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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, and welcome to UPM's Fourth Quarter and Full Year 2018 Results Webcast. My name is Jussi Pesonen, and I'm the CEO of UPM. And I'm here with our CFO, Tapio Korpeinen.
Hello, everyone.
Ladies and gentlemen, 2018 was a record year for UPM in many respects. Our sales grew by 5% and comparable EBIT increased by 17%. Our cash flow was strong and our net debt fell below zero. Last year was a commercial success. Sales prices increased in all business areas and we succeeded in mitigation of the significant input cost increase. We laid the groundwork for the future growth in our current and innovative new businesses. And we received exceptional recognition for our responsibility performance. All these demonstrates the impact of many years of transformation and hard work. UPM is in strong position as well as it concerns start of this year, 2019. As you know, during the Q4, there were a lot of discussion on the uncertainties and slowing growth rates of the global economy. For us, this was also visible in some destocking in various value chains for our products during the fourth quarter. But however, our fourth quarter volumes were solid and we delivered a strong fourth quarter. Our sales grew by 6% and comparable EBIT increased by 10% to EUR 404 million. Ladies and gentlemen, this was the 23rd consecutive quarter of earnings growth. But at this point, I will hand over to Tapio for more analysis of the results and then we will come back on the growth projects. Tapio, please?
Thank you, Jussi. Here, you see the analysis of the profit drivers on the left hand side year-on-year. And then on the right-hand side, sequentially, fourth quarter vis-à-vis third quarter 2018. And first, on the left-hand side, you see that the positive impact of the higher sales prices across all businesses continued to be clearly larger than the negative impact of the increased variable costs. And here, right away, I would just note that it's good to remember, given that -- given our operating model, that the impact of pulp prices is felt on this chart, both on the green sales price bar and this orange variable cost bar because the variable costs include pulp as a cost for our paper businesses and in fact of that variable cost increase, about half is due to higher pulp cost. Obviously, then also, higher pulp cost has -- or higher pulp prices have benefited our pulp business in Biorefining. The earnings impact of delivery volumes overall was neutral in the fourth quarter, which was actually an improvement compared to the earlier quarters where delivery volumes represented a minor headwind for UPM earnings. Fixed costs increased year-on-year, partly due to somewhat higher maintenance activity in several businesses. And so on the right-hand side, you have the sequential comparison. There fixed cost increased by EUR 69 million from the third quarter. UPM's fixed costs, including personnel costs, maintenance costs and other fixed costs are seasonally the highest in the fourth quarter and also the lowest in the third quarter. Then on top of that, in the fourth quarter, we carried out a scheduled maintenance shutdown at the Pietarsaari pulp mill. All in all, sales margins on UPM level were stable from the third quarter to the fourth quarter. Sales prices across our businesses had a small positive contribution to comparable EBIT. Variable costs were on the same level as in the third quarter. In the third quarter, our energy costs were higher due to the turbine damage at our Plattling paper mill, and in the fourth quarter, the plant was back in operation. Changes in delivery volumes had a small positive impact on EBIT. Then looking at the quarterly development for the 6 business areas, first of all, Biorefining had an excellent quarter. Our pulp deliveries resumed growth, growing by 4% year-on-year and 5% sequentially despite the Pietarsaari mill maintenance shutdown. The average pulp price decreased by 1% from the third quarter and was 18% higher than in the previous year. Biofuels continued to operate on a new level -- higher level of profitability and output, which was achieved after the turnaround shutdown in the second quarter. Communication Papers increased its earnings slightly both year-on-year and sequentially despite steadily declining market demand and high variable costs. The average paper price increased by 1% from the third quarter and was 11% higher than in the previous year. Also Energy increased its earnings slightly. The average electricity sales prices were 20% higher than in the previous year. However, hydropower volumes remain low due to the very dry hydrological situation, limiting our generation volumes and earnings potential. Raflatac resumed sales growth in the fourth quarter mainly