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Edited Transcript of STERV.HE earnings conference call or presentation 19-Jul-19 11:00am GMT

Q2 2019 Stora Enso Oyj Earnings Call

Helsinki 00101 Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Stora Enso Oyj earnings conference call or presentation Friday, July 19, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Karl-Henrik Sundström

Stora Enso Oyj - CEO

* Seppo Parvi

Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland

* Ulla Paajanen

Stora Enso Oyj - Senior VP & Head of IR

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Conference Call Participants

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* Alexander Berglund

BofA Merrill Lynch, Research Division - Analyst

* Antti Koskivuori

Danske Bank Markets Equity Research - Analyst

* Cole Hathorn

Jefferies LLC, Research Division - Equity Associate

* Justin Joseph Jordan

Exane BNP Paribas, Research Division - Analyst

* Lars F. Kjellberg

Crédit Suisse AG, Research Division - Research Analyst

* Linus Larsson

SEB, Research Division - Analyst

* Markku Järvinen

Handelsbanken Capital Markets AB, Research Division - Analyst

* Mikael Doepel

UBS Investment Bank, Research Division - Executive Director & Analyst

* Robin Santavirta

Carnegie Investment Bank AB, Research Division - Financial Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Quarter 2 2019 Stora Enso Earnings Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today on Friday, the 19th of July 2019.

I would now like to hand the conference over to your host today, Head of Investor Relations, Ulla Paajanen. Please go ahead.

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Ulla Paajanen, Stora Enso Oyj - Senior VP & Head of IR [2]

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Thank you, Nicole. Good afternoon, everyone, from sunny Helsinki and welcome to Stora Enso's Q2 2019 Earnings Call.

And I will hand this call now over to our CEO, Karl-Henrik Sundström. Karl, please?

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [3]

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Thank you, and good morning or good afternoon depending on where you are in the world. And I will go through some of the highlights of the second quarter 2019, and Seppo will go into some more details on the financial and the divisions, and then we end it up with a Q&A session.

So we have been focusing a lot in this quarter on cash flow and costs. And we have also increased the profit protection program to EUR 200 million. I will come back to that. So sales decreased. This is the first time in a long time, and we came in with a operating margin of 11% versus 12.3% a year ago. This is a decrease by 12% versus 12 month ago.

We actually had a very, very strong cash flow. It's up over 50% versus a year ago, and net debt to EBITDA increased temporarily to 2.2x due to the Bergvik transaction as well as the new lease accounting regulations. Return on capital employed came in at 11.3% over -- versus 15.5% a year ago, which is below the strategic target of 13%, 1.2% are explained by the lease rules and the Bergvik deal.

So what really happened in the quarter? And when we left Q1, we were a bit more aggressive on volumes. That was the plan. But we figured out pretty soon that the market was very mixed. As you can see here, we have EUR 48 million negative in the combination of sales price, mix and volume, and we have a cost increase of EUR 26 million, which the biggest one is fiber.

So during the quarter, we increased the focus on the profit protection program and started to accelerate it to be able to compensate from the headwinds, both in costs but also in the market. So at the end of the quarter, we managed to have a cost savings of EUR 45 million. On top of that, we had a negative development of EUR 13 million in the associates, of which EUR 9 million relates to onetime costs in conjunction with the acquisition of Bergvik Skog, our part of it. So that's EUR 9 million. I -- another way of expressing it is that we will probably have been down 26% in profitability if we haven't started with a profit protection program in time.

So with the success of the speed and the value reaching EUR 60 million year-to-date, that is basically what we thought originally going to be the full outcome for the full year, we are now increasing that to EUR 200 million. So we have reached EUR 60 million in the first 6 months, of which EUR 45 million in the second quarter. And this program includes some of the restructuring that you have seen being announced in our sawmilling business.

During the quarter, we -- concluding the very complicated restructuring of Bergvik Skog, and it's basically an increase from 1.1 million or hectares in indirect holdings to 1.4 million in direct holding, of which 1.15 million are productive. We have financed that with a green bond. And we have -- basically, when all this is over, we will have an impact in our capital employed of about EUR 1 billion.

And in conjunction with this, we did have some items affecting comparability, which amounted to EUR 88 million. This is a technicality, how you actually back out something from equity. So you lose in the income statement when you gain in the equity, and that's how you back out the accumulate -- translations adjustments.

But the more simple way to describe the deal is actually that having an indirect ownership of 1 -- slightly more than 1.1 million hectares where we had a value in our books in Sweden of -- per hectare, about EUR 2,000 per hectare. We actually increased it by 250,000 hectares at the price of EUR 2,400 per hectare. And with the translation or currency effects between the beginning of this year and the end of June, we actually ended up with a value in our books of EUR 2,000 per hectare, giving it a total value for the Swedish forest holdings of EUR 2.8 billion.

But just as an example, another owner of Bergvik, BillerudKorsnäs has announced that they are going to sell their holdings for a value of EUR 3,700 per hectare. And you have to remember, in that value is also included a wood supply agreement for x number of years, which means that it's not a pure sell of forest. It's actually including taking any commitment or taking forest out of that holding over x number of years.

