UPM-Kymmene Corporation (OTC:UPMKF) Q4 2015 Earnings Conference Call February 2, 2016 6:15 AM ET
Jussi Pesonen - President and Chief Executive Officer
Tapio Korpeinen - Chief Financial Officer and Executive Vice President
Mikael Jåfs - Kepler Cheuvreux
Antti Koskivuori - Danske Bank
Mikael Doepel - Handelsbanken Capital Markets
Harri Taittonen - Nordea
Lars Kjellberg - Credit Suisse
Linus Larsson - SEB Enskilda Equities
Rebecca Clements - BlueMountain Capital
Ladies and gentlemen, welcome to UPM’s Fourth Quarter 2015 result webcast. My name is Jussi Pesonen. I am the CEO of UPM. And I’m here with Tapio Korpeinen, our CFO.
Let’s then get started at the Page #2. 2015 was a good year for UPM. We improved our profitability. Our growth projects proceeded well and started to contribute to earnings during the fourth quarter. Strong cash flow drove our net debt to down to €2.1 billion level.
Fourth quarter was a strong end to a good year. Two main factors supported our performance. First, our profit improvement program exceeded its target by 10%, reaching annualized cost reduction impact of €165 million. And then, second, the growth projects started to contribute to our earnings during quarter four.
The start-up of the expanded Kymi pulp mill was a success. At the same time, our Biofuels business continued ramp up and reached operating profit breakeven level by the end of the year in less than 12 months from the start-up.
Our fourth quarter EBITDA increased by 9% and reached its highest level in nearly five years, reflecting the good performance in 2015 as we - as well as confidence in our outlook. The Board of Directors has today proposed a 7% increase in dividend from €0.70 to €0.75.
Page 3 summarizes our financial KPIs. Our fourth quarter top-line grew by 2% year-on-year. Our sales decreased 4% in Paper ENA, whereas sales in the other business areas, combined, grew by 9%.
As I already mentioned, UPM’s EBITDA grew by €29 million or 9% to €363 million. Operating profit was €5 million lower than that of last year due to less favorable fair value change of forest and unrealized cash flow and commodity hedges. The combined impact of these fair value changes was €6 million negative in fourth quarter 2015; whereas, it was €28 million positive in quarter four last year.
Excluding these items, the operating profit has improved in line with the EBITDA. Despite the fair value change items, our pretax profits and EPS increased from comparison period.
Page 4 shows the progress of our profit improvement program. By the end of the year, the program had reached an annualized cost reduction of €165 million. We exceeded the target savings both in the fixed side and the variable side.
Continuous improvement in cost competitiveness is one of the key focus areas in our strategy. Our business areas are targeting to top performance in the relevant markets and the cost competitiveness is one of the key enabler to perform.
We will continue our measures to reduce variable fixed cost also in 2016. Even if we have no populist saving program externally. Now, I would like to hand over to Tapio for some more further analyses of our results. Tapio, please.
Thank you, Jussi. I’ll continue by going through EBITDA development by earnings driver which is shown here. The impact from prices, volumes and cost items are shown here on constant currency basis, and the net impact from currencies including hedging is shown as a separate component.
Compared with the fourth quarter in the previous year, we still had headwind from sales prices, especially from publication paper prices in Europe. All in all, changes in sales prices decreased our EBITDA by about €70 million.
We were able to more than offset this headwind though with cost reductions. Variable costs were €55 million lower and fixed costs €17 million lower than in the comparison period last year. Clear majority of these cost reductions were attributable to the successful profit improvement program.
Changes in currencies had a €29 million positive impact on our EBITDA after hedges. In the fourth quarter 2015, the realized currency hedges decreased UPM’s EBITDA by €24 million.
Looking at the business areas on the right hand side, all businesses achieved cost savings. Biorefining and Raflatac also began to show some contribution from their growth projects to the bottom-line. The positive currency impact mainly supported Biorefining, whereas the €24 million negative impact from currency hedges affected Paper ENA and Paper Asia business areas.
