Stora Enso Oyj

Thank you, Janie. Good afternoon, everyone, and welcome to Stora Enso's Q1 2019 results conference.

And I will hand it over now to our CEO, Karl Sundstrom.

Thank you, Ulla, and good morning or good afternoon depending on where you are in the world. So today we published the first quarter result of 2019.

We believe this was a good start of the year, and it was supported by the profit protection program. I will come back to that later on.

Sales increased by over 2%, and this is the highest Q1 since 2013 when it comes to sales and it's a ninth consecutive quarter of growth. And the operating EBIT decreased by €45 million, to €324 million.

We did deliver in the upper end of our guiding range, which was €260 million to €350 million. 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 0.3x.

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%. It's about the target of 13%.

Here we have to understand that the IFRS lease impact is about negative 0.4 percentage points, or slightly below €300 million. If we go to the next page, this is an attempt to describe what happened in the first quarter.

First of all, we have to remember that we have a different maintenance schedule this year for the annual shutdown of the pulp mills. So that's an impact of €20 million.

Then there have been two areas where we have been focusing on. One is obviously the increased variable costs.

And here it's a total of €68 million, of which fiber, mostly wood cost but also [indiscernible] €44 million. And the other €24 million are everything from increased logistics, chemicals and [indiscernible] 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 I come back to compensating the increased costs by €43 million. So all in all these two factors had an impact of €25 million 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 fourth quarter of 2018. Now we are back above 13%, but that is also including the IFRS, impact of IFRS 16, which is, as I said before, 0.4 or slightly below €300 million.

We have had some interesting events happening in the quarter. One of them is the decision to invest as a startup phase €5 million in formed fiber production in Hylte Mill in Sweden.

This is a new line of forming fibers for new products such as inserts, containers, cups, industrial packaging, et cetera. This is a circular product and contains no plastic.

It's basically 99.9% wood. And now we are ramping that up in a very fast bit.

Oulu conversion feasibility study was completed in the quarter, and the proposal that we have is to convert the paper machine number 7 to kraftliner and close down the paper machine number 6 and the sheeting plant. The decision on the potential conversion is planned to be made by Stora Enso board of directors during the first half of 2019, after the co-determination process has been completed.

We also started the first deliveries from our new CLT factory in Gruvon, Sweden, and it's ramping up according to plan. And last but not least, the investment in the additional drying capacity in Imatra Mills has been completed, and we can now start to drive the commercialization of the 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 Imatra Mill for production. The ongoing and fairly long process of restructuring of Bergvik Skog is proceeding as planned.

The aim is to complete the transaction in the second quarter. As you know, this is a change from being part owner, of 49%, in a company to basically increase our forest holdings as well as taking it into our balance sheet.

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 the first green bond made by Stora Enso, which we did during the quarter; as well as an increase of capital employed, about €1 billion; and a return on capital employed, by around 1 percentage point.

The transaction is forecasted to increase the net debt to operational EBITDA temporarily above the strategic target of 2 during Q2 and Q3 and then coming back to below 2 by the end of 2019. With that, I would like to hand over to Seppo.

Thank you, Karl. And I'll 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 €2,635 million.

Operational EBIT was €324 million, and operational EBIT margin, 12.3%. Operational return on capital employed was 14% and above 13% targeted level.

Cash flow from operations was €223 million, approximately at the same level as a year ago. And net debt to last 12 months of operational EBITDA was 1.7.

And here it's worth to remember and notice that this includes impact of 0.3 negative impact from IFRS 16 leases standard change, as well as good to remember 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 in a bit more details on IFRS 16 leases standard change on the figures, this is now quarterly figures effect during the Q1. And operational EBITDA increased by €19 million because of the standard changed and operational EBIT by €2 million.

The difference is the increase in the depreciation. Net financial items increased €6 million, and effect on net profit level was €4 million negative.

And operational return on capital employed, down 0.4 percentage points, and net debt increased €526 million. 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 million. And their lower board 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 million, to €54 million.

That is due to significantly higher variable costs, especially for wood. Also negative total volume development had negative impact on that result.