driven by price increases. Delivery volumes were on par with the previous year. EBIT decreased as the quarter was still impacted by variable cost increases and seasonally high fixed costs. Plywood enjoyed good demand and was able to fully offset the higher variable cost with price increases. However, our fourth quarter deliveries were 8% lower than in the previous year held back by political strikes in Finland. For clarity, these strikes were directed against the Finnish government policies not to UPM. EBIT increased sequentially, but was lower than in the previous year. Specialty Papers had a disappointing quarter. In the Asian fine paper business margins continue to be under pressure as the destocking in the value chain continued to pressure prices and pulp costs remained high. However, good demand continued in the label paper and release liner businesses. Here, we have the financial KPIs for the full year 2018, and as Jussi already said, we reached record earnings, and our net debt fell below zero, ending the year at a net cash of EUR 311 million. Page 6 shows the realized returns of each business area compared with the long-term return targets. Four of the 6 business areas exceeded their targets in 2018 and Energy came close. Biorefining achieved ROCE of 26.6%, mainly driven by the favorable pulp price. In Communication Papers, the free cash flow return was 15.3%. The 2 previous years benefited from significant working capital releases and some asset sales that did not take place this year. The normal return -- or conventional return on capital employed for Communication Papers was 16.5%. Specialty Papers did not reach the target, achieving 10% ROCE. The main reason is the thin margin in the Asian fine paper business in the second half of the year. One can say here still that the energy ROCE was close to the target even if the fair value of the energy shareholdings increased by EUR 183 million during the year. Here, we see the group financial performance and long-term targets. UPM aims for comparable EBIT growth in the long term and 2018 was the sixth year in a row where we achieved this target. We target comparable return on capital employed -- return on equity, sorry, of over 10%. Last year, we reached 12.9%, 1% -- 1 percentage point up from the previous year. And the net cash of EUR 311 million was already mentioned. Here, we have operating cash flow and free cash flow. Operating cash flow in 2018 totaled EUR 1,391,000,000, which was EUR 167 million lower than 2017. Working capital increased by EUR 209 million during the year, whereas, in 2017, we had a decrease of EUR 91 million. So working capital changes represent a EUR 300 million difference between the 2 years. There are 2 main reasons for the increase in working capital in 2018. First, the higher prices of European products and raw materials tied up more working capital. And second, our wood inventories at the end of 2017 were unsustainably low because of the weather-related wood harvesting and logistics difficulties. This year, we had no such difficulties. In the fourth quarter, our operating cash flow increased to EUR 420 million year-on-year, including a EUR 29 million release from working capital. And here, we have the dividend proposal. UPM's Board of Directors has today proposed a dividend of EUR 1.30 per share for 2018. This represents an increase of 13% from the previous year and 50% of operating cash flow per share. The proposal, which is above company's long-term dividend policy range of 30% to 40%, reflects UPM's exceptionally strong financial position and confidence in future cash flow generation. And Page 9 shows our outlook for 2019. As a starting point, we expect the global economic growth to continue in 2019 albeit at a slower pace than we saw in 2018. We do recognize that there are significant uncertainties outlined on this slide that may have an impact on the economic growth in different regions and on UPM's product and raw material markets during the year. All in all, we expect UPM's business performance to continue at a good level in 2019. We expect favorable demand to continue for most of UPM businesses. Demand decline is expected to continue for Communication Papers. In the beginning of the year 2019, pulp prices are expected to be lower and graphic paper prices in Europe are expected to be higher than in the fourth quarter of 2018. Input costs are expected to stabilize after the significant increases seen in 2018. Finally, fair value increases of forest assets are not expected to contribute meaningfully to comparable EBIT in 2019. This is reflecting the change in accounting policy for forest renewal costs. Also less forest sales for this year compared to the previous year. And the underlying operations. Now, I'll hand it back over to Jussi for some comments on our growth projects.
