UPM-Kymmene's (UPMKF) CEO Jussi Pesonen on Q4 2016 Results - Earnings Call Transcript

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UPM-Kymmene Corp. (OTCPK:UPMKF) Q4 2016 Earnings Conference Call January 31, 2017 6:15 AM ET

Executives

Jussi Pesonen - Chief Executive Officer

Tapio Korpeinen - Chief Financial Officer

Analysts

Mikael Jåfs - Kepler Cheuvreux

Antti Koskivuori - Danske Bank

Lars Kjellberg - Credit Suisse

Mikael Doepel - Handelsbanken Capital Markets

Justin Jordan - Jefferies

Linus Larsson - SEB

Andre Vandrini - TPI Europe

Robin Santavirta - Carnegie

Harri Taittonen - Nordea

Martin Melbye - ABG

Mikko Ervasti - DNB Markets

Jussi Pesonen

Ladies and gentlemen, welcome to UPM’s Full Year 2016 Result Webcast. My name is Jussi Pesonen, I am the CEO of the Company. And I am here with our CFO, Tapio Korpeinen.

Tapio Korpeinen

Good afternoon to everyone.

Jussi Pesonen

Not it’s time to look at UPM’s results for the full year of 2016. But before digging into the details, I would like to start with the kind of overall statements for the year.

2016 was of course financially a record year for UPM. The year demonstrated very well the benefits of the transformation that we have been implanting in the recent years. I feel very comfortable with operating model that we have today.

Our business model of six separate business areas is working very well. After the business model change, our growth businesses have been free to grow to compensate to for the smaller top line of the paper business.

All of the businesses have improved their competitiveness and sharpen their commercial strategies. You remember I spent some time out Capital Markets Day last September discussed of the business model. This is one of the sources why UPM was able to perform as it perfumed 2016.

On CMD, we also discussed capital allocation. Our disciplined way of allocating capital is making a difference. When we consider investing on growth, we focus on returns, how good they are in the short term and also longer term as well, how sustainable and defendable are they in longer as well. Why? As a results, our focused growth investments have been made insignificant - have been made a significant contribution to our earnings. At the same time as our dividends have been growth and our balance sheet is stronger than ever before.

We have several continuous improvement programs that have had a significant impact on many important measures, such as variable costs, fixed cost, safety and working capital to name few. In the case of UPM Paper ENA, on top of the improvement programs, we have continuously used also restructuring as a tool it shows in the result and performance of 2016 as well.

Today, UPM is earnings growth oriented capable and financially strong. This is a good position from which we plan to go for the future.

Let’s turn to page for the real financial numbers of the year and compare those to 2015. Our comparable EBIT increased by 25% to EUR1.143 billion. Return on equity increased by 1.4 percentage points to 10.9. Operating cash flow increased by EUR0.5 billion reaching EUR1.686 billion. And of course then through that net debt decreased by almost EUR1 billion during the year, being now EUR1.131 billion.

Next page is showing how our strategy i.e. the new operating model, CapEx efficiency and smart programs as we call all of the cost saving programs throughout the whole company is effecting and impacting to our EBIT.

First out cost efficiency measures continued to strong track, thanks to the continuous variable cost reduction program including all of the businesses not only those that are having most challenging life. We succeeded in reducing variable cost clearly more than what we gave out in sales prices during the year. On a group level, our margins improved.

We continued to reduce also fixed cost, UPM Paper ENA, reduced its fixed cost significantly through capacity closures and other fixed cost measures. The other growing business is succeeding and keeping the fixed cost under good control. And therefore all in all, our fixed costs were decreased by EUR52 million during the year 2016.

Our growth projects contributed significantly to our EBIT as well. Of the first wave of the growth investments all projects are contributing to our earnings. The positive currency component you see here came from rolling over of our currency hedges. In 2016, we simply no longer had any negative impact of the currency hedges that was a burden on 2015.

Page 5 shows our operating cash flow and the net debt. Another improvement program is visible here. We call that smart cash. As we achieved EUR195 million released in working capital during 2016, that program by the way will continue.

Increased EBITDA combined with a release of working capital resulted in a record operating cash flow. As 2016 cash flow after investing activities was around EUR1.4 and we paid EUR400 million of dividend.

Our net debt decreased by nearly a billion, very close to EUR1 billion. And now our net debt was only 0.75 times EBITDA.

