Good day, welcome to the Stora Enso First Quarter 2012 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ulla Paajanen, Head of IR. Please go ahead, sir.
Hello, everybody, good afternoon. Welcome to Stora Enso's Q1 result release. Let me hand this call over to Jouko immediately, our CEO.
Thank you, Ulla. Welcome everybody on our quarter one call. It's the first one for 2012. In some ways, the quarter that wasn't that eventful, I guess. On the other side, we made some decisions that will accelerate our future transformation with the China project. If we go to page three, we said approximately in line with Q4 when we guided Q1. Well, it was EUR 2 million off, I must say that was more accurate than I ever thought, there it is. At the same time, as I was trying to communicate in my CEO comments, we cannot be satisfied with that because that still did not produce a return that's even above our cost of capital, which is another reason to invest in growth markets on higher return projects like Montes del Plata or China or elsewhere.
Cash flow, happier with that than the EBIT, I must say. The liquidity on EUR 1.2 billion plus, that's the happiest number to me on that chart. If we move on then on page four, you see now two quarters in a row, a limited earnings in the EUR 150 million range. Yes, obviously, we need to make sure that we improve the speed, I must say that specifically, we need to also improve our operational performance. In this particular quarter of quarter one, we had too many issues in our Nordic standalone power mills, which limited dramatically the BA earnings Q1 to Q1 in biomaterials. I think those issues are good because those are a lot easier to tackle than some of the external factors and so forth. If you then go to page five, printing and reading had price pressure, as did biomaterials.
We'll not go into the details. I do want to highlight on biomaterials that the group impact on biomaterials is actually less year-on-year than what the segment report shows because they also include the Veracel part that they supply to Printing and Reading. From a group point of view, it's not as dramatic as it was on the segment report. Renewable Packaging actually had, interestingly enough, a lower volume issue, which then led to also the need and action to curtail or reduce inventory, sorry. That limited their performance, even though, again, sequentially at least, it starts to be in the right rhythm and clock speed, and I'm pretty positive going forward on that one. Building and Living, poor quarter in terms of earnings.
I think strategically, when we get our high-value added products growing a little faster, there are ways to go and show there, too. Cash flow liquidity we talked about. Rather than me talking about profit improvement actions, I think you start to see a more and more frequent news from Stora Enso where individual Business Areas or even mills start announcing that they're going to improve productivity costs and so forth. On a think about it every morning basis, so to say. The China investment decision, I'll get back to that. If you go to page six. You can see the fixed cost per sales still improves, but too slow. I think we need to accelerate this somehow. I think the best thing we can do is that it happens more and more in the operations rather than on a corporate level and so forth.
Page seven, personnel costs. There you actually see that Q1 to Q1, we stopped improving. I could explain that, yes, but this includes impact and the other one didn't. Well, let's leave that aside. There's another thing that we need to continue to improve in the future. Page eight, cash flow, always important. Now, especially important given the large investments that we are building or have decided to build. There you can see that in Q1, which is a short window, obviously, it is the Printing and Reading and Renewable Packaging that generate the cash. The other line is quite a bit driven by the working capital, quite a bit driven by purchasing and so forth. The point of the story is, yes, we did generate north of EUR 200 million cash in the quarter, but you can also see that we're spending the money.
The good news is we are spending the money on clearly higher return businesses than our existing asset-based average. Let me hand it over to Markus now for a minute, our CFO, so he can walk you through a few other numbers. Thank you, Markus.
Thanks, Jouko.
Thank you.
Moving to page nine, I'll go through some of the key figures that have been highlighted on this slide. Sales as guided stayed on the same level as Q4, almost spot on. We've highlighted the operational EBITDA and EBIT change. On the EBIT, we were up EUR two and a half million, but on the EBITDA up EUR 20 million. This is due to that Bergvik and Tornator results went down, but we don't record the EBITDA from them. Whereas BH went up, so they contribute additional EBITDA. On the business area and Bergvik Tornator side, the EBIT impact offsets each other. The operational EBIT stayed approximately the same. Jokke already pointed to the good cash flow from operations, even when the result came down EUR 110 million on a annual basis. Cash flow from operations improved by EUR 60 million compared to last year.
