Earnings Call: Q4 2019

Jan 30, 2020

Dear ladies and gentlemen, Welcome to UPM's 4th quarter and full year 2019 results webcast. My name is Yussi Peson and I'm the CEO of UPM. And I'm here with Tapio Korpein, and CFO of UPM. Hello to everybody. Let's then get started. 2019 was a year of continued good performance and all time record cash flow. And this statement, by the way, applies both Q4 and full year. We ended the year with exceptionally strong financial This enables us to release our transformative growth projects and at the same time, pay an attractive then to our shareholders. We have now 2 truly transformative growth projects underworks. Our highly competitive pulp mill project in Uruguay is proceeding well. The mill will be one of the lowest cost or valve operations in the world and as such an attractive investment for UPM. Once up and running, it represents a step change in UPM's future earnings. The exciting news today is obviously our decision to invest in next generation biochemicals refinery in Germany. With this investment, we are creating a totally new sustainable business with large growth potential markets are huge. This is another major milestone in UPM's transformation and the growth and the very good and great showcase of years of focused R and exceeded in maintaining stable comparable EBIT and margin throughout the year. In my view, this is, by the way, a good achievement given the erosion of the product prices during the second half of the year. Our Q4 sales decreased by 10% due to 2 drivers of main facts, lower pulp prices and graphic paper deliveries. Bulk prices came down throughout the whole year and the paper demand decline was somewhat faster than earlier years. Average pulp prices in the Q4 were 31% lower than than a year ago or year on year level, which affected, biorefining performance. However, communication papers reported a very strong earnings and record strong cash flow. Specialty Papers reported a record EBIT on Quarter 4 also Raflatac reported very good cash flow on Q4. We, as the whole company, generated 592,000,000 of operating cash flow in Q4 and our net debt ended. At the end of the year on negative figure of 1,000,000. Please note that this includes roughly 1,000,000,000 of lease liabilities that were recognized as a debt following the adoption of the IFRS 16 in the beginning of the year 2019 As I said, our financial position is especially and exceptionally strong at this point of time. But now ladies and gentlemen, I will hand over to Tapio for some more analysis of our result. Tapio, please. Here, we see our 4th quarter comparable EBIT, as it has developed compared to both the fourth quarter last year and sequentially to the 3rd quarter 4th quarter 2018 and sequentially to the third quarter in 2019. In the 4th quarter, we did have substantial headwind from sales price year on year. Biggest sales impact as this price impact came from pulp, but also many paper prices and plywood prices were lower. But on the positive side, we were able to offset most of the negative sales price impact with lower variable costs. Bob costs obviously were lower for the paper businesses as where energy costs, wood costs also RCP logistics costs. We did have substantial headwinds and many other raw materials. Energy costs were particularly low in the 4th quarter. The annual energy related refunds that are always booked in the 4th quarter, contributed about 1,000,000 more than in the previous year. And this is substantially influenced or due to higher CO2 prices. In the fourth quarter, delivery volumes were a negative earnings driver due to 10% lower graphic paper deliveries year on year. We were able to offset most of this with lower fixed costs. Sequentially, from the third quarter, you can also see the impact of lower prices and lower variable costs. Variable costs are seasonally low in the 4th quarter, due to the annual energy related refunds that I mentioned. And as I said, this year, the refunds were 1,000,000 higher than in the previous year. Fixed costs are always seasonally higher in the 4th quarter when you compare to the 3rd quarter. And in the fourth quarter of 2019, we also had the scheduled maintenance shutdown at our Fibentus pulp 1,000,000 Uruguay. The EBIT impact of the fragmented shutdown was about 1,000,000 negative. Overall, you can say that the improvement in group sales margin shown here to the 4th quarter is seasonal by nature. But as said, so is the increase in the fixed cost as well. And here we have the comparable EBIT quarter by quarter by business area. Customer demand continued to be good for pulp, biofuels and timber in the fourth quarter. However, pulp price in the fourth quarter was about 31% lower compared to 4th quarter last year. And 9% lower from the 3rd quarter. You can clearly see the impact in prior biorefining performance. At the same time, the low pulp price was a clear benefit for the 2 paper businesses on the cost side. Specialty Papers enjoyed good demand for its products, and reached a record quarterly EBIT. The business has been able to drive down fixed cost as well. And this is a good starting point now that we are ramping up, 2 expansion projects for label papers at the Changshu Mill in China and the converted paper machine at the Northland Mill in Germany. As you can see, Communication Papers had an excellent quarter. In the fourth quarter, it enjoyed the sweet spot of stable contract prices and lower variable and fixed costs. Variable costs reflect the low RCP Logistics And Energy Costs. Energy Costs in the 4th quarter are seasonally low due to the annual refund refunds. Fixed costs already benefited from the capacity reductions that we have executed. There are no one off