Thank you, Tapio. In the coming years, UPM seeks significant growth in 3 focus areas: Pulp business, specialty packaging materials and molecular bioproducts. These spearheads have 2 key factors in common. First, they all have an attractive long-term growth outlook supported by global megatrends, all of them provide sustainable solution for the growing and changing consumer demand. And secondly, UPM has a unique competitive position and sustainable competitive advantage in each of these. There are also clear barriers to entry. We are growing in the specialty packaging business area in Raflatac and Specialty papers, mainly through focused-growth projects. The potential new pulp mill in Uruguay would be a large growth step for our pulp business, but also for UPM earnings. The molecular business, biofuels and biochemicals, could provide a large, new growth platform for UPM for the coming years and decades. The whole case is about replacing fossil-based fuels and chemicals with the much more sustainable drop-in alternatives. If we can do that in a competitive way, the market potential is huge. In the Biofuels, we have already succeeded well in our market entry with our first refinery Lappeenranta. In Uruguay, preparations for potential new world-class pulp mill are proceeding. The familiar slide reminds you of the main items that we have -- we and the government of Uruguay are working on. The implementation of the investment agreement between us and the government is currently in the intensive phase where tangible progress in the infrastructure initiatives is required. For our part, we announced in January that UPM is taking part in the public tendering process in the Port of Montevideo. Ladies and gentlemen, if the ongoing second preparation phase is concluded successfully, we will initiate the regular process of analyzing and preparing the investment decision on potential pulp mill project. Concerning our biochemicals, we continue the basic engineering work for the potential first industrial scale biochemicals refinery in Germany. This would represent our entry to chemicals and chemicals market in commercial scale. In Biofuels, we have completed the environmental impact assessment for the possible biorefinery in Finland. The refinery would represent scaling up the Biofuels business -- our current Biofuels business, building on success of the Lappeenranta refinery. 2019 will be an important year for these prospects pointing us into the future. Page 14 shows the current list of focused-growth projects during the fourth quarter. We completed the release liner expansion at the Specialty Papers in Jämsänkoski. In January, we completed the specialty label expansion at Raflatac Tampere factory. The biggest current focused investment is the conversion of the Nordland PM2 fine paper machine to release liner to be completed in Q4 this year. We also -- we are also growing in the Plywood and Energy businesses with focused investments. As the latest project we have today announced an expansion of one of our hydropower plants, increasing our renewable and flexible hydropower generation at Kuusankoski. Ladies and gentlemen, now I would like now to summarize our presentation before the question. UPM delivered a record earnings in 2018 and we are in strong position for 2019. We recognize there are significant uncertainties in the global economy. We expect UPM's business performance to continue at the good level in 2019. We continue to work on our transformative prospects, aiming for significant long-term earnings growth. The proposed dividend increases of 13%, which is actually a reflection of exceptional strong financial position and our confidence in future cash flow generation. With these words, we conclude the prepared part of the presentation, and we are ready for questions. Dear operator, we are ready for the questions.
[Operator Instructions] And our first question comes from the line of Mikael Jafs from Kepler Cheuvreux.
Congratulations to the 23rd consecutive profit growth. I've got 2 questions. You are pointing to lower pulp prices there in the beginning of the year. Do you have any update for us what has been happening during the past few weeks in China? Have prices continued down or do you see a flattening out there? And then the second question would be around the paper pricing where you are pointing to higher prices in Europe, I guess. Is that a risk that it will speed up the ongoing secular demand decline in paper as prices that now have actually been rising since last year, continue up? Those are my 2 questions.
Obviously, we are not forecasting any of the weeks. I don't even have exact numbers for the -- what has been the last weeks of pulp business. That is quite clear that the pulp volumes have been moving in Asia much more than that of -- by the end of the year. We will see how the prices will develop, but the volumes have been moving. Paper prices. I think that the kind of trend decline will be somewhere on 5% across all products and I do not see that the price increase will speed up the pace of decline. The kind of reasons for declining markets are somewhere else.
Our next question comes from the line of Antti Koskivuori from Danske Bank.
I would also have 2 questions. First, on variable costs. In the outlook comments, you say, a, that you expect variable costs stabilizing in 2019. Just to clarify, do I read this correctly that you see variable costs in 2019 at the same level as in 2018? That would be -- and also including the extra new cost from the difficult harvesting conditions in early 2018. That would be the first question. Then secondly, on maintenance costs in 2019 versus 2018. At least from your published schedule, it seems that the maintenance program during this year seems to be quite lighter than it was in 2018. Is this the right call for that?