Debt to equity has increased due to our investments into our growth projects and also the valuation side, fair valuation of ratio and so on. The gearing is on a good level, improved by one point quarter-on-quarter and up eight points on a year-on-year basis. At a good level giving us the strategic flexibility that we want to have also going forward. This added to the EUR 1.25 billion of liquidity gives us the possibility to continue to implement the growth strategy and the options trade if we create. Turning to page 10, going a little bit into the changes by business area. The business areas collectively improved their results quarter-on-quarter by EUR 24 million. Maybe the one thing I'll highlight on the business area side is the seasonality in renewable packaging.
Q4 is a low seasonal quarter and Q1 is a more normal one. On the line other, we are down EUR 22 million. As explained already on the previous slide, Bergvik and Tornator being the main contributors to this change. We had a good quarter in real estate sales in both in Q4 and the net sum of these changes is then EUR two and a half million up then on the EBIT quarter-on-quarter. I'll turn over back to Jouko for the strategy.
Good. Thank you. I'll be quick because I hope many of you were at our capital market not too long ago in Langerbrugge. Slide 11. Growth markets. Yes, we are building capacity and business in markets that grow. Typical example is the Chinese integrated approach is now which on its own is worth less than one year of growth in the Chinese specialty board market. There's definitely space and definitely earnings with the renewable packaging biomaterials. Competitive paper is very important for us because it is, as you saw earlier also in Q1, the cash engine, one of the cash engines that needs to finance our transformation into a higher return company in renewable materials. We move on to page 12 to characterize a bit the project. Many people say packaging, we are saying actually pretty selectively packaging.
High-end carton board, liquid and food packaging, very much a needed product in the Chinese market, and supported also by the government because of the issues of food and drinks and so forth. We have the strongest customer relationships I can imagine in this industry. The customers who are interested, who are partners, and I think that is an important factor in a high-value investment like this. It is a scalable thing. As you know, we are building an integrate to start with one board machine, but it is pretty obvious that we are designing all the architecture such that one day we may be able to expand it if the market allows. It is an integrate which I think has its own value. Most of the virgin fiber in China or a lot of the virgin fiber in China is imported. I think that we do not want to do with this.
We believe we got the lowest cost solution as well on that. We do think there's a lot of opportunity for innovation and a lot of challenges. Sustainability, corporate responsibility. We need absolute focus, resources, efforts to do every day better. The complex environment with land in China. We need to have government, municipalities and others, NGOs with us in Guangxi to make sure that we are a welcome partner for the next tens and tens of years. I am confident we are doing good things for the local people, and with that, we will do good things for our shareholders. Page 13 is just a photoshoot, and it is a computer-generated image. We have not built the mill yet, but that is how it is going to look like a bit. As you can see, it is 450,000 tons of consumer board with a 900,000 ton total power plant and auxiliary facilities.
Goal is towards the end of 2014 to start it up. Page 14 Outlook for Q2. You may think that we're boring, we're still saying slightly up on sales. Again, we say operational EBIT approximately the same as in Q1 2012. As stated on page 14. Maintenance stop is several of the European mills will impact mainly biomaterials. It's a bit driven by the fact that we have quite a few operational production issues in the Nordic pulp mills in the Q1, which obviously limited the operational performance of biomaterials. We do want to run through two of the maintenance stops to make sure that we get the reliability and all that stuff up to the good level. Yes, we're seeing, in my personal opinion, too slow, but anyway, the impact of deflation coming through actually means variable cost start to improve.
Last slide, page 15. Colex performance as expected, or I guess I should say as guided in February. That takes nothing away from the fact that I'm not happy with it. We need to improve, and that's why we say that we need to keep moving faster and faster like we are. Meaning accelerate just the same way or in a similar way at least as we're accelerating the Montes del Plata pulp mill and Chinese pulp and packaging board mills. Investments which will, in the next few years, really transform the company. Thank you. I think it's now time for your questions. Yes, please.
Thank you.
Could we get the instructions for the Q&A?
If you would like to ask a question at this time, please press the star or asterisk key followed by the digit one on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We will pause for a moment to allow everyone to signal. Our first question today comes from Markus Almerud from Morgan Stanley. Please go ahead.
Hi, Markus Almerud here from Morgan Stanley. Could you just talk a little bit about both prices and demand and also about wood cost going forward? You usually have these arrows in your presentation, just if you can just give some light on both Printing and Reading and also on Consumer Board, what you're seeing at the moment, please.
