UPM-Kymmene Oyj

Dear ladies and gentlemen, welcome to UPM's fourth quarter and full year 2019 result webcast. My name is Jussi Pesonen, I am the CEO of UPM.

And I’m here with Tapio Korpeinen, CFO of UPM.

Hello everybody.

Let's then get started. 2019 was a year of a 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 position. This enables us to release our transformative growth projects and at the same time pay an attractive dividend to our shareholders.

We have now two truly transformative growth projects under works. Our highly competitive pulp project in Uruguay is proceeding well.

The mill will be one of the lowest cost pulp operations in the world as an attractive investment for UPM. Once up and running it represents step change in UPMs future earnings.

The exciting news today is obviously our decision to invest in next generation bio-chemicals refinery in Germany with deep investments we are creating a totally new sustainable business with large growth potential markets are huge. This is another major milestone in UPM transformation and the very good and great showcase of years of focused R&D.

As you can see on the page 2, we succeeded in maintaining stable, comparable EBIT and margin throughout the year. In my view, this is, by the way, a good achievement giving the erosion of the product prices during the second half of the year.

Our Q4 sales decreased by 10% due to the drivers or main fact, lower pulp prices and graphic paper deliveries. Pulp prices came down throughout the whole year and the paper demand declined was somewhat faster than earlier years.

Average pulp prices in the Q4 were 31% lower than a year ago or year on year level, which affected Bio-refining performance. However, communication papers reported a very strong earnings and records from cash flow.

Specialty papers reported a record EBIT on quarter four. Also Raflatac reported very good cash flow on Q4.

We as a whole company generated 592 million of operating cash flow in Q4 and our net debt ended, at the end of the year or negative figure of 453 million. Please note that this includes roughly €0.5 billion of lease liabilities that were recognized as debt following the adaption of the IFRS 16 in the beginning of the year 2019.

As I said our financial position is especially an exceptionally strong at this point of time. But now ladies and gentlemen, I will hand over to Tapio for some more analysis of our results.

Tapio please.

Thank you. Here we see our fourth quarter comparable EBIT as it has developed compared to both the fourth quarter last year and sequentially to the third quarter, fourth quarter 2018 and sequentially to the third quarter in '19.

In the fourth quarter we did have substantial headwind from sales price year-on-year. They get sales impact, sales 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. Pulp cost obviously were lower for the paper businesses as were energy costs, wood costs, also RCP, logistics costs and many other raw materials.

Energy costs were particularly low in the fourth quarter. The annual energy-related refunds that are always booked in the fourth quarter contributed about €20 million more than in the previous year.

And this is the 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 cost seasonally low in the fourth quarter due to the annual energy related refunds that I mentioned. And as I said, this year the refunds were €20 million higher than in the previous year.

Fixed costs are always seasonally higher in the fourth quarter when you compare it to the third quarter. And in the fourth quarter of 2019, we also have the scheduled maintenance shutdown at our Fray Bentos pulp mill in Uruguay.

The EBIT impact of the EBIT impact of the Fray Bentos shutdown was about €20 million negative. Overall you can say that the improvement in group sales margin shown here to the fourth quarter is seasonal by nature.

But I 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, continue to be good about pulp, bio-fuels and timber in the fourth quarter, however, pulp price in the fourth quarter was about 31% lower compared to fourth quarter last year and 9% lower from the third quarter.

You can clearly see the impact in bio-refining performance. At the same time, the low pulp price was a clear benefit for the two paper businesses on the cost side.

Specialty Papers enjoyed good demand for its products and which they record quarterly EBIT. The business has been able to drive down fixed costs as well.

And this is a good starting point now that we are ramping up to 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 pulp, RCP, logistics and energy costs.

Energy cost in the fourth quarter are seasonally lows due to the annual refunds. Fixed costs already benefited from the capacity reductions that we have executed.

There are no one-off type items in the Communication Papers fourth 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 hydropower generation and Raflatac continued demand managed margins and succeeded in improving EBIT from the previous year.

Plywood was impacted by weakening demand, lower prices and a strike and a lockout in the fourth quarter. Page 5 shows our financial key figures for the full year 2019.

Sales decreased by 2% and comparable EBIT by 7% from the record year in 2018. Sales prices decrease somewhat more than variable costs.

We also reported less fair value increases for our forests in 2019 than in 2018. Operating cash flow of €1.847 billion is a new annual record for UPM.

And here we have our group performances 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 by refining Communication Papers and Raflatac achieved their targets in 2019. Specialty Papers during the second half as well and for the year came close to the target level.