Dividend proposal of the board, the board has today proposed the 27% increase in our dividend to EUR0.95 per share. These represent 30% of the 2016 operating cash flow per share. I believe this is more than 25% increase, so is the board’s confidence on UPM’s ability to continue its strong performance also in the future.

Ladies and gentlemen, at this stage, I will hand over to Tapio, and he will talk about the Q4 results and then of course, the renewed financial targets of UPM. Tapio, please.

Tapio Korpeinen

Okay, thank you, Jussi. Looking at the Q4, overall the fourth quarter was a good quarter for us even though operationally it was not as clean as a quarter as compared to the first or third quarter of 2016 as an example. But this was as expected and we discussed this actually already when we discussed the third quarter results.

But then still looking at the fourth quarter EBIT, it increased by 15% from the tough comparison period from one year ago in the fourth quarter. UPM Paper ENA continued to perform strongly showing a clear earnings growth year-on-year. Also UPM Specialty Papers, Raflatac and UPM Plywood improved their earnings as compared to the previous year.

UPM Biorefining and UPM Energy reported clearly lower EBIT than in the fourth quarter of 2015. In both cases, the average sales price was significantly lower than in the comparison period, pulp price 12%, rest in energy 8% lower.

As we discussed already in the previous earnings call three months ago especially Biorefining was impacted by high maintenance activity in the fourth quarter. We had the scheduled annual maintenance shutdown at the Fray Bentos mill in Uruguay, but in addition to that extensive turbine revisions at the Fray Bentos and Kaukas pulp mills. And of course this turbine revision happen only every 7 plus or minus years or so.

In round figures, the impact of maintenance on Biorefining’s Q4 EBIT is around EUR30 million, about double the normal Q4 level.

In UPM Energy, the availability of hydropower decreased clearly from the comparison periods decreasing the electricity deliveries and increasing the average power generation cost.

We had also a relatively active quarter in our forest and plantation operations which was visible in the ERU37 million larger increase in the fair value of biological assets compared to the previous year. In the plantation operations in Uruguay, Q4 is an active planting season resulting in increasing fair value of the plantations. And also in Finland, fair value increased in our finished forests due to a combination of some forest land sales, some lower harvesting and including also a minor valuation adjustment.

On this following page, we see the earnings spreads from fourth quarter 2016 as compared to the previous year Q4 2015. The right hand side of the slide shows the changes in business area EBIT. Paper ENA, Specialty Papers, Raflatac and Plywood improved their earnings while Biorefining and Energy showed lower EBIT.

Combine the business areas generated the same EBIT as in the comparison period. And obviously lower energy prices, lower power prices are negative for our energy business and pulp business, but also a positive in our paper businesses and we have been able to show that benefit in the bottom line of the paper businesses.

The left hand side shows the EBIT change by earnings driver. We had a similar negative impact from sales price in the fourth quarter year-on-year as we have had in the earnings quarters during 2016. In Q4, we compensated for most of this with lower variable costs but not completely. Lower hydropower volume and somewhat lower operational efficiency during maintenance had an impact on our variable cost in Q4.

Our fixed costs were temporarily higher in Q4, partly due to the high maintenance activity as discussed.

Looking at the comparable EBIT charge quarter-by-quarter for the business areas here, I would comment briefly on the sequential changes from Q3 to Q4. In the fourth quarter, we had seasonally higher costs in Biorefining, in Raflatac, Specialty Papers and Paper ENA. Maintenance activity was clearly higher again in Biorefining and seasonally higher in Paper ENA in the fourth quarter as compared to the third quarter.

In Energy, our fourth quarter average sales price increased 8% from the third quarter sequentially but hydropower volumes decreased. And as a result, EBIT increased only slightly.

This Page 10 shows the outlook for 2017. As Jussi showed, our profitability improved significantly in 2016. And we expect our profitability to remain on a good level also in 2017. We expect that the market demand will continue to grow for most of our businesses in Paper ENA though we expect the declining demand trend to continue. We expect further gradual contribution from our growth projects as the year progresses.

In the previous two years, we have operated in a deflationary environment. In 2017, we expect this to turn to modest input cost inflation. Obviously, we will continue our measures to reduce fixed and variable costs to mitigate this.

Finally, the year 2017 starts with lower pulp prices and lower availability of hydropower than the previous year 2016.

Now I would like to more to the next topic which is the renewed long term financial targets for UPM. As Jussi discussed in the beginning of this presentation, UPM had achieved a significant improvement in its financial performance since we adopted the current business model of six separate business areas in 2013.