type items in the Communication Papers 4th quarter performance. But obviously, this is not the new normal for its performance either. We expect a mid single digit percent price reduction for graphic papers from the beginning of the first quarter. And the seasonal benefits from energy costs and delivery volumes will not be there in the early part of the year. Energy had a strong quarter supported by improved hydroborrower generation and Raffeta continued to manage margins and succeeded in improving EBIT from the previous year. Plywood was impacted by weakening demand, lower prices and a strike and a lock out in the 4th quarter. Page 5 shows our financial key figures for the full year of 2019. Sales decreased by 2% and comparable EBIT by 7% from the record year in 2018. Sales prices decreased somewhat more than variable costs. We also reported less fair fair value increases of our forests in 2019 than in 2018. Operating cash flow of 1.8 1,000,000 is a new annual record for UPM. And here we have our group performance as a whole. We could not show earnings growth in 2019. However, our financial position is exceptionally strong. And here we have our, business area return targets and the returns for the full year, energy bio refining communication papers, and Ratlatac achieved their targets in 2019. Specialty papers during the second half as well and for the year, came close to the target level. Communication Papers reported particularly strong returns. Its free cash flow return on capital employed was 39% in 20 19 and the regular return on capital employed reached 23%. Cash flow we already discussed, what made this the record year and quarter in terms of operating cash flow was also the working capital release that we achieved in 2019 and particularly in fourth quarter. The board proposes a dividend of per share, which represents 38% of 2019. Operating cash flow per share and is unchanged from last year. This reflects UPM's strong financial position and confidence in our future cash flows. I think the message here is that we are implementing 2 transformational growth projects. And at the same time, we are maintaining our dividend. Shows our outlook for 2020. We expect robust demand to continue in 2024. Most of our businesses, we expect demand to continue to decline for communication papers. We know that pulp prices start the year at a low level after the decreases that took place throughout 2019. And we also expect paper prices in communication papers and specialty papers to decrease in the beginning of the year moderately. Which means a mid single digit percentage decrease. We will continue our actions to reduce fixed costs and variable costs. There will be additional costs related to our transformative projects growth projects, however, in addition to the CapEx, but we aim to offset fixed cost inflation and the project related costs to keep our fixed costs on about the same level as in 2019. Due to the decrease in sales prices, we expect comparable EBIT in the first half of twenty twenty to be significantly lower than in the first half of twenty nineteen. We expect comparable EBIT however, to recover in the second half of twenty twenty. And maybe to add some color, One can mention some, contributing factors this year. Major maintenance shutdowns are all scheduled for the second quarter, which means that the second half of the year is maintenance light. Also seasonally, it's 2nd half of the year, for UPM, is, is seasonally stronger than the first half. And also the growth projects in the Specialty Papers business start contributing as the year progresses. As mentioned, we are on the fixed cost and variable cost side. And also, we believe that, those actions, contribution will come in as the year progresses. Maybe also as a kind of a note, perhaps it's helpful to say that for modeling purposes, the annual net selling position for pulp today is about 1,000,000 tons. We have gained from debottlenecking our pulp mills and on the other hand, consumption is down has been coming down because of closures and lower deliveries on paper. And then here on page 11, we have a summary of some of the tools that we use to ensure our competitiveness going forward. We are implementing fixed cost reduction actions in all businesses and functions, and we always aim to use our assets. Efficiently. So in Communication Papers, we reduced our capacity in graphic papers by 620,000 tons during the second half of twenty nineteen. And we have started the consultation process for selling or closing a further 240,000 tons of newsprint capacity by the end of the second quarter 2020. We proceed with our continuous improvement programs. For example, for variable cost reduction, We were successful with our variable cost reduction in 2019, as you can see from our last year's performance. And given the sales prices in early 2020, obviously, we aim for further savings on costs. At the same time, we continue hand over back to Yousry for the exciting strategic topics. Thank you, Tapio. And as we already discussed earlier, this presentation and Tapio went through as well. The company is in good shape. We have plans to mitigate all of the cost items that are ahead of us by having the fixed cost and variable cost programs. In the company, we are able to pay an attractive dividend our balance sheet is strong. But today is a significant, in that respect that we have done almost last 12 months have been kind of in that nature that we have done a lot of good decisions that we have been making for for our future and our future earnings. But ladies and gentlemen, let's start with the climate actions. That is one of the key cornerstones of the future success of UPM as well. And therefore, we have