UPM-Kymmene's (UPMKF) CEO Jussi Pesonen on Q1 2016 Results - Earnings Call Transcript

| About: UPM-Kymmene Corp. (UPMKF)

UPM-Kymmene Corp. (OTC:UPMKF) Q1 2016 Earnings Conference Call April 26, 2016 6:15 AM ET

Executives

Jussi Pesonen - President and CEO

Tapio Korpeinen - EVP and CFO

Analysts

Mikael Jåfs - Kepler Cheuvreux

Lars Kjellberg - Credit Suisse

Linus Larsson - SEB

Harri Taittonen - Nordea

Rebecca Clements - BlueMountain Capital

Tom Burlton - Bank of America Merrill Lynch

Jussi Pesonen

Good afternoon, ladies and gentlemen, welcome to UPM’s First Quarter 2016 Result Webcast. My name is Jussi Pesonen, I am the CEO of UPM and I am here with Tapio Korpeinen, our CFO.

Tapio Korpeinen

Good afternoon, everyone.

Jussi Pesonen

Ladies and gentlemen, let’s go directly to the result on the page two. We achieved a strong start for this year 2016. In Q1 we had three positive items working for us. First, we had a clean quarter with good level of operational efficiency. We had no significant maintenance stops or production issues during the quarter and of course, I would always take it up in this moment that our business model with the six business system is actually delivering nicely as it was doing this quarter as well.

Secondly, our variable and fixed cost decreased significantly from last year. As Tapio will later show, our earnings increased mainly because of the cost efficiency measures we implemented during the last year and in the first months of this year. And thirdly, market demand continued to develop favorably in most of our businesses and we were able to respond to demand growth with our good growth projects in Biorefining, Paper Asia and Raflatac.

As a result, our EBITDA grew 24% and our comparable EBIT by 34% from last year both figures increased from Q4 as well. Ladies and gentlemen, our cash flow was particularly strong for the first quarter and finally, our net debt continued to decrease reaching EUR1.873 billion by the end of the quarter, more than EUR0.5 billion less than a year ago.

Then on page three let’s talk about the markets and where we see the growing demand, stable demand and declining demand. As you remember, there was some economic uncertainty in the beginning of the year and especially related to China and other emerging markets. As it turns out, most of our businesses were enjoying favorable demand development in Q1. Also in Asia, demand was robust for our products and especially since the Chinese New Year.

Starting with pulp, strong demand continued across the major regions. Growth was again strongest in Asia and our debottlenecking projects enabled us to increase our pulp deliveries by 5% from last year. In Raflatac, demand grew for self-adhesive label materials picked up in Asia and after a period of slower growth last year that we experienced in Asia.

In Paper Asia, demand growth continued for label and release materials in all main markets as well as for high quality office papers in China. Our new specialty paper machine in Changshu in China was ramping up its production during the quarter and Paper Asia deliveries grew by 9% from that of last year. Demand was mostly favorably also in Europe with growing demand for pulp and advanced biofuels and labeling materials and plywood. Structural decline continues as we all know for graphic papers in Europe and North America.

But now, ladies and gentlemen, I will hand over to Tapio to have more analysis on our result. Tapio, please.

Tapio Korpeinen

Thank you, Jussi. Here we have our usual waterfall chart showing the EBITDA development by earnings driver and by business area, the right hand side. And in the first quarter 2016, EBITDA was EUR78 million or 24% higher than in the first quarter of last year. And as you can see on the left-hand side, our earnings growth came mainly from significantly lower variable and fixed costs. About 50% of the variable cost savings and all of the fixed cost savings you see in the chart come from the cost efficiency measures and actions we implemented last year and so far this year.

In the first quarter, we were operating in a deflationary business environment and other 50% of the variable costs reduction shown in the chart came from lower market prices for various raw materials and production inputs. At the same time, sales prices decreased slightly from last year in most of our Europeans businesses. All in all, as you can see in the chart, sort of the orange block is about half of the variable cost piece of change, so all in all this business environment on one hand lower sales prices, but then on the other hand lower raw material prices was neutral to European’s earnings in the first quarter and our own cost actions then were improving the results.

Deliveries had a minor positive impact on EBIT DA as the growth projects compensated for lower paper deliveries in the European, North American paper business. Gross impact of changes in currencies in the first quarter 2016 compared to last year’s first quarter was neutral and as a result, also the realized currency hedges had little impact in this year's first quarter. But then as you may recall, last year currency hedges had a EUR25 million negative impact in the first quarter. So what you see in this waterfall chart is the absence of that negative impact in the comparison to last year.