Operational return on capital decreased to 10.3%. This is due to lower profitability, as mentioned earlier, and impact of IFRS 16 leases standard.

In China, we launched premium-quality folding boxboard, new grade Artic Deer, and this is suitable for applications in food and pharmaceutical packaging, as well as publications. At Imatra Mill, co-determination negotiations [indiscernible] the close of PM6 were finalized and it will be shut down by the end of 2019.

This will [decrease] annual sales by approximately €70 million after the close. Then moving forward to Packaging Solutions division where we had record first quarter sales.

Sales increased 2%, to record-high €338 million. We had higher prices in corrugated and fluting businesses.

Operational EBIT decreased €10 million, to €51 million level. There, higher sales prices were offset by overall higher costs and lower China Packaging sales margin.

In Packaging Solutions, changed maintenance schedule compared to a year ago for Ostroleka Mill's PM5 decreased production and increased maintenance costs during the quarter. Operational return on capital remained above 20% targeted level.

It was at 21.8%. At the Heinola Fluting Mill here in Finland, industrial scale pilot plant will be built, to turn sludge from the mill's water treatment plant into renewable fuel.

This plant will test new energy efficient technology. And these new biofuels will reduce carbon dioxide emissions at the mill's power plant, going forward.

Then moving to Biomaterials, where good performance continues, they had record quarter. Sales up 1%, to record-high €398 million.

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 million. 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.

Positive 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 million, and higher sales prices were offset by higher fixed costs mainly related to startup preparation of strategic investments. But there was also some negative impact from the volumes.

Operational return on capital decreased to 17.7%. This is partly due to the seasonality of the business, but also good to remember and notice that capital in Wood Products division has been increased now the Gruvon new CLT plant has been finalized and is in the ramp-up phase.

This of course also effects the return on capital. As well as negative impact of IFRS 16 leases 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 million level.

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 million. EBIT margin increased to 9.1%, which is highest in 10 years.

We had significantly higher sales prices and slightly lower fixed costs during the quarter. Higher variable costs, especially in wood, pulp and energy, had an effect on the profitability, as well as lower volumes.

Cash flow after investing activities-to-sales ratio was 6.1%, somewhat below the 7% targeted level. Then 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 start the [indiscernible] on green on most of the targets and remained there.

Fixed costs-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, work 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 seasonal [indiscernible].

And Paper, cash flow at 6.1% of the net sales, slightly below the 7% targeted level. But those 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 2018.

There is no change here, exactly the same things. Moving to the guidance for this second quarter of 2019, operational EBIT is expected to be in the range of €270 million to €350 million.

During the second quarter of 2019, there will be an annual maintenance shutdown at the Nymolla paper mill. The total negative impact of maintenance is estimated to be €35 million less, I repeat, less than in Q2 2018.

And that's, one of the main reasons is that we had 6 mills with annual maintenance shutdown in the second quarter of 2018, and in this quarter that we are in now, the second quarter of 2019, we have only 1 mill. So by summarizing the second quarter -- first quarter of 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, 9 consecutive quarters. 7 consecutive quarters 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&A. Ulla?

Okay. Thank you, Karl.

We are ready now for the Q&A.

Two quick questions if I could, please. Firstly, on the Biomaterials division, you talk about in your outlook comments a slightly stronger demand in Q1 compared to Q4 '18 for hardwood pulp in China.

Can you elaborate on that? And secondly, similarly so in Packaging Solutions, in kraftliner, or sort also virgin-based containerboard, you talk about slightly weaker demand in Q1 '19 compared to Q4 2018.

Again can you elaborate on what you're seeing, what you saw in Q1 and perhaps what you can see or tell us about Q2, in both areas, please?

So the first question was regarding hardwood [indiscernible].

Hardwood pulp China, specifically China.

Yes. And what we are seeing there is that in China we are seeing that it's stabilizing, going a little bit -- pulp in China is being a bit more stable and we are getting a little bit more sort of, say, feed to in the supply chain, because 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 say 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, it's 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 just to have that in mind.

Yes. Okay.