We have improved the cost competitiveness of our businesses. We have invested to grow many of the businesses particularly the ones where we have positive fundamentals for growth and strong competitive position. And on top of that we had continuously taking care of the asset quality in Paper ENA. We have sharpened our commercial strategies as well.

Now we are confident that we can continue to aim higher. And therefore we have today announced renewed long term financial targets.

So what has changed, what is new with the renewed targets? First of all we have increased business area return targets. We have also introduced a growth target for UPM comparable EBIT. We have increased the return on equity target and also we have introduced the new policy on financial leverage to replace the previous gearing limit. The cash flow based dividend policy which we renewed a couple of years ago remains unchanged.

This page shows the elements of our new long term financial targets. For the business areas, we continue to have long term return on capital inflow targets, or in the case of Paper ENA, a free cash flow return target. The target levels have simple in raised for five of the six businesses. We have set the new targets on an ambitious level, which is credible and sustainable over both the business cycle and investment cycle in each business.

In the new targets, we have also increased the importance of growth and bottom line growth in particular. We aim to grow our business where the long term fundamentals are strong for growth and competitive position supports profitability. At the same time, we aim to maintain strong performance also in Paper ENA.

However, as said, we prioritize earnings growth over top line growth. Like Jussi already said, in growth investments, we focus on attractive and sustainable returns. In addition to focus top line growth, we aim to capture opportunities to further develop our business and product mix and further improve our cost competitiveness. To reflect all this, we have set ourselves a target to growth our group level comparable EBIT overtime.

Finally, we aim for attractive shareholder returns and efficient capital structure. Investment grade grading is also an important element in our financial strategy.

To reflect these scores, we have set a net debt to EBITDA policy, increased our return on equity target and kept our cash flows based dividend policy as it is.

And this following page 13 summarizes the new target levels for the business areas as well as the group level targets.

Then looking at the following page 14, we can see how the business areas have performed relative to the new long term return targets. With the exception of Energy, all the businesses exceeded their previous return targets for the year 2016. Compared to the increased new target level, Energy, Biorefining and Specialty Papers were slightly below for 2016. Paper ENA obviously had an excellent cash flow year in 2016 achieving a free cash flow return of 31%. Its profitably was in a good level on top of which it’s really a significant demand of working capital and sold the Schwedt newsprint mill in Germany. Paper ENA regular return on capital employed was 14.3%.

On this page we have the UPM Group performance shown as compared with the new targets. We reached our return on equity target in 2016 and ended the year with significant room compared to the new financial policy on leverage.

Now I would like to conclude our presentation. As said, 2016 was financial a record year for UPM. Our performance demonstrated the results of our transformation over the past years. We believe it gives us a strong position from which to plan that for the future and continue earning higher. As two signals of confidence we have today announced renewed more ambitious long term financial targets and the board has proposed a 27% increase in our dividend.

Now I’ll stop here and we’ll be ready for any question. So dear operator, I’ll hand it over to you for the Q&A session.

Question-and-Answer Session

Operator

Thank you very much. [Operator Instructions] Our first question comes from the line of Mikael Jåfs of Kepler Cheuvreux. Please go ahead, your line is open.

Mikael Jåfs

Hello, good afternoon, everybody. I have two questions, the first one is on you speak a little bit about cost inflation and could you please elaborate a little bit on that, are you referring to any particular cost item and how severe should we think around this cost inflation given that you have been quite good at taking out costs historically? That would be my first question.

And then the second question would be on the comparable or return on equity target and could you sort of talk a little bit more around that given that you know the target is for 10% and you actually achieved more in 2016, so are you guiding down or how should we think around that target, please?

Tapio Korpeinen

Yes, if I start the first and the question as far as cost inflation is concerned, I would say where there is kind of obvious impact coming from the market prices is on oil, energy perhaps in general compared to the past trend but obviously oil price is up and compared to the low that we saw during last year. And that has an impact on logistics costs, transportation, harvesting costs as well as on some oil based raw materials or ones where let’s say oil and energy is significant input.

Obviously on both accounts, we have measures that we take to offset the impact which again obviously is indirect when it comes to logistics or harvesting or even this sort of raw materials but still let’s say then flows through us and again we can take measures to offset on that.