Yes, if I'll answer first on the variable costs. So again, like we saw in this analysis of the quarterly results sequentially from third quarter to fourth quarter, then the variable cost impact was nil already there. So basically, it shows what we have discussed here earlier as well that we saw most of the cost increases to happen in the beginning of last year and now we are at a sort of a much more stable trend going into next year.
This year.
Going into this year. Yes, we are already in 2019. And then at the same time, yes, we did have the issues with the wood supply in the first quarter, but still we did start last year with lower variable cost base. So year-on-year, what the kind of average will turn out to be or the total sort of impact will be affected by that to some extent. But again, I think the big picture is that -- let's say, we will have pretty sort of stable overall variable costs going forward from here. And then on the maintenance costs, you're right that we did have more maintenance activity, both in the pulp business and then the turnaround shutdown in the biorefinery in Lappeenranta in 2018. So those then mean that from the major maintenance shutdown, the fixed costs will be lighter this year.
Any guidance on the euro amounts? How much less that will be in 2019?
Well, let's say nothing else than the kind of rule of thumb that we have discussed here earlier, that for the pulp mills, you can calculate roughly EUR 20 million for the kind of a bottom line impact for the big pulp mill shutdowns.
Our next question comes from the line of Harri Taittonen from Nordea.
Looks like the inventory cycle and as you also referred to destocking effect in the business environment and pulp inventories are clearly on the high side. But where do you see the levels in the paper business in Europe? Do you the see sort of destocking necessary in Europe, too? Or is this more sort of confined to pulp in Asia, in your view?
I would say that it's more an issue in Asia and reflecting or related to pulp.
So in paper, there's no unusual amount of inventories in -- as you see?
Not as far as we have seen, no.
Okay, okay. The other question is about then the -- your indication about higher prices and seems that the industry has been successful in raising prices for January. But typically, how long are those contracts? Or could you give some sort of this feel of the split? How much is for the quarterly basis and is there sort of part of the volume, which would be locked in for the full first half of the year?
Harry, I do not anymore have that figure on the top of my head, but typically, it is that we have a lot of contracts that our quarterly and half year and then very seldom annual contracts, but that's the name of the game. Of course, fine paper is typically quarterly priced and then magazine or publication papers is more on the nature of half a year plus 1-year contract.
Our next question comes from the line of Kevin Hellegård from Goldman Sachs.
I just wanted to ask a sort of a follow-up question on your Specialty Paper. As you highlighted yourself, we've seen pulp prices coming down. If you could give any feel for the lag that feeds through into giving lower [ cost ] into that division? And maybe also give an update on how the selling price of both specialty paper and graphic paper has developed in China?
Well, I'll say on this lag, you can say roughly sort of 1 quarter before you see the impact on the bottom line in the business as far as the pulp price is concerned.
And if I take the price question. Obviously, the specialty paper -- specialty part i.e. the release liner and the face paper of the labeling business -- paper business is -- has had positive outlook for the prices. Whereas, as we have seen in China, graphic papers, ever since -- was it the early second quarter last year, where we started to see the declining paper prices that are at least at this point of time, more stable, but time will tell how it goes.
Okay. And maybe just a quick follow-up also on the pulp division. You did quite well in terms of volumes as you highlighted yourself. Do you see any change in volumes into 1Q? Like, I know you have your maintenance coming back, but sort of underlying volume, has there been any sort of buyer strike because of the declining prices?
I think that we are actually quite long-term supplier of pulp to many of our customers -- we are having -- we don't have a third party sales. Basically, our volumes are quite nicely allocated in different businesses and in different segments and in different regions and therefore, we see quite positive outlook for the volume allocation. It is concerning Europe. It is concerning Latin America -- sorry, the Asia market and then -- and also our domestic market. So basically, we do have investments that we have done, debottlenecking investments that we did earlier, a couple of years ago, we have some potential.