Thank you for that. And third, just moving to Packaging Solutions then and your comments regarding slightly weaker demand for kraftliner?

So yes, that's 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 testliners. I think the virgin boards are holding up slightly better.

But all in all for the Packaging Solutions, we see prices coming down into the next quarter.

Okay. But you in your comments you're talking about slightly weaker demand in Q1 for virgin-based containerboard, and 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, the 1,000 kilometers around the Ostroleka Mill.

The rest is global when it comes to kraftliner and fluting.

Yes. And just one final question for me.

Sorry. Just on the €120 million of cost saving, how much benefit could we expect to flow through into calendar '19?

I appreciate most of this [indiscernible].

I will repeat, that I said last time I expected 40%, the last call. And that I'm very sure about.

But yes, you have to understand we will repeat on a ramp-up on the costs. So first of all you have to get down.

So that's why I say quite comfortable, because there's a lot of action going and it's a lot of things happening.

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 in the presentation, but if you could give us a bit more color what would happen [indiscernible].

[Indiscernible] my Slide number 2, 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 was this kind of [indiscernible] related?

I would 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 you give us an idea of which product that occurs, 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.

Thanks. And the second question would be about the kraftliner supply/demand outlook.

There's been news on the recent days from Klabin adding more than 900,000 tonnes 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, but that eucalyptus kraftliner, and I haven't seen that in the market. So I don't know 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 stgrength, you need to have a kraftliner, 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.

But if you take the whole kraftliner capacity of the world, it's a growing business and I think it's about 35 million tonnes per year, of which a lot is with old technology and very little is with the new ones.

They will probably use some of that volume internally, but they all [indiscernible] as well.

Yes.

Two questions from me. First, I guess to 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 it just doesn't make any sense from a fixed cost observation point of view? And then my second question it's more about on your outlook statement of 2019 being largely in line with 2018, given that the current [trading] 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 second half of 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-grade, such as our testliner or fluting or kraftliner, we play a role there because we are quite strong in certain end user accounts. And the same is in certain end users taken in Consumer Board and definitely in Wood Products, where we are by far the biggest supplier of construction material made by wood.

In Biomaterials it's a bit more tricky to do it.

You have to remember, to make pulp is a continuous process. And also like Karl mentioned in the previous reply, we are 2 million tonnes long, yes, but it's split over quite many grades.

So again if we would start to do something at 1 grade, it doesn't really turn the needle a lot on the market.

Here we are more a follower in many grades.

Okay. And on the outlook?

The reason why we have that there, if normal volatility will be there then we are confident. The thing we are a bit worried about is, will there be a solution of the trade war between China and US?

Will US turn on the European Union after it's ready with China? And even though fortunately the Brexit decision was delayed and we've 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 to try to quantify that, given where we're -- most prices have come down a little bit at least in the 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 the 2018, [indiscernible] prices?

So basically it's about where we see the market where we are today [indiscernible]. And obviously, what we see for Q2 is included there.

One question on the sort of if you look at the wood cost on a sequential basis, and I know that it's sort of easing compared to last year, but where do you see it? 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?

I would say wood cost has stabilized and we could say that they might be, going forward, coming down slightly. But it's a quite stable market at the moment if you look at it sequentially.

Okay. Okay.

The other question is about the maintenance costs and if you have, I can't remember if you have indicated the total level of maintenance. Is it going to be about the same level this year compared to last year, when you sort of take into account all this rescheduling or the 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 cost on annual basis. But looking at the annual schedules that we have or maintenance cycles we have, I think it's fair to assume similar level roughly as previously, yes.

And sometimes this, with the changes in the maintenance schedule, it's not really done by us. It's actually done by the permits.

So if you take Nymolla, they need to have every 18 months, which means that that rolls all the time and then others are coming in and out. And also the age of the mill.

So we are trying that to be more specific in the quarter and cover to the next quarter, as well. But as Seppo 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 an [indiscernible] slightly kind of declining price trend overall. But then 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 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 the usual one?

It 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 Products compared to others. And that whole difference is we managed on value.

Secondly, we are not using so many resellers. We only want to sell to customers' owned inventory to avoid volatility and channel stuffing.