And if you look on the LRF statistics, the smaller lots in Sweden are being sold for around EUR 5,700. So with this, I would like to say that we are very happy with this deal, and we feel that we have done a good deal.

During the quarter, we also decided to convert Oulu paper mill and replace the 2 paper machines with 1 board machine of 450,000 tonnes. That project is going according to plan, and we start -- we plan to start up the kraftliner production by the end of 2020, and we will end the paper production in -- by September 2020. We also launched a number of new products like Natura Solo, which is a new way of providing food service board without plastic coating layers. And we also launched DuraSense White, which is a biocomposite for food contact applications.

We are also considering expansions in Wood Products. So we have started a feasibility study to see if it's possible to build a new CLT factory with a capacity of 120,000 cubes and also a feasibility study for a line for construction beams in mill -- in Ybbs in Austria. Those 2 projects together are estimated to have a CapEx of about EUR 90 million.

Last but not least, before handing over to Seppo, I would like just to make you aware of that this morning, we actually announced that we are going to do a investment for EUR 10 million in Sunila. Sunila is the world's biggest place to make a lignin production based on -- fueling a LignoBoost production of 50,000 tonnes. Now we are going to invest in a demo plant where you can actually, from the lignin, process it further and actually getting a graphite out, which is graphite, not the normal synthetic graphite based on fossil-based material but from lignin.

With that, I hand over to Seppo.

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [4]

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Thank you, Karl. And I will start to go through some of the key figures from the results that we have published earlier today.

First of all, looking at the top line, our sales line decreased by 2.1%. That is a reflection of lower volumes and sales prices as Karl already mentioned earlier. Operational EBIT margin remains double digit and was 11%, and operational EBIT was EUR 287 million for the second quarter. Operational return on capital employed was 11.3%, that is below the targeted 13% level. But here, we have to notice that the combined effect of the new IFRS 16 standard and the Bergvik Skog assets in the past, it is about 1.2 percentage points on return on capital employed.

Very strong cash flow for the quarter. Cash flow increased from EUR 357 million a year ago to EUR 548 million this quarter mainly driven by reduction of the working capital during the quarter. And net debt to last 12 months' operational EBITDA is at 2.2 and above the targeted 2.0 maximum level due to the fact that all the steps related to cash flow are not finalized yet in the case of Bergvik Skog transaction. After through all those steps have been finalized, we will be coming back to levels below the targeted 2.0.

Then moving to divisions, and I'd start by Consumer Board where value management continues. Sales decreased slightly and were EUR 675 million. There, lower carton board deliveries were having an effect, and very positive news is naturally the price increases are coming through in Europe. That has continued already for some time to increase the selling prices, and the work still continue also going forward.

Operational EBIT increased EUR 7 million and was EUR 72 million. That was a reflection of lower variable costs and the mentioned price increases. We have some production issues in Fors mill and lower board volumes also had an effect. Operational return on capital, stable at 12.8%.

In Packaging Solutions division, there, we are focusing on cost management. Sales decreased 4% to EUR 316 million and that there, clearly, lower RCP containerboard and kraftliner prices had an effect, and the deliveries grew slightly. Operational EBIT decreased EUR 18 million, but it should be noticed that Q2 a year ago was record high. And this quarter, we were at EUR 39 million level when it comes to operational EBIT. There, clearly, lower RCP containerboard and kraftliner prices had an effect. And the lower fixed costs related to altered maintenance schedule and lower costs in corrugated units have some positive effect as well.

Operational return on capital at 16.3%. That was the case due to lower profitability due to the reasons mentioned earlier. And Oulu conversion, that we announced during the quarter and that Karl already explained as well, is proceeding according to plan.

Then moving to Biomaterials where stable performance in a rocky environment describes the quarter quite well. Sales decreased 5% from record high Q2 last year to EUR 394 million. That is a reflection of higher deliveries and clearly, lower pulp prices. Operational EBIT decreased only EUR 6 million from record high Q2 level last year and was at EUR 103 million.

Clearly, lower pulp prices had an effect there and the positive effect coming from higher volumes and lower fixed costs related to altered maintenance schedule in Enocell mill. Operational return on capital remained above strategic target level and was 15.6%. And like Karl had mentioned, we announced earlier today, investment in bio-based carbon materials at the Sunila Mill in Finland.

Then moving to Wood Products where we are focusing on value management. Sales decreased 4% to EUR 412 million, reflection of lower sales prices and deliveries. Operational EBIT decreased EUR 12 million from record high Q2 last year and was at EUR 35 million level. Lower sales prices, especially in classic sawn products, had an effect on the profitability and the negative impact from volumes mainly due to decreased overseas sales. But here, it should be noticed, especially in Wood Products but in also other divisions, we are focusing on margin and selling price protection instead of going for the volumes.

Operational return on capital was at 20.3%, and that is above the strategic target level of 20%. We also earlier today announced the feasibility study for a possible CLT unit at Ždírec mill in Czech Republic and the new construction of beam unit at the Ybbs mill in Austria. And we are also planning or looking into possible close of Kitee sawmill, and this is in connection to consolidating our sawmilling in that region, area to Varkaus where we also have integrated operation, integrated to pulp mill locally as well as to LVL element mill, producing products for the building solutions there.