this week announced our commitment to UN United Nations Global Compact Business Ambition to limit global temperature rise to 1.5 Celsius decrease. UPM has an unique opportunity to make a positive First, we are committed to climate positive forestry, I. E, meaning sustainability and sustainable managed forest are more resilient to change challenge, to change and take the climate in good shape. We ensure that we always grow more forest than we harvest and we will work to improve our forests and forest growth and ability to absorb more carbon. We from this state, we are also annually reporting the carbon sink of our forest. Secondly, We have, and we will make tangible actions to reduce our CO2 emissions by 60% by 2030. This is based on a global review and analysis of the CO2 reduction opportunities that we have in our company. So we have done a lot of work last 12 months in different technologies and also how to actually mitigate the emissions and improve our energy efficiency. In addition, we aim to reduce the emissions of our supply chain by 30% utilizing different kind of technologies, especially in the vessels that are taking our products globally. And we will improve with this way also our dibleness. Finally, innovating novel products beyond forces is the core of UPM's BioForce strategy. And provides major value creation opportunities for the company. UPM develops safe and sustainable products and offers alternatives to fossil materials. Many of our products are already proven to be climate positive. In the future, we aim to, scientifically verify the climate impacts of all our products. Today's next generation biochemicals decision is a great example of this commitment. To summarize the innovative climate positive products, and turn them into a growth businesses. At the same time, we limit risk of, from climate mitigation policies and physical impacts changing climate to our businesses, businesses and assets. All this is important for long term value of the whole company. Page 13 shows you a very familiar, strategic focus of UPM. We are advancing on all three areas of this growth, spearhead of growth prospects and projects We are currently ramping up our specialty paper expansion project in Germany and in China. Which enables us to continue growing into attractive release liner business area. In July, we made them decision to build a highly competitive pulp mill in Uruguay to drive the step change in UPM's future earnings. The project is proceeding as planned. And last week, we made a preliminary agreement for the main, pulp production technologies with Andex. Molecular bioproducts are the core of the innovation for the future beyond fossil. We have successfully entered in the biofuels business and built a profitable business platform on that. Development continues aiming to scale up this business area or these biomolecular businesses. And today, as you already know, we announced the first scale investment in the next generation bio chemicals. UPM Bio Chemicals is about to drive a switch from fossil raw materials to renewable solutions in various consumer driven end uses. We are helping our customers to make their business more than 10 years of focused and efficient R and D work that we have had in UPM. Next page, is telling the story generation biochemicals refinery at Loyna in Germany, Eastern part of Germany. The refinery will produce a range of 100 percent wood based biochemicals with total annual output of 220,000 tons. The plant is scheduled to start up by theendof2022. Safety and sustainability of the value chain from the forest to the customer will be based on UPM's high standards. This is a major milestone in the UPM's transformation. We are creating a totally new business This is, I would like to underline totally new products, totally new business with large growth potential for the future. We expect also the first investment to generate attractive returns. Our return on capital employed target is 14% once it is once the facility is in full run and ramped up and optimized. We believe our products responds to our customers' increasing need and commitments for renewable alternatives in their businesses. Supply of the such alternative is very limited and high quality, biochemicals are priced at the premium in the markets already currently. We expect to reach a good cost position comparable to the fossil based alternatives. This is based on sustainable wood supply unique technology concept that we have and integration to existing infrastructure and proximity to our customers. This slide summarizes the product areas and production of the biorefinery. Biomono ethylene glycol is used for example, for textiles, PET bottles, packaging and de icing fluids. Lingering based renewable function of fillers are used for various rubber applications as a sustainable lightweight and high purity. Alternative to carbon black and silica. The 2 first ones, biomech and renewable functional fillers will form a main part of the refineries output. Then we have 2 other main products, bio monopropylene glycol, which is used in composites, pharma cosmetics and decertions, for example. Industrial suckers are used for various applications in the chemical industry. The latter two products, while they are smaller in size are important part of the optimizing the total value creation of the refinery. As you can see on this slide, the global market for Glycos are well as Carbon Black and silica are large in size and growth numbers are healthy. The current market supply is based on fossil raw materials, oil, gas and coal or other non renewable materials in the case of silicone. Our customers are increasingly committed to find renewable solutions, reduce carbon footprint