Our next question comes from the line of Mikael Doepel from UBS.
I have a couple of questions, starting off with Uruguay or the project there. As of today, do you have a better view of what the total cost of the potential investment could mean for UPM? And also in case you move into Phase 3, how long would you expect that phase to take? That would be my first question.
Maybe to clarify your thought that do you mean that Phase 3 would be a preparation for the decision or is it the full project? The project will last for 24 to 30 months when it is -- the final investment decision is done. And we do not have any better figure for the mill costs more than that of EUR 2 billion for that investment. So basically, that this on the level -- that level that we have at this stage.
Yes. I was mainly thinking if you -- I mean, there's some other costs also related to the pulp mill, I guess, on top of the actual mill? I was mainly referring to that one, if you had any better view on how much it's going to cost you?
Yes, I guess, that we are every day, actually a bit more aware of all of what is outside of the pulp mill as well, and -- but I do not have a figure for you at this point. But of course, we internally have a better view on that as well.
Sure, sure. Okay. Then moving on to China again and the Specialty Paper division there, which has seen quite steep decline in earnings. And I noted that you also write in your report that you will work to restore the profitability in that division. What kind of means do you have to do that then? And when would you expect to be able to restore the profitability in that division?
Well, there's multiple actions. First of all, of course, we need to sharpen our commercial strategy or commercial tactics or commercial actions that we take on that. Then if you remember, in our capital markets day, we were, and we have been saying that over the years, we move out of more -- more to the specialties on that mill. We are preparing that kind of actions as well through the product development, to produce more specialties in Changshu. Then there are fixed costs initiatives. There are variable costs initiatives. You name it. There are quite a lot of -- there's a long list of actions that we take.
Eventually, of course, this investment that we have underway in Changshu to add capacity to the third paper machine as far as label paper consumption is concerned, then that takes us away from this graphic paper market, which has been the main issue now of recent days.
Our next question comes from the line of Alexander Berglund from Bank of America Merrill Lynch.
I have a question on the divergence we're seeing between graphic paper prices and pulp now into Q1 and kind of thinking a bit longer term. I know you don't want to forecast, but I also know you always monitor kind of the marginal cost of the producer. So given that pulp prices are coming down, from your experience, I mean, I guess, the marginal costs will come down and do you think that the current pulp prices, there still is kind of cost curve support for graphic paper prices?
Well, let's say -- of course, there is a different picture on that depending on the type of paper that you're talking about. If we start, let's say, from the Specialty Paper and label papers in practice, all the main competitors are unintegrated as we are in our paper-making operating model. So in that sense, the kind of main fundamental always has been in that business is the competitiveness of the paper operations and there, we have a cost advantage that is lasting. Then if you're looking at publication papers, there, the significance of pulp price is much less. And if you're looking at, let's say, fine papers in Europe, there is still some integrated capacity that doesn't, in a sense, get impacted by the pulp prices here. So in that sense, I would expect that we can continue to sort of maintain our cost advantage compared to the marginal producers in the paper business.
Our next question comes from the line of Justin Jordan from Exane.
I've got 3 quite separate questions. Firstly, in Communication Papers in Europe, people have -- some of your peers have talked about price increases achieved or sort of announced from Q1 2019. Across your portfolio of Communication Papers, could you give us some indication of some price increases that you've achieved from January '19 onwards? Secondly, can we just talk a little bit about the potential transformation projects? I just want to -- I know we could do Uruguay to death, but I'd love to talk a bit -- a little bit about the German biochemical refinery because -- can you just remind us of the time line for a potential decision on that? I thought it was spring 2019, but I'm just wondering if you can be a little bit more time-specific on that?