Costs decreased in all businesses, but the impact was particularly visible in Paper ENA’s improved profitability. On top of improved cost efficiency, Biorefining, Raflatac and Paper Asia also benefited from increased delivery volumes as the growth projects were ramping up. On the other hand, earnings decreased in Energy and Plywood.

And this following page then shows the comparable EBIT by business area. In Biorefining, our average pulp price in the first quarter was about 1% lower than last year and 5% lower than sequentially in the fourth quarter last year. Despite this comparable, EBIT increased from both comparison periods. This shows the impact of improved cost efficiency as well as the impact of higher pulp and biofuel deliveries.

Of course in Biorefining, the first quarter was a clean quarter with no maintenance stops. Also the full impact of the decreased pulp prices was not yet all visible in the first quarter results. Having said that, the flip side of the coin is true for the paper businesses in terms of the impact on the cost side. But still coming back to Biorefining, it's clear that our competitiveness has improved and our growth projects are contributing to the bottom line.

In the Energy business, you can see the impact of some 14% lower electricity prices. Hydropower volume was still on a good level and we were quite successful in the optimization of our hydropower generation.

Raflatac continued its solid track of improving EBIT. Our own cost efficiency measures and a favorable product mix resulted in higher sales margins. And at the same time our delivery volumes continued to grow in all main markets.

In Paper Asia, EBIT increased due to lower variable cost and increased deliveries and at the same time currency hedges were no longer burdening the Paper Asia results. And in Paper ENA, variable and fixed cost decreased significantly because of the cost efficiency measures and because of the 800,000 tonnes of capacity closures that we implemented during 2015. In the first quarter our deliveries for Paper ENA were some 2% lower, but our capacity was 8% lower than last year. Also the currency hedges were no longer burdening Paper ENA results.

We were able to increase paper prices slightly in the euro area in the first quarter, but this impact was offset by less favorable development in other markets as translated then into euro. All-in-all, our average paper price in the first quarter in euro terms remained on the same level as in the fourth quarter.

In Biorefining, if Biorefining was not yet showings the full impact of the decreased pulp prices as I mentioned already, neither were the two paper businesses yet seeing the full cost benefits of lower pulp prices. Finally, plywood continued on a solid earnings track even though it was not able to repeat the record EBIT of the first quarter of 2015.

Then looking at our cash flow, operating cash flow was very strong in the first quarter reaching EUR341 million and as you know, typically UPM’s working capital increases seasonally during the first half of the year and this seasonal increase is released during the second half of the year. So, also in the first quarter of 2016 working capital increased, but this time only EUR14 million.

In the latest 12 months, our operating cash flow totaled EUR1.4 billion or EUR2.66 per share. The strong cash flow continued to drive our net debt down in the first quarter of this year. So by the end of the quarter, our net debt reached a new record low of EUR1,873 million which is EUR546 million less than in the end of last year. Our net debt to EBITDA decreased 1.3 times and gearing went down to 23%.

And at this time, I will hand it over back to Jussi for some comments on our growth projects.

Jussi Pesonen

Thank you Tapio and let’s move on more to the page 8. Page 8 summarizes UPM's current growth projects, projects were clearly contributing to UPM’s earnings in Q1 and they offer further potential as the various ramp ups proceeds into 2016 and beyond. The pulp debottlenecking project have been a successful for us. Going forward there are still some further optimization potential following the three already completed expansions and the project at Kaukas mill is still to be complete after this year. You may recall that the ramp up of our Lappeenranta biorefinery reads operating profit break even in fourth quarter as a result the bio refining business saw earnings improvement year-on-year level in this quarter, quarter one. In Q2, the biorefining is having a scheduled maintenance stop in which we are planning to open some of the bottlenecks of the process and after that maintenance stop we are continuing to ramp up the biorefinery towards full production.

Raflatac has clearly benefited from the expansions we implemented last year in our Polish factory and in China. They enabled Raflatac to continue growing in the cost efficient way. The new specialty paper machine at our Changshu paper mill in China has had a promising start. Now the work continues to full ramp up in production and gradually optimize the production mix and costs. Finally, plywood will take a growth step in the autumn with a perch birch plywood expansion at our Otepää in Estonia. So we will continue our work to realize the full earnings potential of our growth projects. On page 9, we will also continue our cost efficient measures in all of our businesses. In the case of paper ENA, Europe and North America we are ensuring our competitiveness with two new actions. We are closing down the Madison Paper mill in the US in May reducing our SC paper capacity by 195,000 tonnes. But also as you know we have today announced the sale of our Schwedt paper mill and relevant assets in Germany. The transaction price for the sale of that one paper machine is EUR70 million and the new owner likes to convert that mill to a line of production of 450,000 tonnes and fast removing 180,000 tonnes of newsprint capacity from the market.