Then moving to Paper division. There, stable performance in a declining market describes the quarter quite well, and sales were down 6% and reached EUR 712 million level. That is a reflection of clearly lower deliveries, but where the largest prices were higher in all segments during the quarter. Operational EBIT decreased slightly to EUR 50 million, and that is a reflection of higher sales prices and lower fixed costs, but volumes were clearly lower. And higher variable costs, especially wood costs, year-on-year had negative effect on profitability.

Cash flow after investing activities, slightly below the targeted 7% level at 6.6%. And there, we had very good positive working capital development, improving the cash flow. And relating to Oulu conversion to kraftliner, that means that we will reduce paper capacity by over 1 million tonnes or 20% of our paper capacity after the conversion next year.

Then look at the strategic targets before handing over back to Karl. There, you can see that it's becoming a bit more colorful, but still quite many of them are on a green. In addition to dividend, net debt-to-equity ratio is below the targeted 60% level, but the net debt to operational EBITDA is slightly above the targeted 2.0, as I explained earlier. And fixed costs to sales is slowly coming down towards the targeted maximum 20% level, and there, the work continues on.

And then of course, naturally, for instance, profit protection program that we increased today from EUR 120 million to EUR 200 million increased -- includes also fixed-cost-related actions. And that way will help us to bring down this ratio in -- on top of the other things that we are working on.

Then look at the divisions and the targets there. Like mentioned earlier, Biomaterials and Wood Products, above the targeted return on capital levels. Consumer Board is still behind, but as said, price increases on the European market are coming through, and we are confident that we will continue a possible trend here -- a positive trend here going forward, and we'll come to closer to 20% level and then closing the gap. Packaging Solutions at 16.3% level. And Paper, slightly below the targeted 7%.

Then back to you, Karl.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [5]

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Thank you, Seppo. And we have a new outlook for 2019, and that's a reflection of the unknown and the very mixed picture we're getting. We believe that there are further deterioration in the trading conditions and a likelihood today higher than before of a hard Brexit. And we also see an accelerating demand decline for European paper.

Costs, as you're aware of, has been rising in the whole of 2019 and that is something that we stand with. And therefore, we are only focusing on a guidance for the second quarter, and we are focusing on making sure the things we can address which is cost. And that's the reason why we are increasing the profit protection program.

The guidance for the third quarter of 2019 is that an operational EBIT is expected to be in the range of EUR 200 million to EUR 280 million. During the quarter, there will be annual maintenance shutdown at the Beihai, Imatra, Heinola, Ostroleka, Enocell and Veitsiluoto mills. The total maintenance impact is estimated to be on the same level as in the third quarter 2018 and EUR 30 million more than in the second quarter of 2019.

Before going into the Q&A session, I just want to make sure that the focus in the second quarter has been actually to prepare us to be fit for the future, protecting the profit and the cash flow. We have had 8 consecutive quarters of double-digit operational EBIT margin. And in this quarter that we have published today, the reason is that we actually accelerated the implementation of the profit protection.

Strong cash flow, up over 50%. However, further deterioration in the trading conditions, which means that we are accelerating the -- an increase in the profit protection program. And we believe that well over half of the EUR 200 million will be in the P&L of 2019. We've had EUR 60 million so far.

So with that, I hand over to you, Ulla.

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Ulla Paajanen, Stora Enso Oyj - Senior VP & Head of IR [6]

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Okay. Thank you, Karl.

And before we go to the Q&A, I just want to remind you all that we will be talking more about forest and wood products during this coming autumn by hosting a Investor Day in Sweden on the 19th and then a site visit on the 20th of September. So then, we hope to be a bit more transparent about our forest reporting.

So I'll now -- please, can we get the instructions for the Q&A session?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first is from the line of Antti Koskivuori at Danske Bank.

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Antti Koskivuori, Danske Bank Markets Equity Research - Analyst [2]

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I would have few questions. Maybe I will kick off with the demand growth and the expected slowdown in 2019 that you mentioned. I was just wondering is this only a result of weaker trading conditions or do you see any [monocultural] structural issues behind that, the slowing growth?

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [3]

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I -- we were already out with this in the end of the fourth quarter when we published that early this year. We saw that when the geopolitical situation is deteriorating sooner or later, it will hit the economic environment, and that's what we've done. And I think what you have heard from most of the companies reporting this week is actually happening. So I'm happy we were out a bit early.

But there are very interesting facts. So by end of May, that forest I have pulp shipped into China, into China out -- not only sit -- not the one sitting in the inventories of the big producers in the Chinese port, but it was actually been shipped into China, is down 7% while at the same time, the growth or GDP in China has been around 6%. For me, that's very, very strange.

So -- and obviously, with the whole chain of levies coming on, especially consumer electronics, which usually have a fiber box packaging around, that has been changing quite a bit, that is obviously a reflection of the trade wars. And obviously, people are getting nervous. We see that also in the number of housing starts in the buildings sector where we are a big supplier with our wood products that people are a bit worried. And you see the statistics. I think German core industry is down 6%. That's the end of the European economy.