We're trying to decide who's going to start answering. Markus will start because I'm his boss, and I'll take it from there then.
Thanks.
Yeah. On the realized side, if we look at on a quarterly basis for Q1, Printing and Reading, slightly down. Pricing for Biomaterials quarter on quarter, slightly up on the softwood side, a lot more on the hardwood, though, of course, we are a net buyer there at the moment. Building and Living, sequential pricing down somewhat. Consumer Board, slightly up. Corrugated, somewhat down. That's about it on a quarterly basis. Yeah. For the real life. Yeah. We do not give you To be very clear and transparent, we used to give all the arrows by paper grade going forward for the next three months, and we have now, with the new segment reporting, stopped that. So right or wrong, you only get the sales slightly up and EBIT approximately in the range in Q2.
I think Markus' explanation gave you a flavor of that. On the cost side, I can say, maybe continue on that a bit. For example, if you take the typical key raw materials, we believe there is going to be a deflation. There is a slight deflation already in Q1 on some of the raw materials. For example, RCP is clearly lower than it was a year ago. Purchased pulp is clearly lower, as you can see from our biomaterials. On the wood side, pulpwood tends to be deflationary or whatever you call that. Saw logs are still higher than a year ago. When we go forward, I think, well, we have to keep pushing the overall inflation to a deflation faster and more strongly to improve our earnings capability.
Okay.
Sorry.
Coming back to the wood, we saw some of your competitors announcing the other day that they are taking wood cost, they're decreasing wood cost, especially on the softwood side. Do you have any comment on that? If it's an inventory issue or if demand is poor or what you're seeing, or is it an oversupply of sawmills, or what the reason for that?
I'm sorry, maybe I didn't understand. What was the point of the other company? What were they doing?
They were decreasing wood prices.
How do you decrease wood prices? I don't understand the question.
Okay. To ask in a different way, could you say anything about, do you expect wood prices to be largely flat going forward?
I wouldn't expect. Again, mixture. Point being that I would not expect any big trauma either way.
Okay. Thank you very much. Obviously-
Pulpwood. It's on noise level, the change.
Okay.
I have to figure out other ways to improve my earnings short term than that.
Okay. Can you say anything about demand both on the board side and on paper? We have seen a bit of stability and a bit of improving trend, at least during Q1, and we've seen a stabilization, at least from what we saw in Q4. Has that continued, or do you have any comment on where we're going if you see any improvement or-
Well, like I said, we don't give you guidance, but I can say that I tend to read, like you probably do too, all these actual trend reports. One of them is the CEPI report that they share with the board. It seems the first good news is this is nothing like the 2008 or 2009. It's a lot more subtle change and so forth in Europe. Therefore, I think it seems at least that the ability to continue to operate on fairly good operating levels is still there. It's going to be boring, but I think that's a bit like the wood story. It's not huge to traumatic. It isn't like we're losing huge amounts of demand overnight. It's stabilizing at least, one. Two, this is not a forecast. This is what I see in the already happened reports from a few sources.
Okay. On the board side, you say in the report that in Q1, you saw a bit stronger, slightly stronger demand in consumer board, and is that continuing?
I can comment that I think in Q4, the drop on a year-on-year basis in demand, let's say, was probably bigger than what you'd see from a trend point of view. I think we interpreted that as also customers managing their inventories at the year-end.
Yeah.
There was seasonality combined with that, and at least my feeling is that Q1 is more reflective of a normal level and it's not an unusual level. Q4, clearly, was two factors combined.
All right. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Antti Koskinen from Deutsche Bank. Please go ahead.
Okay, thanks. A few questions regarding the biomaterials business. First of all, can you quantify what the maintenance costs that are some maintenance shutdowns this quarter? Looking forward, what kind of maintenance issues and investments do you see? Because I saw you write that the bulk of the maintenance issues that you will be having will be in biomaterials. So if we could get the total number and then the number for biomaterials. Thirdly, perhaps what kind of timelines would you see for developing the Enocell dissolving pulp production? How quickly and fundamentally we should be able to see that again?