Let's move to the page 10 where the outlook statement is, our outlook for 2016 is unchanged. We expect our 2016 profitability to improve compared with 2015. The main drivers are listed here and we’re already visible in the first quarter result. Our growth projects are contributing, our cost efficiency measures have been successful with the current currency rate to currency rate seasonal longer burden our earnings like they did last year. Ladies and gentlemen I would like now to summaries our presentation before the Q&A session. We reported a strong Q1 result, our cost efficiency measures and growth projects were contributing to the earnings and our operational efficiency was on a high level with no maintenance stops or production issues, so quarter one was a very kind of clean quarter in that respect. We continue our work to realize the full earnings potential of our growth projects and we continue to take care of our cost competitiveness in the future as well.

This ends the prepared part of the presentation and now we are ready to answer your questions. Dear operator, I hand over to you for the Q&A session. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from Mikael Jåfs from Kepler Cheuvreux. Please go ahead.

Mikael Jåfs

It’s Mikael Jåfs. I have two questions. First of all, congratulations to your very strong cash flow for the quarter. Now if we start to compare your sort of last 12 months cash flow from operations to your net debt that constantly keeps falling. Could you elaborate a little bit about how you will use the strong balance sheet going forward and if there is an optimal net debt to EBITDA ratio that you could discuss with us? And then the second question would be around the pulp market, we see that there is new capacity coming, we also see that prices of especially short fiber pulp has been coming down, what are your views on that market? Those would my questions.

Jussi Pesonen

I’ll take the first question and Tapio talks about the new capacity in the pulp business. Obviously as we have been presenting our focus on how we run UPM, these two pages where you have this water mills system where we are having this model of six businesses and targeting to the top performance and how do we use that money that comes out of these six businesses is attracted dividend, focused investments which will continue and then of course strengthening our balance sheet. And then everything comes when there is a right time for making even bigger stakes. But this is really the focus about we are doing and utilizing the balance sheet when there is a good projects and good opportunities.

Tapio Korpeinen

And perhaps on the pulp, obviously let’s say we have seen if you look at past 12 to 18 months movement in the pulp prices, softwood coming down then now more recently hardwood coming down impacted by let’s say different drivers, currencies, new volumes entering to the market. Of course at the same time as Jussi mentioned in the beginning it’s good remember or good to point out that demand growth has been quite stable or strong in the world market for market pulp. And in that sense the new capacity has found a home in the market pretty well. Now we believe if you look at hardwood pulp where let's say this sort of current capacity expansions are entering to the market, their pulp prices are coming to a level in China where we are starting to hit the sort of cash cost level for the higher cost producers locally and these are not small old mills but actually mills that have been built quite recently then there and some of them based on imported wood. So in that sense we believe that we are sort of perhaps coming to that level where the sort of cash cost are starting to impact the further development of pulp prices and would expect based on that there would be a kind of leveling off. There is the one start-up in [indiscernible] in Brazil this year then we will see when the Indonesian start-up comes so actually the volume hitting the market this year is let’s saying relatively limited compared to the market growth which again obviously will reflect in the future development of pulp prices as well.

Jussi Pesonen

And maybe adding on that that you know we have seen almost year in year out EUR1 million demand growth and at least when I saw the first two months of statistics this year will be no different to that.

Operator

Thank you. The next question comes from Lars Kjellberg from Credit Suisse. Please go ahead.

Lars Kjellberg

A couple of questions from me. You had of course a very good operational quarter. Can you give any sense of the quantum of how we should view the cost base going forward in terms of the paper and the pulp sort of maintenance in the balance of the year, how would that impact the cost in those quarters?

Tapio Korpeinen

Well, I say no quantum to that but again I would say overall if you look at pulp price as I mentioned obviously in terms of sales price for the pulp business or pulp cost for the paper businesses, the change that has happened in the market prices already is not yet fully reflected in the first quarter result as we said it flows through. So we will see that kind of rolling through in the second quarter. And again, let’s say, what is negative in the pulp business will be largely compensated by lower costs in the paper business.