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 possible elaborate a bit further on that big year-on-year decline in Consumer Board?

The volume was one, but then presumably you should have got some price back on that price/volume game. But for instance, can 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? Because of the decline.

Then the long contracts, and some of the long contracts we have started to work with and we have some price increases in the first quarter on FBB. We will get some continuing to the second quarter.

But when we come to the big liquid customers, that negotiation is ongoing with the new prices will coming 2020, the first. Because our main competitors in this area, they are 1 year ahead of us, which means that we were 1 year after them.

So there has not been any big movement at all in liquid. And then in the pulp ...

On the pulp side in Consumer Board, like we said earlier, so what has changed in [indiscernible] is that [indiscernible] used to be slightly long in pulp. But now after the startup of Beihai, as well as increasing volumes and utilization of their own pulp at the European mills, they are actually short by some 450,000 tonnes 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.

Earlier, they were benefiting from that rather than suffering. And that's part of the work they're 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's still valid, yes.

And there's no wood shortage any longer, I assume.

No, no. We are not having any wood shortage, not at all.

Yes, harvesting is -- harvesting conditions have been normal and the market is good. So there's a lot of wood available.

So that's not a dilemma.

Okay. And what's the magnitude or potential for price in Consumer Board in the second quarter?

On FBB it will go up a little bit, and some other. We do 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 1 final question, on Wood Products. The €29 million of EBIT is spot on where you were 1 year earlier.

Then second quarter typically has a strong seasonal uplift for Q2, and last year was €47 million. So now the base is the same, and as we look into the second quarter 2019 should we expect the same kind of favorable seasonality as we had last year?

Not that much. Because Wood Products, [indiscernible] end prices are coming down in Europe because we see a bit of worrying signs, especially in the construction sector.

There are two factors here. Wood is becoming more and more popular to build in, 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.

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 for the boxboard 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 [indiscernible] this year?

So if I look more into the -- you're absolutely right. With the tension between the US and China, a lot of the parts that were going into packaging of electronics has been suffering quite a bit and prices have year-over-year gone down.

What we see now going into Q2 is actually more a stable demand and increased prices. And we have launched a new board type, and that is the Arctic Deer, which is basically on a very high-end use, pharmaceutical and other things.

And 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 to people and continue to get the right products in and the right market share now.

Okay. So the Beihai mix improvement is progressing nicely this year?

Yes.

Alright. In terms of the pulp market, you were spot on last quarter where you expected a bit of a rebound in February, March.

Now based on what you now said that we know producer inventories are fairly high, if I understood you, you said that buyer inventories are fairly low. That would sort of translate to stable market going into early summer in your view in China.

Is that correct?

So if I take China, I would say that I think we expect small fluctuation on 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.

Alright. Thanks.

That is clear. Then in terms of this 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.

Alright. Alright.

And then finally, the guidance range, it's again very broad, and you delivered better than or in the upper end of the range now in Q1. What part -- is it still the trade situation and [indiscernible]?

It is the trade, but it's also if something happens or up and down and what really happens to the pulp. Because you have flow-on effects into Packaging Solutions volume boards.

You have flow-on effects into FBB. And so we chose [indiscernible].

We narrowed the range by €10 million. So you can give us credit for that.

But I agree it's a wide range, but I'd rather have that, not to disappoint given the market circumstances.

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 [indiscernible] 2020.

Yes, absolutely.

In your Packaging Solutions business, could you give some color on your packaging business?

Packaging Solutions, okay. Give color what's happening, is that the question?

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.

And 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 decrease from here?

Yes, average pricing.

Average pricing.

Average pricing, yes.

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 a number of things that we are working on. We [indiscernible] our fixed costs.

Like in any typical profit protection program, we are looking at all process-related things, like improving digitalization, using robotics RPA, as an example, to cut costs from the system. A good example there is that we are recently in-sourced, earlier outsourced, [indiscernible] delivery services to our own center, reducing costs at the same time, thanks to automitization.

