okay, great.
And 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. Part of the difficult things is, of course, that you look at the usage of consulting 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. And of course, one important thing is to work on operational improvement of the efficiencies at the mills, to improve the output of the mills and that way be more cost efficient also. So it's not only cutting cost, but also how to be more efficient and better. As well as one important point is this Imatra PM6 closer by end of the year. So 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.
And
more things will come. But whenever it's turning to personnel, we'd rather have the discussion according to the legislation, especially in Nordic countries, that we have to inform them first and then we make it public in the financials.
And like I said, there's good sense of urgency in the organization to implement the program. So we are quite happy with Karel, how it's moving forward and we are confident that we can reach SEK 120,000,000.
And the other thing we are canceling like management conferences. We used that conference for the 300 top people in, that's canceled.
Yes, that's a good example.
Great. Thank you.
Thank you. The next question is from the line of Kevin Hellegard 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? And will it already start to impact from 2Q onwards?
You have to remember that we started the program only at the February. And it takes time to build the momentum. And 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 sort of exact figure how much it would be in Q2 or going forward exactly, but it is more back loaded.
But already being confident that we can minimum deliver this year this 40% that Karl said. I think this is good touch on where we are heading.
Yes. That's very helpful. And 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.
And 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 ten, fifteen years. This we know.
Thanks.
Thank you. The next question is from the line of Mikael Turtle 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 containerboard 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. But so far, we haven't seen any of it yet.
So prices are holding pretty well.
Yes. 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 phosphide based materials, especially driven by the big retailers and brand owners because of the single use plastic directive, which will be implemented in 2021. So we have certain things helping us and that's basically a good starting point for the corrugated units.
Okay. That's very clear. Then a follow-up on the pulp market. We talked about the Chinese market, but maybe just you could give us a few words of how you see the current market environment in Europe and what's your expectations going forward there?
So Europe is a bit more challenging. And but here, we also believe that there will be fluctuations on the high level, but a bit more challenging than China.
And in terms of demand right now, how is that trending in Europe pulp demand?
It's stable.
Okay. Good. And then on the costs, we talked about wood cost and the cost program, but is there anything other any other cost items that are moving in any direction right now to any significant extent, be it logistics or energy or Logistics
or 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 not probably some other industries that are not buying as much. But so a lot of the savings in the 120,000,000 is actually coming from renegotiating and changing suppliers to be able to drive cost savings.
There are some price increases, like Karl also mentioned and commented, but nothing else would stick like the wood cost. And the
wood cost, that's
That sticks from the crowd, so to speak.
But 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. So it was pretty unusual. And 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. And then 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?
Sveta here. Have to remember, it's already sort of mid year before we are ready to make any decisions. So the effect on CapEx this year will be limit quite limited if any. If any.
Okay.
And we have 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 from lower than EUR $550,000,000. So then we need to revisit that once we are getting there.
Okay. That's clear. Thank you very much.
Thank you.
Thank you. And 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 Olo. I appreciate you haven't made a formal decision as of yet. But just a bit on how you deliberated about the decision not to go ahead with the CUK second conversion? And also how you sort of think a bit about the sort of, I guess, the transition from being absorbing eucalyptus pulp from their cell and losing the revenue from the machines and etcetera.
And how we should think about a potential conversion in terms of the revenue near term revenue impact and the P and L impact if and when you were ahead with the project. But in particular, keen to understand why you opted not to do the CUK, if you have any comments on that?
So yes, I have. So first of all, I would like to tell you that doing both the machines and ACTMP 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. So we have permits allowing for both.
That was one. The other one was that the single use plastic directive is challenging some of the composite boards. And now it looks like it's probably going to be okay, but 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 Skogal and taking all the CUK capacity to Ulo. And with that unknown, how this would be actually played out when the national states implement the single use plastic directive on composite materials, it was a too big risk for me.
That makes sense. If you stay in that theme, what does that do to liquid paperboard? Because that's obviously composite material as your buyers buy and then combine with various substrates? So
in many countries already it's already cleared that you can collect or circulate it, you know, you recycle it. Right. In some in some countries, what they're going to do is not known yet. But 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.
Or in The UK, it's a little bit too much to have the biggest conversion ever made and then you have an uncertainties of the local legislation that will be implemented between 2021 and 2023, if I remember right.
And when it comes to financial effects of the project, we will naturally come back to those after the decision is made.
Understood. And that decision makes a ton of sense now in that perspective. Final question from me. Of course, one of your major competitors, the liquid paperboard, it's in the start up process now with a significant new addition. How do we see that impact in the market?
Do you see there is demand for incremental significant tons in Europe? Or is that just a people will need to 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 to bring to the market, if I remember right, is 100,000 to 150,000 tons, right?
A concession across from other grades.
Because they're going to consolidate the smaller machines to a big machine. So I think the net capacity according to is not that much. And on this machine, you can run some other boards, not only liquid, you can also run CUK.
Right. Okay. Yes, that's it for me. Good luck in the next quarter.
Thank you. 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. And we will be announcing our second quarter result of July 19. So I will hand it over now for final words to our CEO, Carlos Orster.
So 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 harder cost, which will secure us for the future. And feel confident that we are doing absolutely the right thing right now. So 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.