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Antti Koskivuori, Danske Bank Markets Equity Research - Analyst [4]

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Absolutely. The second question would be on the pulp market at the current price levels. We hear comments from the market for a few months now that the highest cost producers are not making money at current price levels. And after that, pulp prices have fallen further. I would be curious to hear what are your thoughts about the current price and the cost curve and the implications to any potential market dynamics going forward.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [5]

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So I think some of the marginal players, Asian players, are probably being challenged right now. And it is basically, you have -- every week, you have a new signal on the pulp market. And in the same week, you might have 2 different signals, up or down.

But if I look upon in going into the next quarter, I would say that the European demand is stable. I believe the Chinese demand is slightly stronger, but the prices are under pressure in both those markets. And you remember, we are a smaller player. We are not a Suzano when it comes with our 2.1 million tonnes being long. So it is hard to read, actually.

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Antti Koskivuori, Danske Bank Markets Equity Research - Analyst [6]

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Yes. Okay. Okay. Then lastly, on the European paper, and especially on the price levels going to [HUR]. I don't know how much you want to comment, but the situation has been quite difficult or challenging with the volumes, as you describe as well, while the prices have remained at the high levels. So what should we expect for H2 on the prices?

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [7]

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I would probably more talk about next quarter. I don't want to stretch myself out because on paper and most of my products, everything except the liquid and some of the consumer board, we have short contracts and core prices are uncomfortable to talk about. So if I look upon the quarters coming, it's basically, we see significantly weaker demand year-over-year, and the prices will be slightly lower. This is how I say...

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Antti Koskivuori, Danske Bank Markets Equity Research - Analyst [8]

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All right. You don't want -- yes.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [9]

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Yes. And the prices -- is quarter-on-quarter.

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Operator [10]

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Your next question comes from the line of Linus Larsson at SEB.

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Linus Larsson, SEB, Research Division - Analyst [11]

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I'd like to start with wood cost. If you could just please update us on where you see wood costs trending and maybe in particular, whether we should hope for any easing on the wood costs build in the third versus the second quarter.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [12]

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So we remember last year, in the first quarter, we started with a shortage, continued in the second, which means that we went up quite a bit in pricing during that period, especially towards the end of Q1.

So we still see the prices going forward now into next quarters. We see that they are still on a high level, but probably turning down a little bit because I don't think I'm alone in this industry of facing the demand situation. However, when you are slowing down your wood intake because you have already been out partly contracting some of it, it's not that fast. It takes some time.

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [13]

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Seppo. I could add that of course, year-on-year, we see wood costs going up but sequentially, pressure is off and maybe a bit down here.

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Linus Larsson, SEB, Research Division - Analyst [14]

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But for it to hit your P&L, are you suggesting that in the third quarter, we shouldn't expect any material change compared to the second quarter in terms of realized effect...

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [15]

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Yes. No material change. That was a -- so when you start to take down your wood supply, usually, you have contracted it out for a longer period. So your -- the -- you have usually -- to stop harvesting on the cheapest, which is the land you control, which means that you keep the high contract you might have contracted 6 months ago. That's how it works in the short period.

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [16]

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And as you can see also, if you look at back during the winter time, and now this summer harvesting conditions have been back to normal compared to last year.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [17]

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Yes.

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Linus Larsson, SEB, Research Division - Analyst [18]

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Right. Right. Excellent. Then I just wanted to check this Fors mill production issues. Do you quantify that? How much of an impact might that have been in the second quarter?

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [19]

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It has not been anything huge. And talks are over already. [Therefore, what -- some single millions].

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Linus Larsson, SEB, Research Division - Analyst [20]

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Okay. Okay. Great. And then just finally, on your forest land strategy and Karl, you are very clear in your advocating for the backward integration and the fact that you bought forest land in Sweden at a very attractive price, and I agree with that.

I'm just thinking, like do you have a very clear message and strategy on your Bergvik strategy? And BillerudKorsnäs has kind of the opposite almost when they are cashing on the asset. I'm just a bit curious now in hindsight, when you think about Tornator and the strategy around the finished forest land integration strategy.

And I mean that's of -- it's somewhat smaller, of course, in terms of strategic importance. But nevertheless, it's kind of -- it's -- you're not cashing. You're not realizing the value of the way BillerudKorsnäs did, and you're -- yet you're not fully controlling it. So it's kind of stuck somewhere in the middle. What's your thinking in response to that?

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [21]

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So first of all, there is a fundamental difference. Tornator is about 10% of the wood supply in Finland. It is important but not as big as Bergvik or -- because Bergvik is probably 70% of all the mills except Nymölla and Hylte. So it's slightly different. And the other one is, we would -- we don't have the money at the moment.

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Operator [22]

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Your next question comes from the line of Alexander Berglund, Bank of America.

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Alexander Berglund, BofA Merrill Lynch, Research Division - Analyst [23]

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Two questions from me. First of all, kind of on the cost savings and kind of the profit protection program increased to EUR 200 million. Can you just talk a little bit about -- should we expect kind of a similar pace? Or like you said, is it a bit more tricky to generate the cost savings from here?

And then also, I guess a lot of the players in the market are trying to save on costs in this environment. So what gives you the confidence that you will be able to retain the whole EUR 200 million at the end of 2020?