The following page shows the quarterly operating profit of the six business areas. In Biorefining, the fourth quarter operating profit increased from the previous quarter, mainly driven by the successful ramp up of the Kymi pulp mill and continued ramp up in the Biofuels business. You may also recall that we had a 20-day maintenance shutdown in the Fray Bentos pulp mill in Uruguay in the fourth quarter.
In Energy, we continue to enjoy good hydropower volumes and successful hydropower optimization in the volatile electricity markets. In the fourth quarter, our costs were especially low due to favorable cost development in the part-owned companies.
Raflatac continued on a strong track. During the second half of the year, Raflatac benefited from its well-timed growth projects, especially in Europe. In Paper Asia, our performance was fairly stable compared to the third quarter. The U.S. anti-dumping duties had a negative impact on the Asian fine paper markets during the second half of the year, increasing regional supply.
Our performance was supported by our cost reductions, while the negative impact from currency hedges decreased slightly. On the positive side, the new specialty paper machine at our Changshu mill in China started well in December, and is expected to gradually support Paper Asia’s earnings in the coming quarters.
Paper ENA achieved its best quarter in 2015, largely due to variable and fixed cost reductions. Currency hedges continued to have a negative impact, although slightly less than in the third quarter. And finally, plywood continued its solid performance in the fourth quarter of 2015.
This Page 7 summarizes the business area performance compared with our long-term return targets. In 2015, Plywood, Biorefining and Energy exceeded their return targets and Raflatac improved nicely coming very close to its targeted return on capital employed of 18%. In 2015, currency hedges decreased UPM’s EBITDA by €114 million. This was almost all affecting Paper ENA and Paper Asia.
Growth projects increased our capital employed in Biorefining and Paper Asia during 2015. As the production is now ramping up, we expect these projects to contribute to our earnings and therefore also to the business area returns in 2016.
This page shows our progress in the main group level financial KPIs: operating profit, return on equity and gearing. And to put it in short, UPM’s performance improved in 2015 along all base measures. Also our cash flow continued to be strong. In 2015, our operating cash flow was €1.185 billion or €2.22 per share. Cash flow was slightly above 5% lower than last year as the comparison period benefited from a larger reduction in working capital.
The cash flow after CapEx was strong enough to drive our net debt to a new record low level of €2.1 billion or 1.55 times EBITDA. Our gearing decreased to 26%.
And now, I’d like to hand it back over to Jussi for some comments on our growth projects.
Thank you, Tapio. By the end of 2015, most of our current growth projects have been completed and we’re ramping up. In 2016, we expect that the projects to contribute to earnings and cash flow.
In Pulp, the debottlenecking projects allow increasing volumes for 2016. The Kymi mill expansion had a very strong start getting near to a full production by the end of the year.
The Fray Bentos mill was down for 20 days in Q4 for maintenance and some minor investments that we - that will enable us to continue ramping up production at the mill this year. The Kaukas mill investment is due to start later 2016.
In our Biofuels business, we reached operating profit breakeven by the end of this year, the first operating year as well. This was in my view, a fair achievement in a totally new business based on new technology. This gives a good starting point for continuing ramp up for 2016. The specialty paper machine at our Changshu mill started well in December. By the end of January, it had achieved targeted high quality of the product in its main product areas, both in the label business and then in fine business.
This gives us a good starting point to continue ramping up the production during 2016. Even though smaller investments, the expansions in Raflatac and plywood will enable the businesses to continue growing in the key product segments and geographic areas in a cost competitive way.
Page 12 shows us CapEx. In 2015, our CapEx totaled almost €500 million, €486 million. And in 2016, we expect our CapEx to come down to a level of €350 million. Notable in this picture is as well our maintenance CapEx, which is this yellow part of the bar. And you can see that once again, it’s stepping down about €50 million, which means that once again the efficiency of the company is improving.
Ladies and gentlemen, now going to talk about the outlook. UPM’s profitability improved in 2015 and the improvement is expected to continue in 2016. Like already described, UPM profitability in 2016 is underpinned by the expected earnings contribution from the growth projects, as well as the continued cost efficiency measures.