Then when we come to the second half of the year, it’s not the normal pattern in a sense that we have the Fray Bentos shutdown in the fourth quarter. We have Kaukas pulp mill shutdown in the third quarter, so in that sense, it’s the let’s say, similar pattern as we have had in the previous years, sort of business as usual. Perhaps the Kaukas shutdown this year is slightly longer than normal peer maintenance shutdown because we do have the expansion project going on, so some work on that will be done in the shutdown. But I would say still, while it’s longer, it’s not a very material impact on profitability compared to what their normal maintenance shutdowns are.

Lars Kjellberg

Could you give any sense at all in terms of the water fall when you’re talking about the contribution from the growth? And how far away we are from the target to generate EUR200 million in EBITDA?

Jussi Pesonen

Well, it’s still - so as again we sort of referred in the commentary that we did have contribution to the bottom line, but obviously not yet full contribution, we would expect to be in line with kind of original guidance that we have given that by the end of this year, we will be around that sort of EUR200 million additional EBITDA. So in that sense, we do expect let’s say kind of sequential positive impact compared to the first quarter coming from around optimization of the Changshu paper machine of the biofuel plant here in Finland. And also let’s say the investments in Raflatac and pulp business.

Lars Kjellberg

So the around EUR25 million, EUR30 million in Q1 is a better number or -

Jussi Pesonen

We don’t give a number.

Tapio Korpeinen

Be it Pietarsaari, Fray Bentos and of course Kymi pulp mill now fully contributing to that and when it comes to then the Raflatac expansion that is not fully there, but - and as well as Paper Asia and Biorefining and obviously Plywood and the Kaukas are to come.

Lars Kjellberg

Understood. Just two more questions if I may. Did you incur any meaningful startup cost as we ramped up the Changshu mill in the first quarter? And also if you can give us any sense of how the divestiture of Schwedt’s will impact your business? Understand somehow there is going to newsprint continue, question is, under which ownership and how that works. And also the cost benefit or the profit, P&L impact I should say by shutting down Madison Paper Mill?

Jussi Pesonen

Well, I would say first on the startup cost and kind of startup of the third paper machine in Changshu, that happened - the startup happened in the fourth quarter. So in that sense, any kind of extra costs they were in the fall of last year. And then this year of course we have the full fixed cost of the operation - kind of ongoing operation for the third paper machine in the first quarter, but not yet obviously because it is in the ramp up phase kind of the full revenue and optimized sort of mix and so on and so forth. So let’s say that is just a normal kind of a curve than in the first quarter and further into this year. Otherwise with this Schwedt mill what will happen is that now after the transaction as has been communicated when that has been completed then the kind of conversion project or work and everything kind of - to prepare that for the light that starts up the mill. And in the meantime, there is, let’s say, a continuation in the newsprint business for our account and then at the time when the conversion project is done then the sort of the capacity exits from the newsprint market and of course at that time we should optimize our customer and mill capacity so that in a sense we can then benefit from those sort of savings at that time, but that comes later.

As far as medicine is concerned, of course, there we do have some savings coming from the fact that some of the business that we had from medicine can be transferred to our capacity here in Europe, so that will sort of improve and help our operating rates. Otherwise, there will be fixed cost savings as well, but since it’s 50-50 joint venture, they are kind of a contribution in terms of fixed cost savings coming to UPM is there, but it’s let’s say not material.

Lars Kjellberg

And [indiscernible] ownership until you transfer the assets in sometime in 2017?

Jussi Pesonen

Then assets will be transferred sooner than that, but let’s say, there will be some production of newsprint for our account.

Lars Kjellberg

Okay. Understood. Thank you.

Operator

Thank you. The next question comes from Linus Larsson from SEB. Please go ahead.

Linus Larsson

Thank you very much. On your biodiesel operation, you have been running it now for couple of quarters, you have learnt quite a lot I am sure. When would you be ready to make a potential mix position for further investments into biodiesel?

Jussi Pesonen

Obviously, that is correct that we have been able to produce excellent quality of biofuels, advanced biofuels and the production rate has been improving a lot, and like Tapio already commented that we have the maintenance break now where we are debottlenecking as well the assets and the breakeven level during the first quarter is definitely positive. And I will tell how we will actually move on on this business, but obviously pretty positive development in the last couple of quarters.

Linus Larsson

And that potential mixed investment, what’s the main avenue in terms of feedstock? Would that be similar as to Lappeenranta or would be something different?