As we have said earlier I think also if you look at last year’s result, we had some 270 million lower variable cost for the full year compared to the previous year as one of the chart shows. And as we have said also earlier, more than half of that we believe is coming from our own actions, the rest from the market, so it demonstrates the scale that we have had also during the past couple of years of 100 million plus. On top of any market price moments, 100 million plus achievement or impact in terms of improving our internal cost efficiency as far as variable cost is concerned. So those kinds of cost actions we believe that we can continue and we have some in the pipeline obviously already. And through that can fight the cost inflation.

Also in the fixed cost side, as you know we have actions in the pipeline to reduce fixed costs particularly in Paper ENA through the restructuring that we have announced during the fall.

Then coming to the return targets, whether it’s the group level, ROE or also the business area level returns. As we have said, those targets are over the cycle both business cycle and investment cycle meaning that as we believe that we have an opportunity to invest in the business where we grow than these returns reflect the kind of return that we also expect to achieve over the time on new investments not only on the existing business at hand. And the same goes then in terms of growing the bottom line and let’s say business for UPM as a whole. So this sort of ROE 10% target is there to reflect that sort of a longer term ambition for earnings growth going further as well.

Jussi Pesonen

And then I guess that I might continue a bit that you know what we were guiding here was that we are confident that we can aim higher rather than trying to convey a message that we are actually targeting for the lower returns. UPM is growth oriented capable and financially strong and therefore it's a very good starting point to actually raise the bar. And I think that we have made that pretty clearly and that's our aim.

Mikael Jåfs

Okay, perfect. Many thanks.

Operator

Thank you. Our next question comes from the line of Antti Koskivuori of Danske Bank. Please go ahead, your line is now open.

Antti Koskivuori

Yes, thank you. I have two questions as well, firstly on the long term targets and specially that your target on leverage net debt to EBITDA two times or less, it’s quite significantly higher than 0.7 today. What is the timeline for you to get closer to that two times net debt to EBITDA target? That would be the first question.

And secondly, if you could talk about little bit about the pricing outlook in your paper businesses that would be very helpful? Thank you.

Tapio Korpeinen

Well, if I comment on the two times net debt sort of financial leverage policy, well, first of all as you say, we are and actually have been now for three years clearly below that level and rather reducing the debt during that time, so it's not a target for us to get up to two times net debt, but rather it is reflecting kind of the level, which we see as possible if we are looking at any bigger kind of transformational opportunities sometime in the future.

So we don't see even if we would contemplate any sort of bigger opportunities in the future a need for going beyond that level of leverage, which still is comfortably obviously then within investment grade. So that is more reflecting the way that we think about the strength of the balance sheet considering with whichever options there might be for us to develop the business longer term in the future.

Jussi Pesonen

Yeah, that’s a commitment for a kind of being investment grade profile company, that's our full commitment for that pricing. Pricing environment in paper is pretty stable. In broad terms, there are some paper grades that we see a slight decline in currencies when need conscious some of the mechanical papers in Europe, but broadly stable somewhat down nothing particular, nothing really big swings at this point of time.

Antti Koskivuori

Alright, thank you. Can I continue on the first question, so that if you don't see any big or major acquisition or investments, would you still consider to take the net debt level downward, or what is your kind of short term target here?

Tapio Korpeinen

Well, short term as we have discussed earlier as well of course looking at kind of the free cash flow that the company is generating like again 2016 beyond dividend and beyond CapEx, we generated enough free cash flow to reduce net debt by close to EUR1 billion. And as there continues let’s say to be free cash flow in the company then how we allocate that going forward is the question. And as discussed there are let's all the options are available there in terms of how to allocate that capital.

Antti Koskivuori

Alright, thank you very much.

Operator

Thank you. Our next question comes from the line of Lars Kjellberg of Credit Suisse. Please go ahead, your line is open.

Lars Kjellberg

Thank you. Just wanted to come back to this sort of strong balance sheet, I sort of read in your Capital Markets Day that you were thinking about a great degree of shipment - some sort of capital return to shareholders, where you obviously cut a very nice dividend increase, but wouldn't you consider yourself has been on the lever today, or do you have any sort of immediate cash needs, I guess given your forecast about good grow or good earnings, I don't exactly know what that means in terms of up or down, but still good that would suggest to me that cash is still going to very, very strong. Why do you not signal a sort of share repurchase program or something to share the strong cash flow at this stage, that was long question, but if you can elaborate please?