If currency stays at the same level as in the beginning of the year, the rolling over currency hedges is also expected to be positive for UPM’s earnings. These positive drivers give us enough confidence to guide for improved profitability in 2016 compared with 2015. Even in the somewhat uncertain global environment.
But nevertheless, looking for the next page, the Board of Directors dividend proposal also reflects our confidence in UPM’s earnings this year and cash flow as well. The Board has proposed an increased dividend of €0.75 per share. This represents 34% of the 2015 operating cash flow per share.
And finally, ladies and gentlemen, I would like to summarize our presentation. UPM improved its profitability in 2015. Our profit improvement program exceeded its targets both in variable and in fixed cost savings. We achieved the first earnings contribution from the growth projects in the fourth quarter 2015.
Our cash flow continue to be strong and driving our net debt down to record low level. In 2016, we expect further earnings contribution from the growth projects. We will continue also our measures to improve our cost competitiveness.
UPM will start its year 2016 with a strong balance sheet. We expect our profitability to continue improving and our CapEx is coming down to normal €350 million level. I am very confident about our prospects for the year 2016.
Ladies and gentlemen, this was the end of the prepared part of the presentation. Now, we are ready to answer your questions. Dear operator, I hand over to you for the Q&A session. Thank you.
Thank you. [Operator Instructions] There will be a brief pause whilst questions are being registered.
And the first question comes from the line of Mikael Jåfs from Kepler Cheuvreux. Please go ahead. Your line is now open.
Yes, hello. Good day, everybody. I have three questions. The first one is around your good cash flow and your continued strengthening of the balance sheet. Could you please talk a little bit about how strong balance sheet you perceive that you need? That would be the first question.
The second question is that some time ago at your recent Capital Markets Day, you discussed potential portfolio change in the company. Could you please update us a little bit on that, how should we think around such a potential change?
And then, the third question would be around the European paper market. What kind of development do you see for the beginning of the year? Thank you.
There were big questions, and obviously, we have limited time. But anyway, cash flow is strong and that has been our aim for years. And I’m happy that it has been very strong and our balance sheet is getting stronger. This kind of balance sheet gives us a lot of opportunities and as well confidence for the future. And if there will be any kind of global economy volatility, we are prepared for that.
So basically, the balance sheet is not my first worry. And if it’s getting stronger that gives us an opportunity to make good investments and wealthy investments, at the same time paying solid good dividend and giving us kind of opportunities when it comes to portfolio changes and implementing our strategy.
Portfolio changes, we have always been pretty open, saying that, the businesses that are making - and producing those targets that we have announced publicly, are tend to grow. And like you can see from the portfolio that we have been able to really improve our profitability in almost all businesses year in, year out.
Portfolio changes are not the kind of first priority, but when and if there will be opportunities we have a good solid balance sheet to support that as well.
And then, when it comes to European paper, I think that start of the year will be somewhat more positive than many other years. We will see some price increases, especially coated mechanicals, LWC, we will see price increase, as well as in newsprint. Obviously, we are still in the middle of the negotiations, but the year will start with somewhat more positive view.
Perfect. Many thanks.
And the next question comes from the line of Antti Koskivuori from Danske Bank. Please go ahead. Your line is now open.
Yes, thank you. Few questions from my side. Firstly, on your energy business, the Q4 performance was really good on a challenging market. And, I guess, especially that was due to low cost or rather a low cost levels.
Could you give us a guidance; is this something - are there positive one-offs on the cost side or should we expect this cost level to continue into the 2016? That’s my first question on the Energy.
And secondly, on the balance sheet value of your standalone energy business, I see you have down - write it down by almost €330 million now in Q4. Could you confirm is these due to your lower view of electricity price as going forward? And how - what kind of development do you expect on the prices from this point onwards? Basically, are you expecting recovery or is your modeling based on the current relatively weak forward curve? Thank you.
Maybe, I’ll take those questions. First of all, on the Energy business, like indicated, we did, let’s say, from operative point we have a good quarter and that we did have good hydro and then actually had quite good sort of value creation or optimization, being able to take advantage of volatility in the physical electricity market.