Communications Papers reported particularly strong returns. It's free cash flow return on capital employed was 39% in 2019 and regular return on capital employed with 23%.

Cash flow we already discussed. What made this the record year and record quarter in terms of operating cash flow was also the working capital release that we achieved in 2019 and particularly in the fourth quarter.

The board proposes a dividend of €1.30 per share, which represents 38% of 2019 operating cash flow per share and is unchanged from last year. This reflects UPM strong financial position and confidence in our future cash flows.

I think the message here is that we are implementing two transformational growth projects and at the same time we are maintaining our dividend. Page 10 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 communications papers.

We know that thought process start the year at the low level after the decreases that took place throughout 2019 and we also expect type of 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.

So 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 2020 to be significantly lower than in the first half of 2019, we expect comparable EBIT however, to recover in the second half of 2020.

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 lights.

So seasonally it's two second half of the year for UBM 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 taking action on the fixed costs and variable costs are done. Also, we believe that, those actions contribution will come in as the year progresses.

Maybe also as kind of a note perhaps it's helpful to say that for modeling purposes, the annual net selling position for about today is about 1 million tons we have gained from debottlenecking. Our pulp mills, and on the other hand, consumption is down has being 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 2019. And we have started the consultation process for selling or closing a further 240,000 tonnes 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 some costs. At the same time, we continue to develop our products and product mix as well as commercial strategies for best long-term value.

And now I'll hand over back to Jussi for the exciting strategic topics.

Thank you, Tapio and as we already discussed earlier in 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, it's a significant day in that respect that we have done almost the 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 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 you and United Nations Global Compact business ambition to limit global temperature rise to 1.5 Celsius degrees. UPM has a unique opportunity to make a positive impact and contribute to the mitigate climate change in tangible actions.

We act in three areas. 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 the forest growth and ability to absorb more carbon. We, from this date, 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 the 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 Edison, 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 competitiveness. Finally, innovating novel products beyond fossils is the core of UPM's Biofore 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 ready for the climate impacts of all our products. Today's next generation biochemicals decision is great example of this commitment.

To summarize the innovative climate positive product and turn them into a growth businesses. At the same time, we limit risk of, from climate mitigation policies and physical impacts of the changing climate to our businesses to 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 3 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 a 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 the preliminary agreement for the main pulp production technologies with Andritz.

Molecular bioproducts are the core of the innovation for the future beyond fossils. We have successfully entered in the biofuels business and build a profitable business platform on that.

Development continues aiming to scale up this business area or the smaller biomolecule businesses and today, as you already know, we announced the first industrial scale investment in the next generation biochemicals. UPM biochemicals is about to drive a suite from fossils raw materials to renewable solutions in various consumer driven and uses.

We are helping our customers to make their business more sustainable. This has been made possible by more than 10 years of focused and efficient R&D work that we have had in UPM.

Next phase is telling the story that we have today announced and investment of €550 million in the next generation biochemicals refinery at Leuna in Germany, Eastern part of Germany. The refinery will produce a range of 100% wood-based biochemicals with total annual output of 220,000 tons.

The plant is scheduled to start up by the end of 2022. 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% launched once it is, once the facility is in full run and ramped up and optimized. We believe our products response to our customers increasing need and commitments for renewable alternatives in their businesses.

Supply of the shuts 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 first trial 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.

These slides summarize the product areas and production of the biorefinery. Bio-monoethylene glycol is used for example, for textiles, PET bottles, packaging and deicing fluids.

Lignin-based renewable functional fillers are used for various rubber applications as a sustainable lightweight and high purity alternative to carbon black and silica. The two first ones, bioMEG and renewable functional fillers, will form a main part of the refineries output.

Then we have two other main products, bio-monopropylene glycol, which is used in composites, pharma, cosmetics and detergents, for example. Industrial sugars are used for various applications in the chemical industry.

The other 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 are large in size and growth, growth numbers are healthy.

The current market supply is based on fossil raw materials, oil, gas and coal or other nonrenewable materials in the case of silica. Our customers are increasingly committed to find renewable solutions, reduce carbon footprint and promote circular economy.

I will 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 bio-refinery, and I'm sorry to say here that we are not going to open that that much because it is noble process and with the kind of totally new product that is coming out. With this said we expect to achieve high yield and optimal, a total value creation for the raw material.

Our bio refinery actually has clearly fewer process steps than in the petrochemical rules of producing the current products on the markets. The selected chemical site, Leuna, will provide the biorefinery with existing processes, logistics and different kinds of arrangements and infrastructure for various services and 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 saw and timber mills.