Thanks. When it comes to Communication Papers, across the board, across the products in our publication and the Communication Papers, we are talking about low single-digit numbers, somewhere 3% to 4% on average across the border in different areas and different businesses. Then the biochemicals, yes, the biochemicals, we are having the kind of detailed engineering ongoing on that business. We have not set clear time line when the decision is made. We have 3 projects ongoing, prospects ongoing in UPM. And of course, we are then trying to time them in a way that all the resources and all the needed things are in place when moving on even if they are not clearly overlapping when it comes to resources or even business areas. But obviously, Uruguay is a large one. The largest ever made -- prospect that we have in our mind. And then of course, these 2 are very interesting. Time will tell when we are getting into the final investment decision phase, but that remains to be seen.
Okay. Just one quick follow-up on -- just on pulp at a group level. Clearly, biorefining, you produced just shy of 3.5 million tonnes of pulp in 2018. Can you just remind us, equally on a group level, your net long position because I appreciate you're a big pulp consumer, shall we say or buyer within Communication Papers, Specialty Papers, Raflatac, et cetera. Just remind us what the net long position is on a group level, please?
I might take this because I'm so favored always to answer this because I always say that I don't know, but now I know, it is around 700,000 tonnes.
Okay, and just given that sensitivity, I appreciate, there will be, as you've discussed, quarterly lags in terms of pulp price movement impacting raw material cost in Communication Papers or other paper consuming -- pulp-consuming divisions, but on a -- can you just give us a sensitivity to UPM EBIT, for example, of 10% pulp price move? I believe historically, it's been around EUR 50 million or so to EBIT, but has that number changed slightly?
Well, maybe slightly up. Around EUR 50 million or so given let's say, the long position 700 million (sic) [ 700,000 ] that Jussi mentioned, but that sensitivity analysis, you'll find in the annual report.
Our next question comes from the line of Lars Kjellberg from Crédit Suisse.
I just wanted to stay with pulp for 2 seconds. And clearly, you had significant disruption suddenly in the first half that lingered still into the third quarter. If you kind of look at your capabilities now, how much incremental pulp do you think you, in theory, could be able to supply to the market which would benefit your P&L in pulp in 2019 over 2018?
Yes, if we -- may be Lars, I take it. Our kind of announced pulping capacity is somewhere 3.8 million tonnes. So if the delivery of '18 was well 3.5 million tonnes, so that's around 300,000 tonnes.
Okay. So it's not represented in the fourth quarter volumes? It's #2 we can kind of look at and say that's kind of what you're going to be producing going forward?
I do not -- I don't know if Tapio have the number for fourth quarter, but like I said, our kind of official capacity is 3.8 million tonnes and the deliveries for the full year were 3.5 million tonnes. So that was the conclusion that I came to 300,000 tonnes.
Got it. In terms of the fair value, it was commented that you don't expect any meaningful such contributions to the EBIT in 2019. Help us out here a bit. What's does really imply? You have, of course, increased the fair value, but still clearly, your growth, I would assume, would exceed your cut. So why wouldn't we continue to have some sort of normalized fair value benefit in the EBIT line?
Well, let's say, there's couple of points there. One is that -- again, the sort of accounting change that we announced already earlier in terms of how we treat the forest establishment costs, both in Finland and in Uruguay, which means that particularly in Uruguay, where we, obviously, have been now planting more than what we are cutting as we have been building the critical mass for the plantation base for the new mill there, that has meant a positive change in the fair value. And now that impact is less because of this accounting change. Second point is that, as you perhaps remember, we have been selling some forest estates here in Finland as our footprint has been changing in Finland. And that kind of, let's say, more significant sales of forest estates will no longer be expected. That has given some rise for fair value increases in our annual accounts. And then finally, let's say, in this sort of ongoing operations, we expect less of an impact, particularly also in part because of the fact that we now made an adjustment to the evaluation of our Finnish forest value here based on a, let's say, updated figure on the forest growth. So all that altogether then means that sort of impact will be much less than what we have seen during the recent years.
Can actually give us any guidance, that would be really helpful, what it all sums up to?
Well, let say, the difference can be somewhere between EUR 60 million to EUR 80 million.