and promote Circular Economy. Our products fit perfectly in these targets. Our biochemicals also fit directly into a customer's exciting processes and the existing recycling infrastructure. Page 19 shows a simplified charter of the process in the biorefinery. And, I'm sorry to say here that we are not going to open that much because it is novel process and with the kind of totally new product that is coming out. With this set, we expect to achieve high yield and optimal total value creation for the raw material. Our biorefinery actually has clearly fewer process steps done in the petrochemical rules of producing the current products on the markets. So selected chemical site Loyna will provide the biorefinery with existing processes, logistics, and different kind of arrangements and infrastructure for various services and utilities. Utilities. It is a great place to put this facility. Customers and suppliers are close by. Availability of sustainably sourced hardwood is good in the region from forest thinnings and residuals of the sawn timbermills. UVIA will be responsible, local producer with an entire European value chain. Most of these points are already covered as we see in this page. To summarize, we are truly excited about creating another sustainable business with a really large market growth potential. Germany and the selected chemical site law in our attractive location for this kind of investment. That was, ladies and gentlemen, part of the chemical, and then we move to the next page to talk about El Paso Delos Toros, pulp Mill, Here, I want to shortly remind everybody of the highly competitive pulp mill investment in Uruguay that we have, which is also very important we are investing about USD 2,700,000,000 in World Scale Pulp Mill in Paso Delosporos in Uruguay plus investments in port operations in Montevideo and local facilities in the past of the Los Doros town. Competitiveness of the operations is based on competitive wood supply, state of the art of mill design and efficient logistic setup. Safety and sustainability performance of the value chain from plantations to customers are expected to be industrial leading level. The mill is expected to reach highly competitive total cash cost level of that what we announced half a year ago, $2.80 per delivered ton of the pulp. With this cost competitiveness, we expect attractive returns for the investments in various market scenarios. The investment represents a step change in UPM's future earnings and inter scale of scale and our competitiveness of our pulp business. This page, page 24 outlines the construction schedule Autobankville, I'm not going to go in details, but from that, you can read that, how it will be then handled, in various steps. And Page 25 shows the update of our CapEx estimate for 2020, as we can see that our our expected CapEx for the year of 2020 is 1000000000 including about 1,000,000 from Uruguay project. Our maintenance investment needs needs are consistently low at around 1,000,000 or less. Ladies and gentlemen, with this, I will I will close my presentation. And most probably, I don't want to, I need to report, repeat this what we have been doing. This is a significant day for UPM. Thank you. And now we are ready for the questions dear, operator. Let's take you. And our first question comes from the line of Lars Shelberg of Credit Suisse. Please go ahead. Your line is open. Thank you. You provided an awful lot of details. So not a lot of questions left, but I just wanted to stick with the current a bit. Of course, there is some meaningful market headwinds. If you'd like to share with us how you'd see the strike that we're now having in terms of costs that that would potentially have in the in the current quarter? And also get some sort of sense in what how you think about significant, what that really means And if you want at all, given any view on the sort of full year, how you would characterize that this versus 2019? Also somewhat curious about the significant working capital release you've had, which is truly significant indeed and certainly in Q4. Was there anything particular there? Should we view this as a new normal relative to sales? And the final question for me, again, coming back to the significant investment in Loyna, the uniqueness of this project Do you see any competition specific going into this area? Was this truly unique? And how do you how can you scale this up to the point? As you mentioned, your facility is comparatively small in a very large market. So how can you scale this up both from a perspective of, wood supply in the region and the potential to scale up operations at the site itself? Can I start and Tapio then follows, Tapio can explain the significance? I would always start that at this day is significant because of the decisions as well. So that's my way of taking the significant wording, but Tapio might come to your question. But when it comes to the strike, I think that it is obviously for the short term it will have some kind of effect on our profitability. That is no doubt. But on the other hand, there are kind of dynamic consequences as well when there will be less supply over different materials, whether it's paper or or also pulp. So difficult to really kind of draw a final conclusion what happens throughout the whole year. And that's how I think that what we are fighting here in Finland is to get a competitive union agreement. And that's why we are here today. Short term, yes, there will be a consequence, but then it is also having a positive positive consequences that are dynamic, whether it is in the wood supply or in the prices of our products. But we will see that that then later on. And then, I hand over to