Jussi Pesonen

Yeah, Lars, this is Jussi. Obviously the strong balance sheet has been the new normal for UPM and therefore in our financial targets, we have been now very clear that what we mean by that and that will be the future of this company, which is totally different that it used to be. And coming back that what we already earlier said that now we are quite a lot of below that obviously giving us a lot of room to maneuver and obviously if we are - we have all the options available whether it's kind of strong dividend as we are today announcing 27% increase in dividend or than whether it's an extra dividend or whether it's a say buyback program or M&A or organic growth investment.

So we have a lot of flexibility and this is actually a great place to be. Money doesn't burn in our pockets. We need to be very clear that you know we are indicating that that you know whose money, how we spend money will be well spent for the shareholders and that is one of the reasons why we came out with the long term targets on return on capital employed. So basically there's a lot of you know kind of good things in place and therefore we have all the options available and then we need to consider what is the right time for each and every of those. Today we announced 27% increase in dividend.

Lars Kjellberg

You obviously target EBIT growth which is makes sense, can you give us any quantum, how you think about that, what is the reason of EBIT growth that you would consider with the various options you have to deploy more money to grow the business? Do you have actually target of EBIT growth?

Jussi Pesonen

We don't have a public target in terms of quantum for EBIT growth, but like the sort of track shows, we have been able to improve and obviously while we do have Paper ENA that this facing a market in sort of structural decline in the other businesses, we have growing demand and the growth opportunity where we have been able to during the past years grow in line with the market let’s say around 4% or so and we would expect that to continue and the kind of sum total of that going forward is that the group level bottom line is targeted to grow, but in terms of a kind of numerical target for that that we don't publicly.

Lars Kjellberg

And then final question if I may, just looking at your cash flow of course was very strong and you elaborate to a very successful working capital program that continuous you mentioned, how should we view working capital as a source in 2017, do you think you can achieve anything similar to what you had in 2016 and if we let's assume the following flat EBITDA just as a starting point, CapEx and then whatever you think about working capital, what others moving buckets and how should we see cash flow in 2017 versus 2016?

Tapio Korpeinen

Well on CapEx, we have guided EUR350 million CapEx for 2017. Working capital we had that bit less than EUR200 million kind of the year end figure obviously as it is the kind of number for the year end there is always some shorter term fluctuation around that, but we did have well let me just take a step back, Jussi mentioned this smart cash program and what our focus there is not to sort of look at kind of one-off items but rather look at permanent changes in how we manage our business to improve our working capital efficiency to get that working capital kind of structurally that turns down and we have been able to get good results during 2016 on that and let’s say clearly most of the release that you see in the year end figure can be kind of related to those types of changes. And I would say that obviously we still think that there is room there because we have kind of structure this as a three year step change in efficiency. So we can read similar results if everything goes well also during 2016 plus or minus any let’s say kind of yearend fluctuation that might happen on the last day of the year.

Lars Kjellberg

So do you have any networking capital target as percentage of sales or anything like that in mind that we can try to model well?

Tapio Korpeinen

No. We haven’t given something like that out.

Lars Kjellberg

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Mikael Doepel of Handelsbanken Capital Markets. Please go ahead, your line is now open.

Mikael Doepel

Thank you. A couple of questions. First of all, in terms of EBITDA run rate from the growth investments, where do you stand now at the end of 2016 if remember correctly you stood at 80% at the end of Q3? That would be my first question.

Jussi Pesonen

That is something that we guided last time end of the third quarter. I have not even seen the figure that was it 80% or more, I guess that it’s more, but I have no figure for the full year. That was our aim that will be the last time we will actually follow that, 80% or more.

Mikael Doepel

Okay. And then in terms of your new financial targets and as has been discussed here one of the targets is to reach a comparable EBIT growth. Why did you decide on the EBIT figure in particular you know given the fact that that depreciations and changes to share value of biological assets has a quite a big impact on that figure, why not measure yourself on EBITDA instead?

Tapio Korpeinen

Well, still obviously as we are investing in the business is of Biorefining, Raflatac, Plywood and so on other businesses, then Paper ENA for growth, then as this normal EBIT is the kind of the key indicator for profitability going forward which reflects investments as well. And then comparable EBIT excludes any sort of significant fair value changes that would be related to any kind of valuation parameters like we had a couple years ago. So therefore, actually the value - fair value change that comes from the biological assets is the result of our managing those assets or in the case that we have been selling assets here particularly in Finland then realizing the value at the time of sale. So therefore also that path of the comparable EBIT is this part of the business result that we are managing every year.