And then my second question was just regarding -- I mean this news on the Legionella investigation in Belgium and I guess kind of the potential link of the outbreak to one of your mills. So if you have any comments on that.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [24]

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So on the first one, if there's one thing I'm sure about, and that is that we will deliver on the EUR 200 million. Taking out costs in our industry, and we've been doing it in 2012 program, the 2014 and many before that, that we know how to do that. And we need to build a stronger platform for the future. It's going to be both fixed, as Seppo said, but also variable costs. And in this business environment, you can work quite a bit on your purchasing.

When it comes to Legionella, so we are being investigated. We don't know if we are the guilty one or not. We are doing all the precautions and all the tests in cooperation with the authorities in there. So we don't know. It can be us and it can be -- I think they investigated 17 cooling towers.

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Alexander Berglund, BofA Merrill Lynch, Research Division - Analyst [25]

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Okay. Just maybe a follow-up on the first question on the cost savings. I mean I guess a lot of your competitors as well are quite confident that they're able to take out costs, especially larger players. So why -- isn't there a risk that, that is just kind of in the end, just passed on to your customers and they'll buy lower prices?

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [26]

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I think I -- as I mentioned earlier in the divisional review, they are clearly put focus on margin and price protection over the whole year. And I think that's exactly what we are doing on, that we don't pass on the benefits of the program to our customers.

Secondly, if you look at the space, we are already in 2 quarters. In the pocket, EUR 60 million out of the originally announced EUR 120 million, and now we reincreased that to EUR 200 million. And having in place like Karl said, a well-functioning organization that is used to cutting costs.

And there is also a good sense of urgency in the organization to reach the targets. We are very confident to reach the EUR 200 million level. And I'm extremely happy and proud of our organization about the speed. If you think that we have already 2 quarters reached -- actually, more than we originally thought that we reach in 2019 alone. We said originally 40% of EUR 120 million in 2019, and we're already at 60%. And then we realized the target upwards to EUR 200 million, we are now saying that over EUR 100 million will be already a visible piece here. So almost EUR 120 million that we originally targeted.

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Operator [27]

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Your next question comes from the line of Justin Jordan at Exane.

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Justin Joseph Jordan, Exane BNP Paribas, Research Division - Analyst [28]

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Just firstly, can I just start on biomaterials? I'm just trying to understand, can you help us with perhaps what was the average pulp price decline that you saw year-over-year? Because clearly, you've had a very strong performance in deliveries.

And I'm just trying to understand, we can see clearly benchmark European pulp prices are down some 20% year-over-year, benchmark Chinese prices are up some 30% year-over-year. The achieved Stora Enso price is substantially more robust than that, shall we say, it would appear like. And I'm trying to understand, is that a time delay impact? Or is that a product mix impact? Or how should we think about that?

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [29]

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So it's partly a product mix and it's also a bit of a time delay when the prices are coming in.

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Justin Joseph Jordan, Exane BNP Paribas, Research Division - Analyst [30]

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Okay. And then just circling back to your earlier comments, you talked about Chinese demand potentially stronger in Q3 than Q2. Can you just sort of elaborate perhaps a bit more on that, specifically for pulp clearly?

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [31]

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So that is when we speak to our customers in China, that's what we're feeling. However, can I write that in blood? No. No, you see what I mean. It is a big, but that's what we see. Because if they are down -- I think China last year probably used 19 million tonnes of chemical pulp. And in May, they were down by -- if you annualize that by months, down by 7%.

But in May, they actually was increasing the usage, and I haven't got the June figures yet, but that indicates if they would keep that, which is in line with many external forecasts, they were talking about 9.4 -- 19.4 million tonnes. And that means that they are accelerating. Because something doesn't square. If you're down 7% on a commodity and your economy, according to decisions, are growing by 6%, which is the GDP.

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Justin Joseph Jordan, Exane BNP Paribas, Research Division - Analyst [32]

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Sure, sure. And just again, just a burrowing factual clarification, I take it given your production volumes, you have no plans for any sort of commercial downtime in pulp production at Stora Enso.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [33]

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Yes. We will do it in connection with annual maintenance shutdowns.

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Justin Joseph Jordan, Exane BNP Paribas, Research Division - Analyst [34]

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Okay. Understood. Okay. Just switching to Packaging Solutions, if I may, for a second. Clearly, it's obvious you've been impacted by lower benchmark pricing for both virgin and recycled containerboard. Can you talk to us a little bit about corrugated prices? Are you being impacted there by lower corrugated prices as yet in Q2?

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [35]

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So in the second quarter, the corrugated packaging was not down so much. That's why we -- as you can see, in our material, we switched over to sell more of the board internally because that was a better value creation.

Going into the third quarter, we believe that the demand year-over-year will be slightly stronger, however, for the corrugated prices, slightly lower. On the containerboard, we see in the third quarter, year-over-year stable volumes and prices lower, a bit more when it comes to testliner than to kraftliner.

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Justin Joseph Jordan, Exane BNP Paribas, Research Division - Analyst [36]

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So just so I'm clear, incremental declines then in Q3 on testliner and kraftliner from what you achieved in Q2.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [37]

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Yes.