Patapio. Yes. Well, let's say, unfortunately, for the I don't have ruler in a sense to, help you with the wording of their guidance than we have just given But again, I would sort of just point to the factors that we mentioned that we obviously do have in the first half, the impact from the pulp price as it is in the beginning of the year and the paper sort of mid single digit reduction in the sales price. So those, you know, and you can sort of estimate the impact on that. But then also in the second quarter of this year, We have the typical seasonality. And on top of that, this year, the maintenance activity, is focused on the first half and on the second quarter of this year. So that's why also, as we have guided, we are saying that we expect the second half EBIT to recover And, again, no, no, so the further guidance on that than what we have just today given. As far as the working capital is concerned, of course, one thing that obviously is good to remember is that what we have seen now in this cycle is that when, in the previous years, the economy was sort of accelerating or growing, healthily during, still 2018. Then we were tying cash into working capital as, let's say, there was inventory buildup, but also particularly that value of finished goods or raw materials in inventory was going up. Obviously, now we have seen in a sense, the reverse effect throughout the year and particularly at the end of the year. And then of course, also the fact that when we are downscaling our Communication Papers business that means that that has a sort of releasing effect on our working capital. So I would say that obviously we work to sort of keep our working capital efficiency efficiency up, going forward as well. As in the previous years, typically in the beginning of the year, there some buildup of working capital and then typically at the end of the year, we then release cash flow or working capital down. And if I take the low in our scaling up question that Lars you had, which is a good question, As you know, that in the biofuels, we did have this Luna project in Lappeenranta and the plan that is currently under development phase we are talking about 5 times bigger or 4 to 5 times bigger plant actually, which is now in our mind. So basically, yes, we are always considering the next steps of scaling up a similar happens in Loyne. And most probably that mill site will host a options to grow as well. So we are seriously now coming into this business, but course, this is the first step of, of its guide. It is the novelty in this whole globe. Nobody has done this before. And this 220,000 tons of products, you know, it is a already industry size investment with 1,000,000 investment. But yes, we do have a plan how to move on then thereafter. But let's put ourselves now in our notes into the implementation. And we have 2 big significant growth projects ongoing in Uruguay and now in starting in Germany, as we speak, the decision was made today, and happy with that. And just one follow-up. The 220,000 tons that it will launch in 2022, do you have customers lined up from that or will you need to launch the product into the market and, or do you have already customers lined up, so to speak, can be the taker? Yes. We have worked with this whole issue ever since 2010 last 12 months or even maybe 18 months, we have worked with heavily with customers already concretely. With the pilot products and the product kind of features to get the kind of their interest and there's a huge interest today. So basically, we are well done and we have still 3 years to go to to really that, to make that market entry solid. Our next question comes from the line of Antti Koskabori of Danske Bank. Yes, thank you. Two questions from me. First of all, like to give a comment about the topic of the mild winter that we are seeing now in Finland and the potential impact on wood cost in, let's say, H1 2020. Do you see risk that there is could potentially be higher would cost you the current weather that we have? And then second question, about your pulp business. I was just wondering about the pulp price for you going into Q1, we've seen that the spot prices have been stabilizing or have been stable for a while already now. Should we expect that your effective price is still coming down in Q1, whether it's a timing related issue or higher rebates or whatever, how should we think about that? I take the mild winter and then Tapio, Tapio prepares the answer for the bulk business. And yes, there has been milder winter that we expected for this year, but this is not nothing comparable what we had 2 years ago. In Finland, yes, the southern part has been a bit more challenging and is more challenging as we as we currently speak, but we are much more well prepared for that actually than 2 years ago. And therefore, we don't see that as a kind of that challenging at this point of time. And like I said earlier, once again, the strike will help on that as well. So basically, we don't we don't see that as a kind of as badly affecting us at all as we had 2 years ago. Maybe if I'll comment on the pulp price, I think, in a sense, obviously, you have to kind of make your own estimate because basically, as you know, what happened was that we did still have some movement down in the market price in the 4th quarter, in Europe, primarily, but less so than in third quarter. So in that sense, what kind of delta there might be on the average price in the 4th quarter visibly first quarter then depends on what the curve is for the remainder of this quarter. So you can sort of make your estimate on that. Could you comment anything on the level of rebates? Has there been any changes to that? No, we don't comment that. Thank you. Our