Mikael Doepel

Okay. Then just finally a quick question on CapEx that you guide for 2017 at 250, could you give some more details on that, how much is maintain and somewhat at a bigger, bigger growth project potential into that figure?

Tapio Korpeinen

Well, maintenance CapEx, we expect to be let’s say similar to last year unless it has been so less than EUR200 million. Then the rest obviously is going to these kind of focused investments for growth. The bigger ones ongoing are in Biorefining, second phase expansion as well as the investment that we now announced in Raflatac.

Mikael Doepel

Okay, good. Thank you very much.

Operator

Thank you. Our next question comes from the line of Justin Jordan of Jefferies. Please go ahead, your line is now open.

Justin Jordan

Thank you. I’ve got three separate questions. Firstly, obviously there’s been some press speculation recently just regarding the potential investment in Europe and your discussions with the government. Can you just I guess update us just where that is that and then just perhaps both press speculation?

Secondly, just can just remind on energy and I appreciate obviously we can all see global oil prices are rising and but you UPM is a group I thought was net long of electricity and now featuring your energy division, would that not be benefiting in 2017 from increased electricity prices?

And thirdly, on biofuels and obviously specifically refinery, I know you talked about obviously its performance quote at a good level in terms of profitability in 2016. Is that now perhaps I’d say group return on capital employed levels or can you give us some color as to the improvement year-on-year that business enjoyed and the potential the potential for further improvement in 2017? Thank you.

Jussi Pesonen

I might take your - this is Jussi, I might take the first one. Obviously that this is what we have announced already earlier that we are looking for the long term possibilities to have a big scale investment in Uruguay and that has actually led to a discussion with the government of the prerequisites and especially the fee infrastructure possibilities and debate. And that discussion is ongoing. Those negotiations are ongoing. The spirit is good. Lot of you know of course publicly has been there because this is public. But there’s nothing more to comment that what we put in the press release. The discussions are ongoing and when they are finalized, we will then and then draw the conclusions out of those and move forward.

Justin Jordan

Okay. And do you have any - sorry, can you communicate any timeline for when you think discussions might be complete and conclusions might be reached?

Jussi Pesonen

There is no such a kind of timeframe for that and obviously there are plenty full of important difficult big decisions when it comes to infrastructure things and therefore there’s no guided timeline for that.

Justin Jordan

Okay. Thank you. And just moving to Energy then?

Tapio Korpeinen

Yes, on Energy, well let’s say in Finland, we are as far as electricity is concerned we are as a group generating more electricity than we are consuming. But then if you look at let’s say the global balance of UPM, we’re pretty much in more or less balance as far as electricity consumption and generation is concerned. So in that sense, if you look at the group as a whole, we’re fairly neutral.

Justin Jordan

Sure. And obviously I know Q4 hydropower generation was perhaps lower than 250 season expected but there’s been no longer term change within this division in terms of its potential capacity?

Tapio Korpeinen

Well, let’s say then as we have indicated for the energy business, the hydro situation is different than what it was for instance one year ago as was reflected already in the Q4 results. So now in the very beginning of the year, the availability of hydro is less obviously that can then change as it cannot be sort of forecasted very far into the year, but that’s kind of the starting point for the year in any case in the power generation.

Justin Jordan

And then just finally with regarding Lappeenranta and biofuels?

Tapio Korpeinen

Well let’s say biofuels as also be kind of reflected in the comments in the release was ramping up during last year and the sort of technical ramp up and sort of level of output was getting to a good level at the end of the year. And in the fourth quarter financial kind of result was good. So in that sense, won’t go into the figures as such but the - in a sense gives us proof that the business case can be reached and it is there as expected, so not only production wise and in terms of technical performance, but also financially in the fourth quarter, we were on good track.

Justin Jordan

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Linus Larsson of SEB. Please go ahead, your line is now open.

Linus Larsson

Thank you very much and a good day to everyone. May I just follow-up on the previous question regarding biodiesel and Lappeenranta, it sounds like you’re pretty happy with performance that Lappeenranta, could you talk about also the market as you view it currently and whether we are approaching the point in time when you would announce another investment in biodiesel and if so in what kind of scope? Thank you.

Jussi Pesonen

Basically if - first shortly commenting on market you know we have not seen any kind of weakness in Europe or only a lot of decisions by the commission and directives that will promote you know transportation fuels for the future. So that is not going to be the challenge how the market will move on, and especially for the advanced biofuels, it will be definitely look pretty market. There will be room for both electric cars and the biofuels for many, many years, decades going forward. So that is definitely proceeding as we have been expecting or even hoping.