Just had 2 more questions for me. Raflatac, in comparison to Avery Dennison, seems to be not doing that well. What's, in your view, is driving your decline in this business? Is it just that you've been lagging to recover rising costs? Or -- and if I look at Avery Dennison's numbers, they are consistently going up and had a strong performance again in Q4. Are there really market differences or just different pricing mechanics at play? Or what would you believe is the reason for this relative underperformance of your business?
Lars, I have not seen Avery's numbers, unfortunately. I know that they came out yesterday. But I have been at least -- I don't know if Tapio has seen, but I haven't seen the Avery numbers. Obviously, we do have some internal measures as well to be taken to improve the profitability. But of course, we are a different company comparing to Avery where our market position is different in Europe, North America and Asia as well. So that could be one of the reasons. I have no knowledge of where -- how it has been in Avery. I need to look at that more in details.
Okay, then. Let me just rephrase my question. They basically say they're pretty much done with the cost price recovery. Do you still have a cost recovery to do in the beginning of '19 before you catch up with rising raw material costs?
I think that we need to actually get our efficiencies up and then the added value as well. And I guess that we are working around that as will on the commercial front in our cost basis and of course, the segments, when it concerns, like in Raflatac, there are films, there are specialties and then the paper labels and that is something that we improve and take in full use, our investment in Poland. So there's a lot of activities going on to turnaround that trend.
Very good. And finally, I just wanted to hear if you can give us any color on what you mean by good level? It was a comment that we had expected. Does that mean level or slightly up or slightly down or kind of where in between, in terms of your profitability expectations for '19 versus '18?
No, I'm afraid we don't have any sort of more guidance to give than what we have in the sets. But again, we had a record year in 2018. I think the businesses overall are performing well. We know where the challenges lie. We have discussed those today as well. So we look forward to a good level this year as well.
Our next question comes from the line of Markku Järvinen from Handelsbanken.
Yes, a couple of questions from my side. On the investments, you said that you've completed the environmental impact assessment at Kotka. Could you sort of give a bit more color what the current focus is there on that investment?
Like typically, when the environmental impact study is done, then you're starting to put more focus on the kind of detailed engineering and the specifics to get the kind of level of investment requirement into the level that you are then approaching to the final decision -- investment decision. Obviously, you work a lot on the markets. You work a lot on the kind of regulatory world, that how do you see long term regulatory world moving on. There's plentiful of topics that we work on, raw materials and how to build raw material base for the mill. There's a plentiful of things that are now moving on.
And do you want to give a sort of time line of what -- how long will this phase take? Do you have sort of an idea of that?
No, we're not disclosing that at this point of time.
Okay. Then on the Uruguay investment. You said that you're tendering for the port terminal. Should we expect a sort of return on that potential investment to be in line with the target set for Biorefining?
I think that it will be a huge kind of part of the success of the mill. If you think about the pulp mill that is world-class and one of the most profitable pulp mills, the inbound and outbound logistics is crucial for that and building or being part of building the kind of -- being part of the whole concept, a deep-sea harbor with efficient operations handling pulp. I think that it will have a great return for the whole Uruguay operations, not only for the new entity but also for the present operations. So that will be definitely one of the key cornerstones of the cost-efficient concept.
Okay. Then still on the Specialty Papers in China. I suppose -- do I interpret correctly that the problem is mainly with uncoated wood-free business from Changshu? And are you planning to gradually exit that business? And are there some sort of other options for the PM1 at Changshu?
That is absolutely correct. It is focused on that. Graphic papers, i.e. the uncoated and coated paper -- fine papers in Changshu and, like I said, that we presented in our Capital Markets Day material that gradually, we are moving away from standard products to more specialties. That is absolutely correct.
And what are those sort of more special products that you produce in the machines?
They are related to what we do today and also there are some new ideas as well.
Okay, good. Then just on the accounting change that you're doing, at least historically that has a bit of an impact on your operating cash flow. Do you see a need to refine your dividend policy based on that?
No. We have actually sort of multiple accounting changes, as you know. The IFRS 16 for leases, but then also this treatment of the forest renewal costs, which both have impacts on cash flows and actually based on that, the operating cash flow figure change won't be such that it would -- kind of make us -- make any changes to the dividend policy as such or the metrics for us.