next question comes from the line of Alexander Berglund of Bank of America. Please go ahead. Your line is now open. Thank you very much. Two questions from my side. The first one is on graphic paper and supply and demand. If you look now, how much capacity closures have been announced in Europe, in 2020 as a percentage of the total market? And do you think that this is enough, or do you think we need to have more closures announced And where would those come from? Do you think that the lower prices in the first half now is going to put pressure on high cost producers or has a deflation we've seen in pulp and O and P and made that these mills are still quite profitable? My second question is on the biochemicals. Just as a comment on the return on capital employed, my question is just why is this so much lower than my understanding where it is in biofuels? Is this because there's different credits or subsidies, so you can help me understand that? And if you would compare these markets, what do you which one would you see as more attractive biochemicals or biofuels on a long term basis? Thank you. Can I, if I take at least this, three questions, one attractiveness, the last one? Traffic Papers and closures, UPM, as already Tapio explained, we are taking more than more than 800,000 tons of capacity when all the actions are done. We are doing it for ourselves as we have been doing always. To have an high utilization rate for all our mills, remaining mills, which means cost competitiveness and thus good cash flow and, and that's how we kind of weigh how we operate, where the closers will come, obviously, It is interesting that there are not only any more, you know, that, this company or this mill will be close because of the of non profit making, but also there's a highly interest to turn and convert those machines into packaging grades. And therefore, even big, big units like Purokobertsuolo or then Oulu machines are turned to a packaging bridge. Which I think that is one factor on this whole ballgame. But UPM's way of operating has been and will be that we are keeping our machines filled with high operating rates and we take capacity down as we need to take to get the efficiency and the cash flow out the business. Biochemicals return on capital employed 14, we said we will meet that target. And obviously, this is attractive business, and we will meet that 14% level. This didn't mean that we are not going to be above that. But we will meet that target after the optimization. And then which of these are is more attractive. I think that they both are very attractive. This world is moving into where the CO2 emission reduction needs to be in the in the transportation and traffic, which I think that will only promote a demand for good demand for biofuels. The biochemicals is having an feature that biofuels doesn't. There's a plentiful molecules that you can you can choose. This is the selection that we made for this mill. But then when moving on, we can turn solid wood to a different molecules as well. So basically, the market is really having a lot of opportunities we did have a big selection process selection process for those molecules that we just selected. And therefore, it is having even bigger opportunities from the market point of view. But the same factors once again, our customers, the world is committing themselves into a 1.5 self safety fluid increase in in climate warming, and that will trigger a good market for both of these grades. Maybe just to clarify, we haven't set whether the ROC is, higher or lower for biochemicals or biofuels. This 14% is our target for the capital intensive businesses that we have in biorefining, then the biofuel plant in La Penranta is exceeding that. And we believe that the biochemical business will exceed that as well. Okay, thank you. I know I was just comparing it with some of your peers in the biofuels business. Thank you for your questions. Thank you. Our next question comes from the line of Harry Taittonen of Nordea. Please go ahead. Your line is open. Yes. Good afternoon. A couple of questions on the major project, if I may. On the line up, can you give a some color on the wood intake or how much is the sort of the typical unit consumption? And overall, like, what is the sort of the procurement sort of a side, how is it sort of organized and for how how how much and, and particularly given that if there is a sort of potential to scale up later on, to get a feel of what sort of would intake this involves? Harry, we have not disclosed, though, how much it will take, but the yield will be high, whereas in pulp making the yield typically is 50%. Also, roughly speaking, this is, becoming quite high number. On yield. So therefore, it doesn't need that much of wood. And we do have a very good kind of process. Obviously, UPM currently is operating in Germany in wood sourcing. So we do have the network in place and that helps us a lot. We have We have our current operations, which will be then adding this capacity. And therefore, the wood supply is in well developed phase at this point of time. Sure. Okay. The on the pulp side, I mean, you you now mentioned that the net exposure or net sales position has kind of reached 1,000,000 terms. And just how are you kind of finding acceptance in the customer base? And overall, maybe if you can give a bit of a feel of your thinking where you are seeing the pulp inventories at the moment in the global system? Well, I guess what you can look at is our deliveries, they were up in the fourth quarter. So demand from our customers is good, as mentioned. So So in that sense, I would say the customer demand is working well for us And, obviously, that is a good thing that we