And then it is pretty clear and obvious that we have now already separated our organization one being running the mill of Lappeenranta as efficiently as possible. And then the second part of the crew is now considering what next if anything. And that work is ongoing at this point of time. I have nothing more to report on that this stage, but you know like Tapio said, we are very pleased with the performance of the Lappeenranta unit at this stage.

Linus Larsson

Great. May I also ask regarding - something completely different regarding your energy operation, if I recall correctly when you talked about your energy assets and the energy markets, you said something like you rather a buyer than a seller of energy assets in the market environment that we’re seeing, is that still a valid statement from your side?

Jussi Pesonen

Well, I would say that as for any business, there are no holy cows, but let's say to perhaps what you're referring to is that has there has been generally rather bearish view on the - and uncertainty on the kind of the energy market that might give rise to acquisition opportunities as well. So far still value expectations of whatever assets have been exchanging hands have been very high. So obviously that kind of hurdle can be there or we won't consider anything that is not financially attractive for us.

Linus Larsson

Okay, that's excellent. Thank you very much.

Operator

Thank you. Our next question comes from the line of Andre Vandrini of TPI Europe. Please go ahead, your line is now open.

Andre Vandrini

Thank you and good afternoon. I've got two questions. The first one, is there timing for the conversion of the Schwedt mill and therefore the end of the manufacturing agreement for newsprint?

And the second one some marketplace the capacity reductions in supercalendered paper in 2017 will not be enough to compensate further increasing demand, what’s your outlook? Thank you.

Jussi Pesonen

I guess that we don't give any outlook, the Schwedt mill will be out of the operations by the end of next - sorry this year somewhere in the autumn. I don't have even the specific date for that. And obviously what we have been doing for ourselves by doing that on mechanical and SC we are taking care of our cost competitiveness. You know this is something that you know I'm repeatingly going here that for us, it is enough to keep our Paper ENA profitable and making good cash flow and that this works every year. Last 10 years we have been taking capacity out and we have been gaining more through the efficiencies that the closer and that works brilliantly for us and therefore we are looking only our own cost position when it comes to the market and then I have no comments for the market itself.

Andre Vandrini

Thank you very much.

Operator

Thank you. Our next question comes from the line of Robin Santavirta of Carnegie. Please go ahead, your line is now open.

Robin Santavirta

All right, thanks. Lot of my questions have already been answered. I guess one question, so in terms of your two key business divisions, the Biorefining and Paper ENA divisions, I guess the pricing for the full year do it on 2017 looks quite stable, but what about fixed cost of productivity for this two main divisions in 2017 for the full year?

Tapio Korpeinen

Pretty enhancing, when looking that we closed last year half a million tons so paper capacity and this year will be another 305 million - sorry 1,000 tons again on the Paper ENA side so basically another fixed cost are under very good control for the Paper ENA, which is not the case for the rest of the industry. And also the Biorefining has been really, really actually performing well when it comes to fixed costs.

Jussi Pesonen

Also in productivity, obviously we had the Kaukas expansion, which was finished during the fall and we’ll then obviously have a positive impact on productivity in the Biorefining in pulp business this year. And then once during this year that expansion is done that obviously has a clear impact on the productivity in the Kymmene mill here in Finland.

Robin Santavirta

Right, so if I continue with the product because I guess that's fair to assume, I guess your guidance for the full year sort of flat profitability despite the sort of productivity gains some cost cutting and some growth investments, so what is sort of the negative thing that you're seeing that sort of them balancing down, I guess the outlook?

Tapio Korpeinen

Well, as we have indicated in the outlook statement, let’s say first of all, we believe that we continue to have a good year this year in terms of profitability. And we do have growing demand in many of our businesses and we are able to capture that because of the investments that we have made. We continue to take cost actions. We also discussed that. We have been able to show a more than 100 million cost improvement on variable cost now for several years in a row, no reason why we wouldn't be able to continue on that track, the track going forward as well.

So in that sense, how good profitability this year will be at the end of the year that we will see how it unfolds. But still longer term, we have had now several years of profit improvement than if we sort of look beyond 2017, we have already actions in the pipeline that improve the bottom line and we believe as the new targets that we published today kind of indicate that we will looking at the coming years continue on the profit improvement track that we have now demonstrated for a number of years.