UPM 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 really large market growth potential. Germany and the selected chemical site, Leuna, are attractive location for this kind of investment.

That was, ladies and gentlemen, part of the biochemicals, and then we move to the next page to talk about Paso de los 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 to our future value creation.

As you remember, we are investing about USD $2.7 billion in world-scale pulp mill in Paso de los Toros in Uruguay, plus investments in port operations in Montevideo and local facilities in the Paso de los Toros town. Competitiveness of the operations is based on competitive wood supply, state of the art 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 $280 per delivered tonne of the pulp.

With this cost competitiveness which we expect attractive returns for the investments in various market scenarios. The investment represents a step change in UPM's future earnings and in the scale of, scale and our competitiveness of our pulp business.

This page, Page 24 outlines the construction schedule of the pulp mill and 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 expected CapEx for the year of 2020 is €1.3 billion including about €900 million from Uruguay project. Our maintenance investment needs are consistently low at around €200 million or less.

Ladies and gentlemen with this I will close my presentation. And most probably I don't want to need to 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 the Q&A system.

You provided an awful lot of details, so not a lot of questions left. But I just wanted to stick with the current EBIT.

Of course, there is some meaningful market headwinds. If you'd like to share with us how you see, the strike that we're now having in terms of costs that could potentially have in the current quarter?

And also get some sort of sense and what, how you think about significant, what that really means? And if you want at all give any view on the sort of full year, and how you would characterize this versus 2019?

Also somewhat curious about the significant working capital gains you've had, which is truly significant indeed, and certainly, in Q4. Was there anything particular there?

Or 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 Leuna, the uniqueness of this project. Do you see any competition specifically going into this area?

Was this truly unique? And how can you scale this up to the point as you mentioned your facilities compared to this more 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 only start that this day is significant because of the decisions as well. So that's my way of thinking to 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 or consequences as well when there will be less supply over different materials, whether it's paper or also pulp.

So difficult to really kind of draw a final conclusion what happens throughout the whole year. And that said, 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. So, yes, there will be a consequence.

And, but then it is also having a positive consequences that are dynamic, whether it is in the book supply or in the prices of our products. But we see that later on.

And then I hand over to Tapio.

Yes. Well, let's say unfortunately for the, I don't have a ruler in a sense to help you with the wording of other guidance then 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 bulk 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 of 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 sort of 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 the cycle is that when in the previous years the economy was accelerating or growing a healthy during still 2018 then we were tying cash into working capital, let's say there was inventory build up, but also particularly the value of finished goods or raw materials in inventory was going up.

Obviously now we have seen, in the sense that 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 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 up going forward as well as in the previous year's typically in the beginning of the year there is some buildup of working capital. And then typically at the end of the year we then released cash or working capital down.

And if I take the Leuna scaling up question that, Lars, you had, you know which is a good question. As you know that in the biofuels, we did have this Leuna project in Lappeeranta, and plan that is currently under development phase.

We are talking about five times we grow, four to five 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 Leuna, and most probably that that new cycle hosts a options to grow as well. So we are seriously now coming into this business but of course this is the first step of its kind.

It is novelty in this whole club, nobody has done this before and these 220,000 tons of products, it is already industrial size investment with 550 million investments. But yes, we do have a plan how to move on then thereafter but let's put ourselves now in our [else] into that implementation.

And we have two 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 20,000 tons that you will launch in 2022, do you have customers lined up from that overview or will you need to launch the product into the market and but you have already customers lined up so to speak because it's going to be bigger?

Yes, we have worked with this whole issue ever since 2010 and the last 12 months or even maybe 18 months, we have worked with the customers already concretely with the pilot product and the product kind of feature to get the kind of their so a huge interest today. So basically, we have well done and we have still three years to go to really make that market entry solid.

Two questions from me. First of all, I'd like to give you a comment about the topic of the mild winter that we are seeing now in Finland and the potential impact on wood costs in, let's say, H1 2020.

Do you see a risk that there is a, could potentially be the higher wood cost to the current weather that we have? And then second question about your pulp business.

I was just wondering about the effective 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?

If I take the mild winter and then Tapio prepares the answer for the for the pulp business. And then yes, there has been mild winter that we expected for this year.

But this is not nothing comparable what we had, two years ago. In Finland, yes, the southern part has been a bit more challenging and is more challenged as we currently speak.

But we are much more well prepared for that, actually than two years ago. And therefore, we don't see that that's the kind of that challenging at this point of time.