Typically, towards the end of the year we do have some, let’s say, cost items coming from the associated companies that cost some, let’s say, cost some - cost factors. Into the fourth quarter this year, they were somewhat higher than usual. But in any case, they were coming also from, let’s say, measures that have been taken to improve cost efficiency also in our associated companies, as you probably have seen some of the measures also in the public news.
But in any case, let’s say somewhat higher kind of an adjustment there in the fourth quarter than we have seen previously. Then on your question on the values for the balance sheet, we do have a price forecast of our own for the long-term. Our sort of short-term forecast this, let’s say, not too much different from what the forward curves show even if we don’t, obviously, just mechanistically take the forward curves as such.
But in any case, I would say that kind of the recent factors that have been also affecting the forward curves downwards, they have kind of reflected into our pricing forecast model as well, and that is the main reason for this change in the balance sheet values, let’s say, taking down our forecast for the short-term here as happened in the forward market.
Yes. Then, one follow-up question, if I may, you’re now taking in your new guidance for 2016, you’ve taken away part that I guess worst for last year, stating that lower Polar [ph] prices will impact negatively on your energy business. Is this statement kind of that you see stable environment or stable earnings in your Energy business going forward?
Not exactly. Again, as you know, we have been hedging during, let’s say, several years - three years backwards and the forward curves have been coming down during that time. So let’s say, similar to what we saw in the beginning of 2015. Then as these sorts of hedges are rolling over, we will expect to see a drop in the average realized electricity price also in the beginning of this year. And we will see how the sort of hydro volumes and other factors affect the remainder of the year.
But then, as far as the guidance is concerned, overall, as we are obviously also a significant buyer of electricity not only in Finland, but also, let’s say, in Continental Europe, where electricity wholesale prices are low as well. This is in a sense not impacting the UPM result as such, so that we would sort of pick it up in the guidance. Like last year, even considering the fact that, in a sense, the electricity market obviously was negative for our Energy business area, still lower energy prices were a net positive for UPM as a whole.
All right. Thank you very much.
And the next question comes from the line of Mikael Doepel from Handelsbanken Capital Markets. Please go ahead. Your line is now open.
Yes. Hi, good afternoon. First of all, a question on the pulp market, globally, it seems to be some volatility there. We’re seeing Chinese prices down with them. We’re also seeing price hike announcements for Europe for certain grades. So my first question would be what kind of pulp market do you see out there and what’s your expectation for the first half? Thank you.
First of all, if I take - Tapio, these are actually, if we just look at our kind of fundamentals for the pulp business, the pulp demand or pulp deliveries imports to China grew end of November by 1 million tonne. So we are talking about more than 6% increase.
So once again, we are seeing the year of 1 million plus more demand in China, and the year 2015 was the same as year before and year after - the year before that as well. So basically, the demand has been pretty solid, even if there has been some concerns of the situation. Then there has been some concerns during this month as well about supply - increased supply but those calculations to be carried down taken in consideration that there will be a net closures as well in that area.
Long term, it is absolutely clear that the graphic paper’s demand is going down, especially North America and in Europe, i.e., there will be less recycled fiber available, i.e., meaning - thus meaning that there will be demand for actually chemical pulp promoting that as well.
Talking about high chine [ph] packaging tissue products where the primary use of pulp is positive as well, if we take a long-term views. But when looking also short term, and UPM short term this year, as you know, that we are not more than 500,000 tonnes long in pulp making, because of the new project that started up in China. We are relatively okay, and doesn’t - do not see the problem when it comes to full UPM profits.
Okay. That’s clear. Then just a question on the FX and that hedges that you’re mentioning rolling over; now, I guess in 2015, the hedging losses were about €114 million, if I calculated correctly. Just at least theoretically, is this the delta we should assume going into 2016, assuming that the spot rates remain?
Well, let’s say, theoretically, yes, of course, let’s say we are hedging on a rolling basis. So in that sense, it’s not a static picture. But let’s say, the big swings in currency, we did see during the previous year or - and let’s say, the preceding years, so in that sense, those big impacts as far as hedging result is concerned are coming from that. And again, let’s say, absent such big swings happening again, we would not expect that sort of result for this year.