Jussi Pesonen

Most probably, you don’t even kind of ask me to answer that because of course, it is something that - we have some ideas how to move on. Of course, one option is still utilizing the crude tall oil, but also there are other streams that we consider at this time. And like I said that I will tell when the next phase of that business will come to the decision making phase.

Linus Larsson

On Raflatac, you had a very positive earnings development. At this stage, how much spare capacity do you see in that system following the recent investment?

Jussi Pesonen

Basically today we are not capacity constraint at all. Actually, we have kind of local capacity, but what is important for us is the product mix development. We are actually putting a lot of emphasis to the specialties and some other kind of high added value products. So basically, there is not that kind of limitations at this stage. We have been putting the capacity that you say is meeting the nice growing business globally. Notice, e-commerce is especially benefiting our label materials business.

Linus Larsson

Great. Thank you very much.

Operator

Thank you. The next question comes from Harri Taittonen from Nordea. Please go ahead.

Harri Taittonen

Yes, good afternoon. You mentioned on the call that the pickup in demand in China after the Chinese New Year, could you characterize a bit more, are you seeing the end use sort of demand picking up or is it more like an inventory cycle after sort of destocking related to last year, what are you seeing there?

Jussi Pesonen

Basically when it comes to our product mix, our position in the Asia market, all in all including China, if we had actually kind of some kind of questions around third and fourth quarter of last year, how that will continue and as that was kind of question mark, but especially after the Chinese New Year we have seen pretty good order inflow to the products that we produce in China. And of course, this labeling materials machine is having a good kind of benefit where the self-adhesive label business is growing quite nicely globally. Like I said, this e-commerce is benefiting, especially self-adhesive labels as we all know. Therefore, we have a very good solid order book at this point, and the mill is running with high efficiency.

Harri Taittonen

Great. Regarding that Changshu machine, how long does it take before you reach the ultimate grade mix, of course it never happens 100%, but basically, when you have reached the target qualities?

Jussi Pesonen

That remains to be seen. Of course, our kind of main aim is to actually fill it with all kind of special grades by the end of the period that on the ramp-up, but of course, now, we’re still producing some of the office papers, cut size on that line, but basically our aim is to produce more and more - all kind of specialty grades that are not having a kind of graphic paper demand drivers in Asia as well. It remains to be seen, Harri, I cannot say that how long it takes but as soon as possible and obviously what has been created. Now, we have had very solid good growth in release liner, which is of course going to be our main grade out of that machine.

​Harri Taittonen

Great. Maybe just a final question, just on the working capital, usually increases more in the first quarter and now, it was almost flat. Was there something structural that you can sort of hold on to the gain over the year or how do you see the reasoning for that particular, especially kind of the positive deviation in that line for this quarter?

Jussi Pesonen

I would say nothing unusual. Last year, we had the same discussion that while the working capital change went to the other direction and also then I said that there is a fairly difficult seasonality as it turned out to be for the full year that time as well. So nothing special as such. Just always is little bit different year by year, how the previous year finishes and how the kind of quarter ends, then fall out, but annual pattern is, I’d say, kind of behind there in any case. First half of the year, we build up the working capital and then second half of the year, there is release of cash.

Operator

Thank you. [Operator Instructions] And the next question comes from Rebecca Clements from BlueMountain Capital. Please go ahead.

Rebecca Clements

Hi, guys. A couple of questions. The first one is, just a little bit of a detail point. You have on page 5 of your report that you had 47 million of CapEx in the quarter, but the cash flow statement said 79 million. What’s the difference between those two figures?

Tapio Korpeinen

Well, it’s cash flow basis and then let’s say the kind of occurrence basis is different and particularly when we have big projects this time, for instance the paper machine in Changshu. So then in essence, the cash outflow obviously is driven by the kind of payment schedule and typically then in the end of the project, there are payments that are dependent on basically achieving certain metrics and milestones in the projects. So that’s why there is a difference now - that’s one of the reasons why there is difference now in this quarter, which is as notable as you say.

Rebecca Clements

So is the 350 million of guidance for CapEx for the year, should we be - is that a cash CapEx number or should we be using the 47 million against that or this 79 million against that?

Tapio Korpeinen

Well, let’s say, normally, it’s the same, in essence, because it’s just the timing issue between the cash flow and then actually the sort of investments accrued.

Jussi Pesonen

But 350 is a solid guidance for cash out.

Rebecca Clements

Okay. And just back to Raflatac, the margin in the third quarter was like 11% EBITDA and it was 11.7% in the first quarter, but fourth quarter, it was only 9.9%. Was that drop in the fourth quarter seasonality or mix related?