And like I said earlier, once again, the striker will help on that as well. So basically, we don't see that as a kind of as badly affecting us at all, as we had two years ago.

Maybe, so I'll comments on the file price. I think, in a sense, obviously, you have to kind of make your own estimate because basically, as you know, what's happened was that we did still have some movement down in the market price in the fourth quarter in Europe primarily, but less so than in the third quarter.

So in that sense, what kind of delta there might be on the average price in the fourth quarter vis-a-vis first quarter then depends on what the curve is for the remainder of this quarter. So you can sort of make your estimates on that.

Could you comment anything on the level of rebates? Has there been any changes to that?

No, we don't comment that.

Two questions from my side. The first one is on graphic paper and then 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 were 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 the deflation we've seen in pulp and O&P mean that these mills are still quite profitable?

My second question is on the biochemicals. Just a, as a comment on the return on capital employed.

And my question is why is this so much lower than my understanding where it is in biofuels? Is this because there's different credits or subsidies?

So if 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, biofuels on a long-term basis?

Can I, if I take at least these 3 questions, one attractiveness, the last one. Graphic papers and closures, UPM, as already Tapio explained, we are taking more than 800,000 in terms of capacity, when all the access are done.

We are doing for ourselves as we have been doing always to have a high utilization rate for all our mills, remaining mills, which means cost competitiveness and that's good cash flow and that's how we kind of way how we open it. Where the closures will come obviously, it is interesting that there are not only anymore that this company or this mill will be closed because of the non-profit making, but also, there's a highly interested turn and convert those machines into packaging grades.

And therefore, even big units like Paso los Toros or Olkiluoto all machines are current packaging rates, which I think that is the one factor on this whole ball game. 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 we need to take to get the efficiency and the cash flow out of the business.

Biochemicals return on capital employed 40, 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 the target after the optimization. And then which of these are, is more attractive?

I think that they both are very attractive. This will is moving into where the CO2 emission reduction needs to be in the transportation and traffic, which I think that will only promote a demand for, good demand for biofuels.

The biochemicals is having and feature that the biofuel doesn't. There's plenty full of molecules that 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 molecule as well.

So basically, the market is really having a lot of opportunities. We have a big selection process for those molecules have been 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 Celsius degree increase in climate warming, and that will trigger a good market for both of these grades.

Maybe just to clarify, we haven't said whether the ROC is higher or lower for biochemicals or biofuels. This 14% is our target for the capital intensive businesses that we have biorefining and biofiel plant in Lappeenranta is exceeding that, and we believe that the biochemical business will exceed that as well.

Okay. I know I was just comparing it with some of your peers in the biofuels business.

Thank you for your answers.

Yes. Good afternoon.

A couple of questions on the major project, if I may or on the line up can you give 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 much and particularly given that if there is a sort of potential to scale up later on to get a feel of what sort of wood intake this involves.

Harri, we have not disclosed though how much it will take, but the yield maybe high. Where as in pulp making the yield typically is 50% or so, 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. You know, 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.

On the pulp side, you now mentioned that the net exposure or net sales position has kind of reaches 1 million tons and just how are you kind of finding acceptance in that customer base and overall maybe if you can give a bit of a feel of your thinking about where you are seeing the pulp inventories at the moment in the global system?

Well, I guess what you can look at these deliveries. They were up in the fourth quarter, so demand from our customers is good as mentioned.

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 based building up the customers and the business then for the future, a future startup of the second mill in Uruguay. And, well I think, you know, 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 best sort of months and quarters.

And that's probably why also in China, the prices have stabilized. Obviously, we'll know in terms of statistics more when the actual figures from the Brazilians come probably and during the next month.

But that's what we and I'm sure you can see from the statistics.

Exactly. Okay, thanks.

Thank you. I had a couple of questions to lift 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 it's going to recover in the second half of 2020, 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 the comparable EBIT will recover during the second or in the second half of the year.

Then switching to paper and the European markets, as Jussi pointed out there in the beginning, we saw a pretty steep decline in paper demand in 2019. And I guess the question is, will this continue going into this year or was there some 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, call it, a mean 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, we are talking about 5%-plus as a trend decline. And then all of what we have seen before couple of years ago or now is very much related to general economy.

If general economy like 2017 was, 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 5%, but not much.

And then just the final question for me. Switching to China and the fine paper market outlook there.

Now, in the latter part of last year, we saw a good demand there, driven by the 17th anniversary and we also saw prices moving up. But we also saw some fairly big conversions from recycled containerboard into refined paper market.