have, this sort of volume base building up the customers and the business then for the future. Future startup of the 2nd mil in Uruguay. And Well, I think the kind of statistics as well as we do here in terms of what is available in the pulp business that the inventories have started to come down on the producer side during the past past sort of months and quarters. And that's probably why also in China, the prices have stabilized obviously, we all know in terms of statistics more when the actual figures from the Brazilians come. Probably during the next month, but, well, that's what we, and you, I'm sure, can see from the statistics. Exactly. Our next question comes from the line of Michael Duttel of UBS. Please go ahead. Your line is open. Thank you. I had a couple of questions still left here. Just firstly on the guidance and just to be clear on that So what you're saying is that the H1 2020 profit will be down year over year. But then you're saying that the it's going to recover in the second half of twenty twenty. Now is that recovery in relationship to H1 2020? Or is it also on a year over year basis as you guide for the first half of this year? That would be my first question. Yes, that is relative to the first half of this year, we see that then, comparable EBIT will recover during the second or or in the second half of the year. Okay, good. Then that's clear. Then switching to paper and the European markets as you also pointed out there in the beginning, we saw pretty steep declines in paper demand in 2019. And I guess the question is, will this continue going into this year or was there specific things that drove that exceptionally weak demand last year. What's your thinking around that going forward. Do you expect to see some sort of, I don't know, call it the main reversion in the trend declines or should we expect this double digit declines to continue going forward? Our trend idea has not changed that much. Are talking about 5 plus percent as a trend decline. And then all of what we have seen before a couple of years ago, or now is very much related to general economy. If, general economy like 2017 was booming and going to the up in Europe, it meant that the demand decline was only 3%. And now when there's a kind of a slowdown in the economy, it has been triggering higher number of, on our trend. So it is very much related to also general economy. But our kind of trend idea has not changed that much. Maybe this is not somewhat higher than that of 5%, but not much. Okay, okay. That's clear. And then just a final question for me, switching to China and the fine paper market outlook there. Now in the latter parts of last year, we saw good demand there, driven partly by the 17th anniversary, and we also saw prices moving up. But we also saw some fairly big conversions from recycled containerboard into the fine paper market. Have you seen any impact on the market from this conversion? And how do you view the market balance in China in terms of fine papers? Been pretty okay. At this stage, we have been running, in a high operating rate in China. Okay. Have you seen any impact of new capacity in the market? Not that much. I guess that the market has been quite stable strong stable market. Our next question comes from the line of Justin Jordan of Exane. Thank you, and good afternoon, everyone. I've got 2 separate questions. Firstly, on your exciting new biochemical announcement today. I appreciate 14% return hurdle is what you have for Bio Refining as a division. And I'm sure as you as you slightly said, I'm sure it's not a ceiling on your returns aspiration for the project. But from its kind of initial commencement of operation in, let's say, very end of 2022, when perhaps should we envisage you might make that 14% return. Is that perhaps something in 2024 or how quickly might this business ramp up to that potential target as it were? That's my first question, please. Justin, when it is fully optimized. Okay. Can you give us some timelines to when fully optimization might happen? When it is fully optimized. Okay. No problem. Don't blame me for trying. And secondly, now I'm really not trying to trivialize But clearly, in recent weeks, there has been a coronavirus issue and I'm not sure developing as we speak, frankly, in China. Now when I think about UPM, you have 3 business units in a Raflatac specialty paper and clearly pulp by refining. With major operations in that country. In a real life situation, Have you seen any impact on UPM as yet in any of those divisions? And when I think about, I guess, consensual expectations of maybe global pulp prices rising in calendar 2020. Does the tragic events that we're seeing potentially defer or potentially moderate some of those aspirations for rising pulp prices? Well, I would say, well, first of all, in terms of our operations, obviously, where we do have, operations in terms of, manufacturing or production in China, it is in Changshu at our paper mill and Raflatac for pulp, obviously, then we are selling into China. And, of course, let's say, for us, as for anybody, the, maybe the question is more around what kind of an impact this virus might have for the economy in China in general. And therefore, for the end demand which are, let's say, the fundamentals for our business in China including, obviously, obviously, let's say, pulp as well as you say. So it's early to say about that, but the impact comes obviously from the from the possible sort of effect on the general economy and private consumption in China in terms of our own operations in Changshu our paper mill is running because it was running throughout the holidays. So therefore, it is permitted to run at the moment as well. So no sort of