Robin Santavirta

Good, thanks. And if I briefly, I guess I missed maintain this cost impact now in Q4 in Biorefining, could you please repeat that?

Tapio Korpeinen

Well, let’s kind of the total impact was about EUR30 million and discussed also in context of the third quarter release there was sort of EUR20 million extra in there.

Robin Santavirta

Good, thank you.

Operator

Thank you. Our next question comes from the line of Harri Taittonen of Nordea. Please go ahead, your line is open.

Harri Taittonen

Hi, yes, good afternoon, couple of quick questions. On the sort of introduction of the net debt to EBITDA target, I mean it does that potentially have consequences on that sort of credit rating is that sort of probably motivating the introduction of this target, and how would you see that possibly impacting the sort of that cost of debt in the event you would be sort issuing new debt or sort of looking for increasing with that the currently low levels?

Jussi Pesonen

Harri, I hope that it will swell, but you know that's not the reason for that statement. I guess that this is the new UPM we are you know kind of witnessing a new UPM with the new kind of set of you know targets with those new set of how we operate, so this is - this is now after 2016 the confirmation of the new UPM and if it serves the purpose for the rating agencies I'm so pleased, but that is not the purpose, and that is not the kind of reason for that.

Harri Taittonen

Okay, that’s clarifies. And then sort of you’ve touched upon the - sort of the maintenance the impact, but I mean if you just still kind of conclude on the group level that what sort of sequential delta in costs related to maintenance and repairs do you see in the first quarter compared to the past kind of the fourth quarter, is it should be of course operationally quite clean running in the first quarter I suppose?

Jussi Pesonen

Well, let’s says, so that again if you look at the fourth quarter compared to the third so we had sort of EUR20 million more in the Biorefining business as discussed already. And then let’s say third quarter we had very low maintenance cost in Paper ENA as we were kind of running full blast. So kind of EUR10 million difference to what you would expect normally and then again let's say in the Paper ENA business, you have typically sort of roughly EUR10 million, another EUR10 million in the sort of end of the year maintenance fixed cost activities. And as you said normally, the first quarter is fairly clean.

Harri Taittonen

So there's nothing major, but you know that would be kind of cost implications in the first quarter?

Jussi Pesonen

Yes.

Harri Taittonen

Absolutely, many thanks.

Operator

Thank you. Our next question comes from the line of Martin Melbye of ABG. Please go ahead, your line is open.

Martin Melbye

Yes, one short question. Page 27 in your presentation package, you show graphic paper prices Europe and they seem can trust and move up, is that - where does that data come from or is that just wishful thinking that it looks like it's increasing, because you said prices were flat I think?

Jussi Pesonen

Yeah, the PPI/RISI statistics you know we need to ask them unfortunately that how they are coming. Currency of course play quite a major role and this is in Euros.

Martin Melbye

So this is taking into account both U.K. and German prices for instance, so is just an optical?

Jussi Pesonen

Yeah, all of the papers in Europe in Euros, of course the UK.

Martin Melbye

Okay, so there's no real price increase, that’s what indicate the graph.

Jussi Pesonen

I don't know whether that indicates that, but that's the case.

Martin Melbye

Okay.

Operator

Thank you. Our next question comes from the line of Mikko Ervasti of DNB Markets. Please go ahead, your line is open.

Mikko Ervasti

Thank you very much. My question is regarding the specialty papers and the PM-3 there in China. Can you please elaborate on their ramp up there how it's been going? I guess there's now some seasonality impact now into Q4 numbers, but how is that ramp up going and do you have much more potential there that’s going forward? Thank you.

Jussi Pesonen

It is going well according to our plan and you know has been really doing what did so supposed to do, but there's a plentiful of still room to improve in the efficiencies and raw material efficiencies, energy efficiencies, and of course you know growing the business of the release liner and further. So there's a plenty full to come as well, but it has been fulfilling our expectations.

Mikko Ervasti

Thanks. And regarding the turbine issues, can you say now that everything was now completed in the fourth quarter if I refining so there's no spillover for the first quarter or how is it?

Jussi Pesonen

I would say, let's say for any material purposes, they are more or less done, but there can be some impact in the first quarter as well.

Mikko Ervasti

All right, thanks for your time.

Operator

Thank you. There are no further questions at this time. Please go ahead speakers.

Jussi Pesonen

Yes, ladies and gentlemen thank you for joining us for this afternoon and see you soon. Thank you. Bye now.

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