Tapio Korpeinen

I guess that it’s both. But typically, there is - let’s say, at the end of the year, there is kind of a seasonal sort of small dip in, I’d say, December at the end of the year.

Rebecca Clements

So is it fair to say that if you can keep generally speaking, keep that mix that we should be seeing a double digit margin in Raflatac for second and third quarter?

Tapio Korpeinen

We don’t guide that, but obviously we expect that the business will develop favorably as it has been so far.

Rebecca Clements

Okay. Just back to the Schwedt manufacturing agreement on the Leinfelder contract, are there committed volume purchases for newsprint out of that facility?

Jussi Pesonen

We don’t comment the details on that. The point is that the newsprint business stays with us. It’s not transferred.

Rebecca Clements

Okay. And I would imagine you’ll just run it the way you would have probably always run it for the next few quarters?

Jussi Pesonen

Exactly.

Rebecca Clements

Okay. And one of my questions is already answered. Given the declines in graphic papers, approximately how long do you think it would be before another significant amount of capacity either needs to be announced or come out?

Jussi Pesonen

No. At least we’re doing consistently our work to benefit UPM’s cost basis. We took 800,000 tons last year and now 195,000 through Madison closure and 280,000 tons when the newsprint machine will be converted. So we’re absolutely doing when it is needed for us and as you can see from our paper business result, we were really benefiting on the cost efficiency throughout the actions that we’ve been taking over the last many years.

Rebecca Clements

I know you guys definitely do your share. And then lastly, given the declines in graphic paper and paper in Europe, could you just remind me how many tons you are, as a system, long, short fiber and long fiber pulp?

Jussi Pesonen

I don’t know if Tapio you have the figure, I’ve not even followed that, but is it 0.5 million tons all in all?

Tapio Korpeinen

Yes. Let’s say, we’re - obviously the mix that we have, we have more hardwood than softwood, so kind of where we are long is mostly on the hardwood side.

Rebecca Clements

Okay. And 0.5 million tons.

Tapio Korpeinen

In round figures.

Operator

Thank you. The next question comes from Tom Burlton from Bank of America Merrill Lynch. Please go ahead.

Tom Burlton

Hi, guys. Just a couple of questions from me please. The first one, on the variable cost, for the split that you said, the 50% that was featuring sort of efficiency programs and then the 50% that wasn’t. I was wondering of the 50% that wasn’t related to you, how much of that was non-pulp related? Obviously, you had a benefit from lower pulp prices, but how much was from other input costs?

And then the other question was on your pulp delivery growth within bio, of that, how much was due to your sort of debottlenecking or sort of capacity expansion and how much was simply sort of market related? Thanks.

Jussi Pesonen

If I take actually the pulp deliveries, I guess that we have been - maturities, the debottlenecking activities and we have been able to really have an excellent pulp sales portfolio when it comes to products and markets and therefore, maturity of the increase has been coming from the debottlenecking actions.

Tapio Korpeinen

Yeah. Then if we talk about these input costs, pulp is a factor, but then of course the main or kind of major components other than pulp that have benefited from lower market prices is obviously electricity, which is a similar story as pulp in a sense that, yes, we do see a negative impact on our energy business from lower electricity prices, but then we do see also a cost saving in our power consuming businesses. So that is a significant component. Oil price is also driving savings in logistics, in chemicals and sort of oil based raw materials. So those are, let’s say, the significant components where we have this kind of cost deflation on the variable cost side.

Tom Burlton

Okay. Thanks very much. And if I guess follow up on the energy point actually, just pricing within that business, remember on the Q4 call, you mentioned you had hedges rolling off within that business and you realized prices with for, likely sort of the duration, which we’ve I think seen year-on-year, is it realistic or is it sort of - should we be assuming a similar level of deterioration through the rest of the year or were there still hedges in places perhaps that you’re benefiting from or otherwise in Q1?

Jussi Pesonen

Well, as discussed before, of course we’re kind of trading forward on a kind of a rolling basis. So in that sense, we’ve kind of built up our hedging portfolio overtime and again, let’s say, earlier on, the products that are available are annual products on the forward market. So therefore, you tend to have a kind of a more significant change if any at the beginning of the year. So in that sense, looking at the following quarters, this year that will give you some indication.

Operator

Thank you. There are no further questions at this time. So I hand the conference back to you speakers.

Jussi Pesonen

Thank you and ladies and gentlemen, thank you for your great interest to our Q1 result conference call and have a very nice afternoon. Thank you. Bye now.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!