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Justin Joseph Jordan, Exane BNP Paribas, Research Division - Analyst [38]

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Okay.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [39]

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Even though last week, there was a very minor decline in the statistics, but that's what we expect.

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Operator [40]

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Your next question comes from the line of Mikael Doepel at UBS.

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Mikael Doepel, UBS Investment Bank, Research Division - Executive Director & Analyst [41]

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A couple of questions from me. First of all, could you talk a bit about the sawn timber market? What kind of demand trends are you seeing there right now? And then also, in terms of pricing, it seems that the pricing is a bit under pressure there. What do you expect on that front going forward?

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [42]

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So when it came to wood product demand in the third quarter, we expect them to be slightly weaker. There are signals that their building stores are holding back, and we've seen that for a while. And obviously, that also mean slightly lower prices quarter-on-quarter for wood products in Europe.

When you look upon the Asia and the Middle East, which is we'll say basically everything outside Europe, there, we see the demand also year-over-year in the third quarter to be slightly weaker, but the prices are stable.

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Mikael Doepel, UBS Investment Bank, Research Division - Executive Director & Analyst [43]

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Okay. Okay. Got it. And then in terms of the Chinese carton board market and maybe then Beihai in particular, can you give us an update on what is happening in that market right now in terms of demand, in terms of pricing and then particularly on Beihai, if there is any progress on the mix there?

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [44]

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So in Beihai, we continue to get up in the value chain to more advanced boards. In general, we see that in China, it's a stable demand, but we are a bit questioning about the prices. So we probably believe that in the third quarter, we'll have slightly lower pricing quarter-over-quarter on the FPP market in China.

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [45]

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This is Seppo. Just to remind that of course, if you look at the wood products, that CLT/LVL [piece], building solutions products are less volatile than sawn goods generally, if you look at the cycles.

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Operator [46]

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Your next question comes from the line of Robin Santavirta at Carnegie.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [47]

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Now first of all, in terms of what you said about Chinese pulp deliveries, the deliveries to China, your comments about them being down quite significantly over the past 8 months, I guess...

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [48]

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I said 5 months.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [49]

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Yes. But if we look at 8 months...

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [50]

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Without May.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [51]

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If -- they're down as well.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [52]

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Yes. I know that. We didn't say that.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [53]

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So -- and then the economy and retail sales are still growing. Is this sort of a reflection that what we actually have been seeing is a quite significant inventory destocking of pulp buyers in China? Or is this sort of a reflection that the end [part will fall part] are not growing? What is your opinion?

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [54]

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This is a very good question because the visibility of what our Chinese customers are having in inventories is very, very low. We know what's in the ports by the producers and that you also know. But what is in the warehouses owned by the customers or the merchant, we don't know.

But if the economy is still going at 6% as the Chinese saying, then there's something strange going on, then it's a destocking. But they've been destocking for quite a while. And all the 19 million tonnes, if I remember right, that they used in 2018, probably somewhere between 0.5 million and 1 million is actually for the export-oriented consumer electronic business to be used -- virgin fiber around. And that is not all gone.

So I can't really say. I think it's a combination of a slightly lower economic level than what's in the numbers plus a destocking. So I don't think it's one. I think it's both of them. But I don't know.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [55]

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Sure. And then in terms of your Biomaterials division, could you just provide an update on Enocell closing down on the softwood pulp sales and changing the mix to dissolving? Where do we stand in terms of that project? When will that happen?

And then what about -- you've been talking extensively about 2020 or 2021, quite significantly changed sales mix in that division going from less soft -- probably soft wood to dissolving and fluff. Will that improve the mix already in 2020 or is that 2021?

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [56]

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Seppo here. Maybe I'll take a comment than a compliment. First of all, the investment at Enocell is coming to final stage here. So it should be finalized now during the second half of this year and then we move to dissolving pulp.

When it comes to dissolving pulp change in the mix -- and also, as you know, the change is already as good share area where we are already more or less in fluff, some standard parts also are produced there. But it should start to be visible already next year.

And we have been doing this exactly for the reason to have less volatile portfolio when it comes to our pulp portfolio and that a strategic decision made already some time ago. And I think if you look at the volatility of the market recently, it shows some proofs that this is the right way to go. And also, profitability channel is quite good in those both grades.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [57]

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What is the amount of softwood you have been producing in Enocell that you would terminate or...

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [58]

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It would be totally in dissolving pulp after the conversion. It was originally some 600,000 to 700,000 tonnes. 500,000. Yes.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [59]

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Okay. Then in terms of the Bergvik Skog transaction, what is the earnings impact? So you have more forest on your balance sheet and you, in fact, now own more than 50% of that entity. I guess there must be a positive impact on the operating profit from either Q3 or Q4 forward. What is that number roughly?

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [60]

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Yes. But in the second quarter...

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [61]

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So I think we have earlier mentioned, there is still a positive impact as sort of as-is basis, some EUR 20 million, EUR 30 million. But let's save this for the Forest Day in Stockholm. So we will tell more there about the figures and effects on profit and loss and how we plan to report it as well.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [62]

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Okay. But for now, EUR 20 million to EUR 30 million on the EBIT line and I guess it's reported in the others segment.