Okay, thanks. And just finally, you’re mentioning your growth project contributing to earnings this year. Would you currently quantify a bit, what kind of a magnitude do you expect to see there? I guess, you have the Biofuels business, which was, I would assume, loss making last year. That’s probably going to also going to give some sort of delta than you have the pulp mill in Kymi, adding volumes and the paper mill in China starting up. If you could, could you give some more guidance on that, how we should think about that? Thanks.
We don’t have, let’s say, guidance on how much the impact for this year would be. But as you remember, the overall contribution from this growth investments in terms of EBITDA contribution is €200 million, when they would be sort of all fully up and running, which obviously won’t be the case for the full year, this year, but in any case, partly that will be coming to this year’s result already.
We have opportunity to produce more. Actually in the pulp business, it is - more or less volumes are growing 200,000 tonnes, and of course, the Changshu paper mill will another improvement and increase in volume. So basically, that kind of things are happening now.
Good. Thank you very much.
And the next question comes from the line of Harri Taittonen from Nordea. Please go ahead. Your line is now open.
Thank you. Yes, good afternoon. Sort of continuing a bit on the previous question, I’m concentrating on the volume potential in Biorefining overall. I mean, do you sort of give any indication on where you are in the volume ramp up in the Lappeenranta renewable diesel project?
And also you indicated that Kymi was almost running at full at year end, but is this sort of - if you look at the quarterly volume for Q4, did you see sort of how much can you sort of see volume upside still from that ramp up; so basically, Kymi and Lappeenranta, where you are in the ramp-up curve of those projects?
Kymi has been pretty good by the end of the year, what we were expecting that to be in the proposal of the investment decision or in the investment decision we are already close to on that level by the end of the year, and maybe having some upside potential still on that area.
When we are looking biodiesel and the biorefinery in Lappeenranta, obviously, we are witnessing now, its sixth consecutive months that we have been improving the profitability. And also production has been coming up. It has been very good. We have been thus when the production is starting to be on a higher level, the cost will start to come down as well, and therefore, the profitability has now, as we stated, improved.
And also the market prices have been developing quite on a okay level.
Yes, yes. And but you’re not willing to say, as you have sort of indicated, that you have EBIT breakeven, what sort of capacity utilization rates you are capable of doing that.
That, we don’t want to do. We are in the competition as well as the same time.
Exactly. Yes. The other question is on Paper Asia. I mean, the volumes were slightly down compared - the deliveries overall compared to the third quarter. And do you put it down to the start up or is there sort of market weakness, which is sort of affecting deliveries there?
Also related to that, it looks like the pricing has been on average very flat, but if you could sort of say what’s happening in the release liner prices in Europe and then on the other hand the fine paper pricing in Asia, because those are the two main components, I guess, for the business area pricing?
Release liner and when talking about the specialty papers, there we have do - do have the positive outlook for the prices as well. Whereas in Asia, there is heavy pressure now, especially because of the countervailing duty that is now actually causing a more or less oversupply in the Asia market. At this point of time, there is a pressure for prices.
And of course, we are having an excellent position being inland China and having good, strong customer relations there. But that’s a mainly kind of the issue globally, release liner is having a good growth and also the pricing is positive. And then when it comes to fine papers, Asia is having a challenge.
Okay. Thank you very much.
And the next question comes from the line of Lars Kjellberg from Credit Suisse. Please go ahead. Your line is open.
Thank you. Just come back to the growth projects. You have, of course, the €200 million EBITDA target. And you alluded to that that’s kind of what you’re still aiming for. Has anything changed in the sort of compensation allowance [ph], given the tremendous volatility we’ve seen on the energy side, and of course, the - what seems to be some economic issues in China, and obviously, pulp volatility?
Sticking with it, are you comfortable with that, just wanted to confirm that and do you see any change within that €200 million mix?
I would say not in a big way. Obviously, as far as pulp is concerned there are many moving parts there on one hand. There has been, let’s say, some moderation on the pulp prices in U.S. dollars terms. But on the other hand, at the same time, of course, from the time that these investment decisions were made, competitiveness from currency reasons amongst other has improved at our mills.