Okay. Let me try to say the numbers. For Q1, it was to about minus EUR 20 million on total group and a significant part of it. Ulla is waving. It is about half, but I will say in the order of half of it at least is in the two mills that we are going to maintain in biomaterials, two of the Nordic mills. That should give you enough, hopefully, on that. Sorry, what was the second part of your question? I missed it now.
Yeah.
I do not think we give you a number there, unless Markus, you want to.
I do not think we will give a number, of course, we have the best pulp mill in the world in the segment. It was a significant impact on the biomaterial side. Jouko, the last one was the Enocell dissolving.
Enocell dissolve. Let me put it is an interesting small experiment. It is not going to have a material impact on the group level this year.
Okay, thanks.
Thank you. Our next question today comes from Lars Kjellberg from Credit Suisse. Please go ahead.
Yeah. Hi. I got three questions. Starting with the Printing and Reading, where you obviously are gaining market share. Do you want to comment a bit what you've done differently? You talk about efficient sales. How have you changed and what have you done?
Okay. The Printing and Reading overall. I must say that when people in a business like this with this margin level start talking about market share, I get very hesitant in my own company. Yes, selectively, when you have an opportunity to get a good margin addition, of course, we do compete fiercely on the market. I think the bigger part of your question is, well, what are we doing differently? Let me suggest that we're not great friends of economy of scale, meaning that you have to be the biggest in the segment because market share means less than customer share in a commodity business like this. Customer loyalty is that high. One, two, we believe that through several methods, we have pushed and will push more of the fixed cost, variable cost, meaning outsourcing of maintenance, meaning a few other things.
Meaning that we are not necessarily the great friends of the traditional belief that every machine has to specialize into something that you never change, because that will kill your flexibility. I finish my story by making a claim that we are very competitive. When I benchmark, which I can do obviously because I know my internal numbers, using other people's reporting structures, I think we are. Maybe we don't have the latest Ferrari every place, but I think we're very competitive right now, and I can assure you that Mr. Juha is going to make it even better. That's end of the speech.
Very good. On that metric, you mentioned clearly at the capital markets today about accelerating the pace of internal measures to improve profitability. You mentioned it a number of times today as well. Can you be any more concrete? What should we be looking at over the next couple of months or year and try to be any specifics on any sort of quantitative metrics that we should be looking at?
A very good question, because I think there is a communication challenge also, because traditionally we too, in my first couple of three years, we did every, I don't know, 12-18 months, a big bang with hundreds of millions of cost provisions and so forth. Now you start seeing several times a quarter, a BA or another BA saying, "We're going to close that shop, and we're going to do this. We're going to improve the maintenance function in Sweden." On and on it goes. It doesn't look as dramatic. The truth of the matter is, if I get my will through, there will be even smaller things and things that we may not even disclose, because I'd like every mill to think about that.
At the end of the day, I think the best metrics will be, and it'll take some time, to look at the earnings capability and the cash generation capability of our Printing and Reading Business Area versus competition. Everything else, all these announcements about, oh, we're going to save EUR 50 million, and the one-time cost is this. I think you can't add it up anyway. I will have to ask you to watch the earnings performance and cash generation performance of our business C, has the best metric I can come up with. Sorry for the long answer.
Okay, not to worry. Obviously, you already touched about maintenance costs. Can you give any sort of sense of what we have in store for the second half, just for modeling purposes, so we get some sort of guidance? If the renewable packaging mills are going down, et cetera, what should we expect on a delta from H1 to H2 for maintenance overall?
Yeah. I'm afraid I won't be able to give you a number, but I do happen to know that both couple of our super guns, Imatra and Skoghall, will both be, I think one in each of the second half quarters, will have a maintenance stop. Here's another thing, that once that we want to be fully transparent, obviously it doesn't help you a lot if every quarter we have one or the other and so forth and so on. Like I said, if you look at some of the earlier quarterly announcements, I think you can get a flavor on what does it mean when we take a Skoghall out or a Imatra out for a maintenance stop.
Sure. All right. Thank you.
Thank you.
We will now take our next question from Johan Sjöberg from Carnegie. Please go ahead.
Thank you very much. Just could you quantify these production problems during Q1? What type of negative impact that had on your operational EBIT?
I'm trying to think. Let me see. Where's the slide of the segments? I would suggest that I would say that the impact on the segment itself, we show that biomaterials result was down 20.