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [63]

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Yes. That is of course very difficult for your modeling at this stage. But like said -- but just join our Investor Day in Stockholm so you'll learn more.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [64]

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Sure. But is this for -- as of Q3 or is it as of Q4?

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [65]

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You can -- let's say, that is of the annual effect. And on rough terms, you can take half of it based for this year.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [66]

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Okay. Good. And finally, just on the Consumer Board division, what is the net short position in pulp for that division?

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [67]

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It's some 400,000 tonnes.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [68]

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Good.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [69]

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Of which 250,000 is coming from Veracel...

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [70]

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To Beihai.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [71]

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To Beihai.

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Operator [72]

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Your next question comes from the line of Lars Kjellberg at Credit Suisse.

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Lars F. Kjellberg, Crédit Suisse AG, Research Division - Research Analyst [73]

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I just want to come back to the profit improvement program. Can you walk us through what steps you are taking in that incremental EUR 80 million that you've accelerated now? And let's just take one at a time. Maybe we can start there with the profit improvement. If you can walk us through what you're doing.

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [74]

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Yes. Of course, you have to remember, we have been building the program. It's not so that we have done EUR 120 million program. And then we have additional EUR 80 million program. It's done in one go -- sort of ongoing as a total.

And as I said earlier, the organization has that very good sense of urgency and very much focused on top of the things. So there are a number of different actions, as you can imagine, typical things like cutting traveling, consulting, et cetera, but also very much focusing on changes in the processes and simplification of the processes and streamlining the processes.

A good example is that we have recently in-sourced earlier outsourced finance delivery services from a third-party service provider from India. We added actually people in Tallinn to do the job, but we are saving millions there compared to what we paid earlier. That is one good example of what we are doing. And then we have been also announcing, as you have noticed, different kind of restructurings at the mills, Consumer Board and Wood Products, consolidating production to more 1 location instead of running separate satellites, if you wish.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [75]

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And obviously, for labor legislation, we cannot tell all the things we can do. We need to talk to our employees first, but we have a very solid plan.

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Lars F. Kjellberg, Crédit Suisse AG, Research Division - Research Analyst [76]

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Very good. The order decision is -- of course makes directional sense given how markets are. One particular question now arises. When you announce a substantial shutdown like this one, how do you protect your own deliveries until you actually shut down? What measures are you taking with your customers to ensure you continue to operate as opposed to giving those orders to someone else?

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [77]

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What are you referring? To the...

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Lars F. Kjellberg, Crédit Suisse AG, Research Division - Research Analyst [78]

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Well, exactly. You've taken the decision, of course, to shut down 1.1 million tonnes of coated paper production.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [79]

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Okay. Now I understand. So...

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Lars F. Kjellberg, Crédit Suisse AG, Research Division - Research Analyst [80]

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If I were a customer, I would reorganize my purchases effectively and fairly quickly.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [81]

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Yes. And that was part of the reason why we also accelerated the buildup of it. And we saw that while we were doing the feasibility study, some customers got a bit worried about the supply. And that happens. But at the same time, they are also -- don't want to be in the hands of only one supplier on the wood-free uncoated. So we are balancing that out. But that is a challenge. It's a huge challenge.

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Lars F. Kjellberg, Crédit Suisse AG, Research Division - Research Analyst [82]

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But you're not taking any particular actions to try to mitigate and lock in those customers. I don't know if you can, but...

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [83]

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Yes. It's -- selling a wood-free uncoated, it's -- you don't have that many tricks in the book.

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [84]

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And I don't know if you mean that we are not cutting prices to keep customers.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [85]

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No.

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [86]

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That, we are not doing it, if that's what you suspect or are after.

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Lars F. Kjellberg, Crédit Suisse AG, Research Division - Research Analyst [87]

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No. No, no. I'm not suspecting anything. I'm just interested in...

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [88]

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Delivery security to the customers and good customer service. And like Karl said, they of course both are several suppliers as long as they can.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [89]

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Yes.

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Lars F. Kjellberg, Crédit Suisse AG, Research Division - Research Analyst [90]

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And in terms of the Oulu, as you approach the closedown, it -- I understand that you're already starting to sell a bit more pulp from Veracel as you slow down production at Oulu. How should we think about the change in profitability as you move out of paper into more -- selling more pulp? Is that a meaningful delta in a negative way, given the margin differential between pulp and I guess Oulu?

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [91]

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I think it's the other way around, to be honest. Because Oulu is not yielding a very, very high EBITDA. And...

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Lars F. Kjellberg, Crédit Suisse AG, Research Division - Research Analyst [92]

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No. That's exactly what I meant. So you...

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [93]

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And now we're just selling -- if you sell the pulp, which is Veracel pulp, from a -- to other customers, you have a transportation gain and you can sell it into Europe or into Asia. And you get -- you have -- you earn more money because Veracel is the lowest-cost producer probably in the world.

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Lars F. Kjellberg, Crédit Suisse AG, Research Division - Research Analyst [94]

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That's exactly what I meant. So the step-down in earnings isn't meaningful effectively. You're just translating to pulp from a lower-margin paper business.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [95]

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Yes. I thought you meant that we were losing now. I think...