And let’s say, the investments have been implemented, let’s say, well within or ahead of budget and schedule. So in that sense, I think the sort of results and the outlook is quite good there.
As we have discussed earlier, the biorefining business area, the biofuel project was somewhat delayed. But again, I would say, that now as we have been sort of troubleshooting and going through the ramp up curve, and let’s say, getting to the solid ground already in the fourth quarter as far as kind of a breakeven level operating profit is concerned.
The kind of progress is good. And again, just to point out that even if the kind of crude oil prices for conventional oil markets are down in the world, there is no direct link to the - at vast biodiesel or biofuel market prices actually. Let’s say, as Jussi pointed out here, they have been moving to the other direction at the moment. So in that sense also that kind of a part of the equation is good.
And then finally, this Changshu paper machine is starting up. And again it’s, let’s say, well in schedule and within budget; I would say, particularly for the label paper market and customers, as it’s shown also in the development in our labeling material business in Raflatac. I think the sort of market development has been very positive.
There is, let’s say, for fine paper this competitive situation that Jussi explained in the short-term affecting the fine paper market locally in China. But again, let’s say, given some time and particularly for the label paper part, which is really the main strategy for the paper machine, the outlook I think is very much in line with what we expected.
So, I would say in the big picture, no major changes as such.
Very good. If you just on quickly the paper again, appreciating the price increases coming through on some of the publication paper grades in Europe, can you comment a bit what you are seeing here on the North American side on the pricing front and also the [Persona] filing for Chapter 11. What sort of impact, if any, you’re seeing in your business? And do you see price-changes overseas has a meaningful offset to European paper price increases?
North America is a bit different story than Europe at this point of time. There has been more challenges when it comes to publication paper prices. I have not seen anything when it comes to our competition filing Chapter 11. There has been no kind of changes on that operating environment. Maybe these other comments of - what I have in my mind at this point.
Okay. And then finally then, I guess, when you’re talking about continuation of cost improvements, do you see that - without any sort of new programs, I guess, do you see that as pro-deal setting inflationary, i.e., that you keep your cost savings or do you see something that actually can exceed the underlying cost inflation relating to labor and as such?
I would say, let’s say, if you look at the past two years, the profit improvement programs that we have, obviously, we have had fixed cost savings coming from capacity restructuring, which is kind of, let’s say, its own sort of topic or category there. But then, otherwise we have had, let’s say, of course, continued streamlining on the fixed cost side as well. But particularly as far as variable cost, we had now in the 2015 program about €100 million savings, and in the previous year’s program €120 million savings in variable cost.
Then that is variable cost savings again coming from our own actions from our, let’s say, improved efficiency as far as variable costs are concerned.
We have had tailwind from - on the variable cost side from the market. In addition to that, during the previous couple of years, and I would say that this year still in that sense, the overall cost environment is positive for us on the variable cost side. So we would not expect any sort of significant headwinds from that; probably rather the opposite still, given where energy prices and so on are at the moment.
And these actions and programs that we have, putting motion as far as projects to improve variable cost, they continue. We have actions already in the pipeline going into implementation. And therefore, we are, let’s say, targeting similar scale of improvement, as we have had on the variable cost side during the past couple of years.
And the labor cost inflation continues, I guess at a moderate - relatively moderate pace.
That’s correct, yes.
That is absolutely correct, yes.
Okay. So net-net, do you expect your cost to come down net of inflation incrementally in 2016 versus 2015?
Very good. Thank you.
And the next question comes from the line of Linus Larsson from SEB. Please go ahead. Your line is now open.
Thank you very much, and good day to everyone. A couple of follow-ups on Paper Asia and just to understand the phasing of this PM-3M [ph] and the startup that has already taken place. Could you just talk a bit about, as from when you’re charging fixed costs depreciation, personnel, et cetera; and what that applies for, let’s say, Q1 in terms of operating profit, so that we don’t miss anything here in the near-term basis?