direct impact yet there for us But, but again, we will see then come during the coming, coming days how the situation evolves. Okay. And is there anything you could add on, any indication or impact pulp demand or expectations on pricing? I can't sort of speculate on that. I think much better than you can. Our next question comes from the line of Markku Jarvinen of Handelsbanken. Please go ahead. Your line is open. Few more questions. I guess, starting with fiber cost, do you see pulpwood prices coming down in any of your sort of production locations and if any, which on the other hand recycled fiber prices seem to have come down quite a bit what kind of impact, if any, does that have on you? Well, let's say, as starting from the last question, RCP, as we already discussed earlier during this call, we have been, let's say, seeing the benefit of the lower RCP price price already. So I think that obviously is something kind of coming into the beginning of this year from last year. And then, Pulpwood price also there, let's say, prices have started to sort of moderate down. Okay. Good. And then on the maintenance activity, I think you've said in the past that pulp mill maintenance will have a sort of 20 to 1,000,000 negative impact per pulp mill. Is that sort of correct magnitude or what are we talking about? Sorry, yes, it's the magnitude, as I said, this Pribentos impact in the 4th was about CHF 20,000,000, and, obviously, includes the fixed cost coming from the maintenance shutdown and then some impact in a sense of lost margin, which margin impact depends on the pulp price. But so now we have the 2 shutdowns in the second quarter of this year. So it could be, let's say, similar scale in terms of impact per mill. But again, the figure then depends on what the pulp exactly what the pulp margin is at that time. Okay. Good. Good. And then the specialty papers, you now have the investments ramping up what kind of a ramp up curve do you expect here? What sort of impact on earnings this year from the Northern Conversion. Is that going to be sort of negative still this year or how do you expect that proceed? What's the sort of timeline on that? We do not close that information, but obviously as soon as possible, we are trying to get that ramped up and optimized again. That takes time, but there's no guidance for the earnings. And in terms of the commercial ramp up, how is the demand situation at the current you're adding quite a bit of capacity. Is the market going to consume that quite soon or what's the expectation there? That is something that we see. So quite nicely growing market and obviously, we have a good position there. And I think that Nautl will be well positioned on that market. Okay. Thank you. Thank you. Our next question comes from the line of Linus Larsson of SEB. Please go ahead. Your line is open. Thank you very much and good day to everyone. Looking at your paper divisions, you're doing very well. EBITDA per ton is higher than it's been for a very long time, actually in both paper divisions. I appreciate your benefit from lower fiber costs in the fourth quarter. But at the same time, you're talking about only moderate price declines in the first quarter. And why is why is that is my question or am I misinterpreting your wording here? That's my first question. Well, as we said, moderate meeting sort of mid single digit which again, I think you can see from the sort of public sources as well. So that is what we see as far as the price is concerned. And sorry, that would be mid single digit for the communication papers division or Yes. That's well, let's say, for moderate for both divisions, but for communication papers as well. And that is coming from the 4th quarter to 1st quarter. Thanks for clarifying that. And then on Specialty Papers, are you seeing the same magnitude price decline as in Communication Papers? Well, as I said, similar, yes, that sort of moderate decline for both. Okay. And then also, unless if you could also just help me. Did I get that right that, so now the CapEx guidance for 2020 is 1.3 1,000,000,000. Did I get that right that the biochemical investment is only 100,000,000 in 20 20 and if so, should we then spread the balance of that 1,000,000 investment on on the 2 following years 2021 2022? Yes, I would say that's correct. That's what we obviously did. Guide is that this decision increased by 1,000,000, the guidance for this year as far as CapEx concerned and the, I think it's for the time being, probably a kind of a good working hypothesis to sort of divide the rest evenly then for the remaining 2 years. Excellent. Great. And the base load CapEx, is that going to remain the same? And I think you've detailed Uruguay CapEx. And there's no change to that facing, is it? No, we have, let's say, you can see from the slide in the materials, we have indicated kind of a Uruguay part there. And as you see mentioned, there's a couple of 100,000,000 or slightly less for maintenance CapEx. And then the sort of difference differences for, let's say, other focused projects and sort of smaller operative investment that we have ongoing, including, for instance, the decision that we announced last year concerning the boiler in Northland. Great. And then just one final for me regarding the biofuels investment that you're also looking at. How far progressed is that when should we expect to go ahead and CapEx on that one? That is still a work in progress. We will come back to that later on. That's fine. Thank you very much. And there are no further questions at this time. Please go ahead speakers. Thank you, ladies and gentlemen. It has been great 1 hour with you guys. Thank you for being with us and have a nice day. Thank you. Bye.