You had also that-
Wait. Driven by the pricing that then benefits some of the other BAs. Let me say this, I won't give you a number, but the production problem issue was a material part of that delta.
Sorry, it was what?
A material part of that delta of EUR 20 million.
Okay. Also, looking at, you mentioned RCP prices down year-over-year, but they are now starting to move up here, especially for OMP prices here. How do you intend to tackle that? The demand for newsprint has not been great this year, but are you preparing your sales force now to start to raise prices as of Q3, would you say, when most of your newsprint price contracts are expiring?
I always say that before I tell you or the media what we're going to do with our pricing, I better tell my customers. Let me put it this way, that we do understand that also even though the return on operating capital in printing and reading was kind of in the range of cost of capital, with the cost inflations, risks and opportunities, and the fact that I do agree with you that there is coming pressure on RCP, we will try to do our utmost on improving pricing quality further when the summer comes.
If you look at fine paper, more impacted by the pulp price, what have you been saying to clients there?
Coated is more immediate driven, more difficult, on uncoated side, which is not immediate driven, pushing very hard up.
All right. Great. Thank you.
Maybe one more comment on the old newsprint and old corrugated containers. I think we definitely acknowledge the problems of being in the market and competing, maybe even on a global scale. That's why we have been going towards solutions where we then have our own collection system, where we have our own sorting systems, where we can buy mixed waste and get the costs lower with that. That is also the basis for our machine investment that we have the existing collection system, we can increase that. There is a lot of waste or old paper that goes to dumps today that we can get our hands on with our systems. Of course, we are the closest buyer, so we should always be competitive.
We have to find the ways, and we work with that in Germany, in Belgium, in Poland.
Just a final question, just coming back to an earlier question about your cost cutting here. During the Analyst Day, you were saying that most of your machinery is in the first or second quartile when it comes to cost efficiency or cost curve here. One way to lower the fixed cost will obviously be to shut down capacity. We didn't get any signal during the Capital Markets Day that you were about to do that. I guess, is that picture still the same?
Well, number one, I believe, if I may, this is Jouko. I think what you have said there is that a clear majority of our present asset base is in the better quartiles. We also said that we are doing quite significant things in some of the assets to move them to the first and second quartile. We did not signal anything in terms of specific capacity reductions. The truth of the matter is that I think it's quite a bit of the market dynamic that drives that demand-supply balance and so forth. Without giving you any schedules or signals, we have a picture in our mind on asset by asset, machine by machine, where do we produce at the lowest cost for any specific market or even customer. That will then drive when the times come, what will stand still temporarily or permanently.
Unfortunately, almost we've had quite a bit of practice of that, if you remember in the past few years where we took.
Absolutely
bits of the capacity out.
Yep. Got it. Thank you very much
to predict that.
All right. Thanks.
Thank you.
Thank you. We will now take our next question from Dennis Larson, SEB Enskilda. Please go ahead.
Yes, thank you. Reports in pulp markets are mixed as always. What is your view? Do you expect pulp prices in the second quarter to be on average higher or lower compared to the prices as of today?
Higher.
Does that go for both short and long fiber?
Yes.
Excellent. Coming back to the maintenance cost topic, I'm not sure I understood the answer fully. Would you say that the first quarter or the second quarter maintenance cost level is more representative for the year as a whole?
I think second is more representative because yeah, we did have Veracel in Q1, but we have now couple of the Nordic pulp mills, and then we have some stoppages in Printing and Reading too.
Okay.
That's more the typical range I'd say.
Would you say that there is some ease if you compare Q3 to Q2 on maintenance cost?
I think we'll comment that once we come out with Q2 numbers.
Okay.
All in all, the idea here is to give light on the things that we can say in advance. The typical variance is, let's say, EUR 15 million-EUR 25 million variance between the quarters. Of course, the underlying maintenance cost rolls on, so the big part happens on a very regular basis. Depending on which mills we have, this can be the variance roughly.
If I may add a footnote to that, Markus' good comment, that is that obviously we have to get the annual cost further down, which is one of the reasons why we're doing what we're doing in Sweden now. If I can save EUR 20 million every year, that's more important somehow to the future than the exact quarterly variances, so to say.
Sure. Also on your CapEx guidance, I noticed that you're guiding for EUR 580 million of CapEx this year. Do you have a number for 2013? Also relating to this, how much of the China investment is in 2012, 2013, and 2014 respectively?