Other typical things is of course that you look at the usage of consulting, consultancy services. You look at the traveling costs, cutting especially expenses on internal meetings and traveling for that, being more efficient, 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 costs, but also how to be more efficient and better.

As well as 1 important point is this Imatra PM6 close by end of the year. So this kind of actions also have a 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 the Nordic countries, that we have to inform them first and then we make it public in the financials.

And like I say, that there's good sense of urgency in the organization to implement the program. So we are quite happy, happy with how it's moving forward.

And we are confident that we can reach €20 million.

Yes. And another thing, we are canceling, like, management conferences.

We used to have a conference for the 300 top people; that's canceled.

Yes, that's a good example.

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 Q2 onwards?

You have to remember that we started the program only at the beginning of February, and it takes time to build the momentum. And it is of course this year more backloaded, as you can imagine.

There is some positive effect of course already now, thanks to sense of urgency built into the organization as sort of quick [indiscernible] low-hanging fruits that you can take and capture. I cannot give you sort of exact figure how much would be in Q2 or going forward exactly, but it is more backloaded, but already being confident that we can minimum deliver this year this 40% that Karl has said.

[indiscernible] could touch on where we are heading. Q - Kevin Hellegard 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.

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 10, 15 years.

This we know.

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.

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 [phosphate-] 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 sort of things helping us, and that's basically a good starting point for the corrugated unit.

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 expectation, going forward, there.

So Europe is a bit more challenging. 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 type that are moving in any direction right now to any significant extent, be it logistics or energy or [indiscernible]?

Logistics, we are working on and we'll probably get something. Some of the chemical suppliers are actually coming down in price, we see now, because it's probably some industries that are not buying as much.

So a lot of the savings in the €120 million 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 speak like the wood cost.

Yes, the wood cost, that's [indiscernible]. 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 a 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. 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?

Seppo here. You have to remember it's already sort of mid-year before we are ready to make any decision.

So the effect on CapEx this year will be quite limited, if any.

Yes, if any.

But we certainly have also said earlier that we believe that we can manage within the CapEx range that we have given. Of course now we have to keep in mind if they are due to the profit protection, that lowers that by €50 million.

So then we need to revisit that once we are getting there.

I just want to stay a bit with Oulu, appreciating 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 a 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 Veracel and losing the revenue from the machines and et cetera, and how we should think about a potential conversion in terms of the near-term revenue impact and the P&L impact if and when you go ahead with the project.

But I'm particularly keen to understand why you opted not to do the CUK, if you have any comments on that.

Yes, I have. So first of all, I would like to tell you that doing both the machines and a CTMP pulp mill and going into a brown pulp mill production would have been the biggest conversion ever made in this industry.

I felt like that was a too big risk. [indiscernible] 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 E.U.

Because what we would have been done, we would have liberated a lot of liquid capacity on Imatra and Skoghall and taking all the CUK capacity to Oulu. 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. And 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 other substrates?

So in many countries already it's already clear that you can circulate it, recycle it. 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, [indiscernible] 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 uncertainty so the local legislation that will be implemented between 2021 and 2023, if I remember right.

When it comes to final [indiscernible] of the project, we will naturally [indiscernible] those after the decision is made.

Understood. And that decision makes a ton of sense now in that perspective.

A final question from me, of course one of your major competitors in liquid paperboard, it's in a startup process now with a significant new addition. How do we see that impacting the markets?

Do you see there is demand for incremental significant tonnes in Europe? Or is that just a -- people will need to find more export markets to move tonnes into [indiscernible]?

I don't know. Because if I remember that competitor, I think the net capacity that they're going to bring to the market, if I remember right, is 100,000 to 150,000 tonnes.

Right?

[Indiscernible] comes from other grades.

Yes, because they're going to consolidate the smaller machines to a big machine. So I think the net capacity according to -- it's not that much.

And all these machines you can run some other boards, not only liquid. You can also run CUK.

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 on 19th of July. So I will hand it over now for final words from our CEO, Karl Sundstrom.

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 in the other one, that we are driving hard the costs which will secure us for the future.

And we feel confident that we are doing absolutely the right thing right now. So thank you for joining this call.