Have you seen any impact under market from this conversion and how do you view the market balance in China in terms of fine papers?

Market balance has been pretty okay. At this stage, we have been running in the 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 is, has been quite stable, strong, stable market.

I've got two separate questions. Firstly, on your exciting new biochemical announcement today.

I appreciate 14% return hurdle is what you have for biorefining as a division, and I'm sure, as you likely said, I'm sure, it's not a ceiling on your returns aspiration for the project. But from it's 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 timeline as to when fully optimization might happen?

When it is fully optimized.

Okay. No problem.

Don't blame me for trying. And secondly, now, and I'm really not trying to trivialize this, but clearly, in recent weeks, there has been a Coronavirus issue, and I'm sure developing as we speak, frankly, in China.

Now when I think about UPM, you have 3 business units in Raflatac, Specialty Paper and clearly pulp and biorefining 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 Changshu at our paper mill and Raflatac for pulp, obviously, than we are selling into China. And, of course, let's say for us, as for anybody, maybe the question is more around what kind of impact this virus might have for the economy in China, in general and therefore, for the end demand of different products, consumer products, which are, let's say the fundamentals for our business in China, including 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 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, no sort of direct impact yet there for us.

But again, we will see them during the coming day how the situation evolves.

Okay. And is there anything you could add on any indication or impact on pulp demand or expectations on pricing?

I can sort of speculate on that, I think, much better than you can.

I still had a few more questions. I guess starting with the fiber cost.

Do you see pulpwood prices coming down in any of your sort of production locations? And if any, which?

And 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, I'd say, starting from the last question, RCP as we already discussed earlier during this call. We have been, let's say, seeing the benefits of the lower RCP price already.

So I think that obviously is something kind of coming into the beginning of this year from last year and then pulp price is also there let's say prices have started to moderate down.

Okay, good. Then on the maintenance activity, I think you've said in the past that the pulp mill maintenance will have a 20 million to 30 million negative impact per pulp mill is that sort of correct magnitude or what are we talking about?

Yes, it's the magnitude. As I said this Fray Bentos impact in the fourth quarter was about 20 million and obviously includes the fixed costs coming from the maintenance shutdown and then some impact in a sense of lost margin, which margin impact depends on the pulp price.

But now we have two shutdowns in the second quarter of this year. So, it could be, let's say similar scale in terms of impact per mill.

Again, the figure then depends on what the pulp, exactly what the pulp Bob Martin is at that time.

Okay, 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 to proceed? What's the sort of timeline on that?

We do not disclose that information, but obviously as soon as possible, we are trying to get that ramped up and optimized again. You know, that takes time but there's no guidance for the earnings.

And in terms of the commercial ramp up, how's the demand situation? Current term, you're adding quite a bit of capacity.

It says the market going to consume that quite sooner, what's the expectation there?

Something that we see as nicely growing market and obviously we have a good position there and I think that Nordland will be well positioned on that market.

Looking at your paper divisions, you're doing very well. EBITDA per tonne is higher than it's been for a very long time, actually in both paper divisions.

I appreciate you 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 that, is my question? Or am I misinterpreting your wording here?

That's my first question.

Well as we said, moderate meaning 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.

I'm sorry, that would be mid single digit for the communication papers division or?

Well, let's say moderate for both divisions, but for Communication Papers as well. And that is coming from the fourth quarter to the first quarter.

And then on Specialty Papers, are you seeing the same magnitude price decline as in Communication Papers?

Well, as I said, similar, yes, that's 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 billion? Did I get that right that the biochemicals investment is only €100 million in 2020?

And if so, should we then spread the balance of that €550 million investment on the two following years, 2021 and 2022?

Yes, I would say that's correct. That's what we, obviously, did guide is that this decision increased by €100 million, the guidance for this year as far as CapEx is concerned.

And they, 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 two years.

Excellent. Great.

And the base load CapEx, is that going to remain the same? And I think you've detailed the Uruguay CapEx and there's no change to that the phasing?

Is it?

No, we have, let's say you can see from the slide in the materials we have indicated kind of Uruguay part there. And as Jussi mentioned, there's a couple of hundred million 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 investments that we have ongoing, including for instance, the decision that we announced last year concerning the boiler in Nordland.

Great. And then just one final for me regarding the biofuels investments 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 work in progress. We will come back to that later on.

Thank you. Ladies and gentlemen, it has been great one hour with you guys.

Thank you for being with us and have a nice day. Thank you.

Bye.