Yeah. We actually changed our CapEx guidance now due to the China investment. The CapEx guidance range, we put a range because we don't know the exact timing of the procurement process, how that goes. EUR 700 million to EUR 750 million-
Yes
CapEx for this year, EUR 150 million of equity injections into our other projects. For 2013, we will guide that once we get there.
Okay. Excellent. Yeah, I said the wrong number there. Of the EUR 700 million to EUR 750 million, how much is China?
The whole change attributed to that. The change from the earlier guidance to this number, that is China. EUR 130 million-EUR 180 million, if I calculate in my head quickly.
Okay.
Yeah.
Great. Also maybe if I may give it another go on the wood cost, do you have any number there for Q2 versus Q1 and any form of quantification?
Let me try again. I think Q2 to Q1, don't worry about it. It's not going to help. It's not going to hurt. It's very marginal. If you look at fiber cost, meaning the totality for us in terms of RCP, saw logs, pulpwood. Call it flat if you want.
Okay.
Within the accuracy that we can estimate or you can estimate.
Just as a very final question in order to prevent any misunderstanding. When you are guiding for second quarter EBIT to be approximately in line with the first quarter, would you care to put a range on that in order to prevent any misunderstandings in percentage terms or otherwise?
Okay. ±20%. That's what we mean approximately in the range.
That's pretty wide.
Yeah, I know. You asked for it.
Yep. I appreciate the answer. Thank you very much.
Thank you.
We will now take our next question from Mikael Jåfs from Cheuvreux. Please go ahead.
Hey, Mikael, this is Ulla here. Before you start, we have an AGM coming soon, please limit your questions to one from here on. I'm very sorry about that delay. I can take them later today, but please ask only one question from here onwards.
Okay. I'd like to ask a question regarding to the discussion we had at the CMD when you outlined that you have these two potential trends for future paper demand decline, you said that you had your map outlined there, and you currently were sort of expecting to be between the two extremes in terms of the future demand decline. My question is simply, based upon the latest data and the latest visibility that you have, do you see any reason to upgrade what you said about the future demand development on the CMD?
Well, this is Jokke. Thanks for the question. The short answer would be no, there's no reason to change. Let me try to give you a bit of flavor of that. Obviously, within the short time window since the CMD, I can't extract, so to say, seasonality and economic cycles from it. When I look at the data I see of the realized Q1 market behavior, not a forecast Q1, believe it or not, it seems to follow amazingly well the five-year trend that I showed. For the past five years where the printing paper market in Europe has lost one fifth of its size. That mathematically turns to about a four and a half plus % per annum. Believe it or not, I did the math myself. That's 20% in five years. We seem to be on that track for the time being.
Which by the way also means that because it's driven by economic cycles and we're still in that two-scenario world, and I keep telling Juha twice a day that nobody will ever know with how fast this is going to go. He better be ready for more than one scenario, like we said in CMD.
Okay. Many thanks.
Thank you. Thank you. We will now take our next question from Rasmus Engberg from Merrill Lynch.
Yeah. Good afternoon, gentlemen. I guess it's one question. It's kind of a two-parter, can you explain really what happened with your Nordic pulp production? You had operational issues, as I understand, in the first quarter, and now you're talking about maintenance downtime in the second quarter. Is the maintenance downtime to fix the problems you had in Q1, or are they two separate issues?
Okay. There was a negative pricing impact on biomaterials year-on-year in Q1. Number one. Okay. We have production problems. Now, to answer your question about why are we doing what we're doing, not that we somehow scrambled through Q1 and put chewing gum into the mills, and now we're trying to fix them in Q2, it is that we want in this maintenance stop, when we shut the mills down anyway, we will do a review and make sure that if we need to improve some of the mechanical parts and so forth and so on. One of the goals of the maintenance always is to improve the technical reliability of the mills, and especially after this experience, yeah, I'm going to be particularly particular about making sure that we get the reliability of the operations improved.
Can you just elaborate a little bit more, though, on what the problem is?