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Lars F. Kjellberg, Crédit Suisse AG, Research Division - Research Analyst [96]

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No. No, no. Not in the least.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [97]

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Okay. Now we're on the same page, Lars. Thank you.

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Lars F. Kjellberg, Crédit Suisse AG, Research Division - Research Analyst [98]

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Yes. Yes. Very well. Final point from me was in Consumer Board, of course, you are not where you want to be in terms of your profitability. And Seppo, you mentioned that you think you're on target to achieve that. How is that going to be achieved? I mean you're well behind your targets and pricing moves very slowly. So what other potential access can you take to soaring it back up to where you need to be?

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [99]

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So part of that is the profit protection program. Part of that is the value management that you have seen we have been doing quite successfully. And the third one is actually where we're getting into renewing some of the really big clients, which we haven't done yet.

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [100]

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And on top of that, they have very, very much focus on and are running program to improve production efficiencies.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [101]

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Yes.

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [102]

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And that's quite a big, big opportunity.

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Lars F. Kjellberg, Crédit Suisse AG, Research Division - Research Analyst [103]

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And a very final one from me then relating to that. Liquid paperboard, where do you see demand trends specifically for that specialty at this moment in your system?

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [104]

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We see that demand trend being positive. And you see, it's a bit on the backside of the single-use plastic directive.

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Lars F. Kjellberg, Crédit Suisse AG, Research Division - Research Analyst [105]

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Right. So -- and it's -- so that means it's stronger than the general Consumer Board. Is that fair to say?

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [106]

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Yes.

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Operator [107]

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Your next question comes from the line of Markku Järvinen at Handelsbanken.

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Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [108]

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I just had a further clarification on the profit protection program, which seems to be progressing well. I was just wondering, you now achieved EUR 45 million in Q2 and you're targeting EUR 200 million sort of overall in the end, which would sort of imply EUR 50 million per quarter. So sequentially, is there sort of more to come and -- or beyond the sort of EUR 5 million delta between EUR 50 million and EUR 45 million? Or how should we sort of think about it?

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [109]

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The way you should think about it is that we did EUR 15 million in Q1, EUR 45 million in Q2. Then we said, me and Seppo, it's going to be EUR 100 million plus for the whole year. And that's the way you should think about the second half because all of these are not linear, because certain things gets -- we got -- I shouldn't say we took low-hanging fruits but probably we did in Q2.

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [110]

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But it's give you a pretty good idea year-to-date so far at EUR 60 million and we said over EUR 100 million for full year. You can do the math.

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Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [111]

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So...

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [112]

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And then I gave you the EUR 15 million for Q1.

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Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [113]

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Yes. So you're saying that you got more of an impact in Q2 than you'll necessarily get in Q3 or Q4. Is that the...

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [114]

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Well, but we are saying you cannot multiply EUR 45 million by 4 to come to annual or total. It's a bit fluctuating on volumes and activities underlying. [So that EUR 550 million per kind] is for full year.

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Operator [115]

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Your final question comes from the line of Cole Hathorn at Jefferies.

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Cole Hathorn, Jefferies LLC, Research Division - Equity Associate [116]

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Could you just remind us when your liquid packaging board contracts are up for price renewal? And now that wood prices are starting to stabilize, do you feel like you're in a better position to be able to pass through the full higher wood prices?

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [117]

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So they are rolling. But the one we have been talking are the big one, our biggest client, and that is unlike our main competitor who got it by the 1st of January 2019. We get it in the first week of January 2020. But that's the big one. And then we have smaller ones on the side and so forth, but it is more towards the end of this year and beginning of next year.

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Cole Hathorn, Jefferies LLC, Research Division - Equity Associate [118]

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So I mean does that put you in a better position? Because now your customer can see the wood prices have gone up, you've got greater evidence to say your costs are higher.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [119]

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We are working as good as we can on it, and they are professional buyers. So it's going to be a very interesting discussion.

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Cole Hathorn, Jefferies LLC, Research Division - Equity Associate [120]

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Sure. And then just on your board business in China, are you seeing any shift in production or any customers moving their production facilities out of China into the regional space? Or do you have any color or commentary you can provide on that?

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [121]

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No. Not really. And it's not that easy to move because when you move, you're talking mega hundred millions of euros.

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Operator [122]

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There are no further questions.

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Ulla Paajanen, Stora Enso Oyj - Senior VP & Head of IR [123]

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Okay. Thank you. So thank you for everybody joining us today for this Q2 call, and let's talk again in October.

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Karl-Henrik Sundström, Stora Enso Oyj - CEO [124]

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Thank you very much for joining this call. And as a reminder, I just want to make sure that we are focusing on protecting our cash and our profit by increasing the profit protection program. We have had 8 quarters of double-digit EBIT margin, and we have also concluded a very, very important investment in Bergvik Skog. Thank you.

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Seppo Parvi, Stora Enso Oyj - CFO, Deputy CEO & Country Manager of Finland [125]

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Thank you.

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Operator [126]

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That does conclude the conference for today. Thank you for participating. You may all disconnect.