Well, let’s say, obviously, charging depreciation starts when we are getting into operations, which happened during the fourth quarter. And obviously, there have been some additional fixed costs already before that, because of just building the organization as such for the mill. So that has been impacting, let’s say, last year and now, obviously, we have a running operation, there where we are starting to or getting revenue against those costs and depreciation.
All right, right. So on a net basis, then is it there sequential negative, if you look at operating profit contribution sequentially from this new operation in Q1?
We don’t give any guidance on that.
Okay. And then, just again coming back to an earlier question, regarding Paper Asia, the countervailing duties that you commented upon, do you– are you saying that this is an increasing price pressure that is taking place that we haven’t yet seen the impact that you’re expecting on Asian fine paper prices?
That has been visible already.
Okay. So you don’t expect deterioration from here?
That we do not guide.
Okay, okay, okay. Good, good. May I just also on the Biofuels side, you’re at breakeven in Lappeenranta; could you just talk a bit about you’re thinking going forward at what stage, would you be ready to potentially take a next step in these - within this area, what would you like to see before you are ready to do that?
First of all, now, we are pretty much actually still ramping up in the middle of ramping it up, but obviously there is a lot of consideration what then could be the next steps as well. But today, we are concentrating on getting the ramp up where we would like to have it. Like I said, that last six consecutive months it has been improving. And thus, like stated, by the end of the year we were in the breakeven level. And obviously, there is a lot of kind of consideration of the what-next.
Okay. Thank you.
[Operator Instructions] We have a question from the line of Rebecca Clements from BlueMountain Capital. Please go ahead. Your line is now open.
Hi, guys. You mentioned that, you were still in discussions on, I believe, publication prices for 2016. When do you expect those to be finalized?
Some of the deals have been already done and quite majority of the deals have been done. But like I said, that typically first quarter - early first quarter, we are finalizing those and then we are commenting those by the end of the quarter.
Okay. But you try to say that those discussions are going to be better than last year, given how the press prices were in 2015?
No, the positive outlook, it is like I said that for newsprint and for the LWC especially, but also that we don’t see any prices to decline.
Okay And do you think that there needs to be more capacity take-outs in 2016 or is that probably more of 2017 event from an industry perspective?
Right, I guess, that it’s everlasting task and everlasting requirement that if the demand goes down by kind of trend decline is 5%. We need to adjust the capacity year-in, year-out.
Okay. And is that something that you are willing to do internally and take actions yourselves or do you think that you’re comfortable with where you are in the cost curve?
That has been asked every year, and I appreciate the restructuring that UPM has done. UPM will take capacity down when there is a need for that, and when it improves our own cost efficiency and our profitability. That is our way of dealing with this factor that we will continue the way that we have been doing last six, seven years. And we will take down capacity when there’s a need for that.
Okay. And then, referring back to your comment about possible portfolio changes, and it seems like perhaps - so it’s my perception, you’re emphasizing the fact you liked the flexibility had on your balance sheet, et cetera; what areas would you expect to see possible portfolio changes either adding - you being acquisitive and/or potentially selling or is that that too specific of a question?
That is exactly so.
Okay. Well, I had to at least ask. Okay, thank you.
And the next question comes from the line of Kevin Helghat [ph] from Goldman Sachs. Please go ahead. Your line is now open.
Hi, guys. I was just wondering, if you would add some details to your expectations of pulp prices in your guidance. Are you just looking at pulp - flat pulp prices and not taking any view or are you having a view in the guidance?
The view is in the guidance.
But are you expecting flat pulp prices or?
Well, let’s say, so that obviously, there may be some impact from the new capacity coming. We don’t see a major kind of cycle now in the short-term happening, but of course, pulp prices always move. As Jussi pointed out, as we do have also the consuming side for the pulp business, then we don’t expect actually in a sense a very big risk from the pulp side as far as our guidance is concerned.
I mean, it’s very important to talk about also the net supply increase, which is taking in consideration closures.
Yes, okay. Thank you.
As there are no further questions registered, I hand the call back to you, sir.
Ladies and gentlemen, thank you for joining us today. And have a very good afternoon. Thank you. Bye now.
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