There isn't a problem. It's three mills. We had different production issues which led to the reuse of them because we couldn't get the production of the premium quality out. It was different problems in different mills, and I would say that, number one, I couldn't explain. My pulping capability is too limited. Number two, even though we're so particular and open about it, you should not read anything more into it than what we said. We had some issues in Q1. We'll have maintenance stops in two of the three mills in Q2. Other than that, it's business as usual, and the pulp price is going up.
Okay. All right. Thanks very much.
We will now take our next question from Antti Koskivuori from Danske Markets. Please go ahead.
Yeah. Hi. Thanks. One question on the pulp market. We see local prices in China down in mid-April and some comments about Chinese buyers taking a breather ahead of capacity increases. What's your take on that? How do you see the Chinese buyers behaving right now?
Far they've been pretty good. Then the question always is Chinese buyers for us, in our particular situation, it would be the long fiber pulp. The long fiber pulp I think is going to be favorably impacted actually because of the famous delta between the short and the long fiber. I couldn't really say too much more than that, because on short fiber pulp as a group, even though it will hurt Biomaterials BA, right, if the short fiber pulp goes down.
the group total net is positive. We're in an interesting balance. See my point? That we gain when this long fiber pulp goes up, and we gain when the short fiber pulp goes down. If you see what I mean.
Yeah.
The position's long and short, so to say. I would not want to speculate more than that on the Chinese pulp development. There's always the concern, obviously, that people, and we've had it now for what, two summers, where towards the summer the Chinese buyers have slowed down, and then we all talk to each other and saying, "Is it inventory build-up? What are they doing? What are they doing?" It then turns out the way it turns out. That's all I can say.
All right. Thank you very much.
Thank you.
We will now take our next question from Harri Taittonen, SHB. Please go ahead.
Yes. Thank you, Harri, Danske Bank. I have a question and a clarification, if I may. Firstly, when it comes to the cost deflation, in the first quarter we saw that variable costs were still up year-on-year, still during the call you have mentioned cost deflation quite a few times. Are you shooting for a full year cost deflation? If so, can you give us a rough sense of the magnitude? This is for variable cost.
Variable cost, let me be very explicit because I think it's important that we communicate clearly. Our variable cost went up in Q1. That was driven by higher energy users and chemical users in some areas. Yes, there was some also, which is a separate measure, unit cost inflation, specifically I believe in chemicals and fillers still, whereas the energy was pretty flat. First things first, I'm trying to say, when we do a unit cost inflation or deflation analysis, that truly is based on the weighted purchases we do, what happens to the cost. I do see, or we do see clearly a limited deflation for the full year. The good news is that we'll see how Q4 is going to be. It's a bit far, but I think it's coming through more and more through the year, obviously.
It will take some time before we get it to the P&L when we reverse and whatever. There is going to be a deflation, which is very important after last year's unit cost inflation. That's one side. The other side is that we have to be more efficient, meaning we can't use more energy and more chemicals like we did a bit in Q1.
Okay, thanks. You don't want to put a number on this word, limited, like you did with the second quarter guidance?
It's a lot less of a deflation than it was inflation last year, I think. I don't quite remember exactly what we said about deflation. We said, I guess 4% above inflation last year. This is a lot less than as a deflation than that was inflation. We won't get everything back. Maybe that helps you.
All right. Fair enough. Thanks.
Thank you.
As there are no further questions in the queue, I would now like to turn the call back to Mrs. Ulla Paajanen-Sainio, Head of IR. Please go ahead.
Okay. Thank you. Thank you, everybody, for this call. We will then speak again in July when we come out with the Q2. I will still hand this over to Jouko for final words.
Good. Instead of repeating like I always do what I already said three times, let me share a thought with you. I was in a media press conference an hour ago here in Finland, just before the AGM and this and so forth. One of the fairly senior editors said, "Jouko, you've had this 13% return target forever. Your predecessor didn't make it. You haven't made it. Should you give it up?" I said, "No." I just started. I did share with him, and obviously with you now, is to get there and stay there, we do need to execute very well on what we have on these cash engines. Like we said in the CMD2, we also need to implement and execute these high-growth, high-return investments in Uruguay and China.
In some ways, I hope in the coming quarters, we're going to be relatively boring because we're going to tell you that we do what we promised. We built what we promised. Then it is more and more the results, not in quarters, but quarters and years that will show that we're worth what we're saying. Thank you very much for your attention today, and talk to you latest in three months. Thanks a lot.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.