Do you expect to publish any further pro forma information on this before Q1 or is this sort of based on what you released?
It's based on what I think -- what we have in the quarterly release.
Our next question comes from the line of Saul Casadio from M&G.
I have a couple. The first one is on the acceleration of the decline of graphic paper demand that we've seen in Europe in Q4, at least judging by the -- your graph of data for October and November, I was wondering whether -- what are the drivers for this decline? What were you seeing in your markets? And the second one is about the CapEx potentially allocated to the investments in the 2 biorefineries. If you already have a number that you can share with us just to give a sense of the potential investment.
First of all, I wouldn't draw any conclusion out of 1 or 2 months declining. As I said in my beginning words that there has been some destocking in many areas, maybe not that much on paper side. It's -- I do not draw any conclusion, especially what I see already today. I think that our best estimate for 2019 would be, on a trend level of decline across the paper products, which is roughly on a 5% level. And CapEx, we have not disclosed any kind of frame for the Biorefining businesses, i.e. the biochemicals or the Biofuels business at this stage.
Okay. Can you share with us whether that would be a greenfield investment or basically a conversion of an existing refinery?
Both of them are going to be greenfield.
Greenfields, okay. Okay.
Our next question comes from the line of Robin Santavirta from Carnegie.
Just going back to this Biofuels project in Kotka. Now could you share some information about the raw material you are planning to use? And also, secondly, related to this, you said the environmental study is concluded. What is key hurdle rate for this investment? Is it commercial? Is it technical or is it regulatory? And then finally, related to Biofuels, what is the profitability of Lappeenranta at this stage? Is it roughly in line with the target for the Biorefining division? Or is it far below or far ahead?
Lappeenranta profitability is absolutely good and it is actually meeting -- it is better than UPM average. If you take EBIT or you take the return on capital employed, it is better than UPM average. So we have been able to really turn that to a good business and volumes are already exceeding the nominal capacity. So basically, that is in that shape. Hurdle, I think that you mentioned all of them. They all need to be good. It's markets, it's the regulation, it is technology. We need to have everything right. There's no one that can be on that level, that we need to meet all of those requirements. And then finally, what was your third one?
I can answer that.
Just on your raw material, what would that be for this refinery?
Yes, Tapio will take that, yes.
Yes, we have described before as well, basically we are looking into sort of broadening our raw material base as compared to the first plant in Lappeenranta. So looking into some new technology that would allow us to do that. So basically, it would be a mix of wood biomass coming from harvesting operations or from our saw milling operations, it would be liquid feedstock and there we have been experimenting with oil plant carinata in Uruguay, which is sustainable source of liquid vegetable oil that is not competing with food production. And then we can tap into other liquid feedstocks including crude tall oil, which we are currently using in Lappeenranta. So it would be a mix. And, as said, broadening the raw material base that we can then use in this -- would be able to use in this new plant in Kotka.
Okay. Can I just ask if -- I believe the hurdle rate is mostly the technology and the raw material. If that works out, that's just my assumption, but if this mill works out and you plan to do it, would you have enough -- will raw material be a restriction for broadening this platform of biofuels?
No, it won't be. And, as like Tapio said, there will be multiple feedstocks and therefore, typically people are really considering only crude tall oil, and crude tall oil will be less than 1/5 of the possible raw material feed. So basically, that what Tapio clearly stated, that we do work and we have been working for years already to actually have a solid raw material base for the mill.
Okay, that's very clear. And then just finally, on this quarter 3 now apparently planned to be started up in 2020. With these power prices, would it have a negative or positive impact on your P&L?
I guess, it depends on which power price you're talking about, today, or last year or this year, but I would say that what we have now seen, it would now -- it would have a, let's say, no negative impact, rather on the positive side.
[Operator Instructions] And our next question comes from the line of Mikael Doepel from UBS.
I just had a couple of follow-ups. So firstly, on the IFRS 16, which you partly described already in the report. But could you give some more figures on that? What the impact will be on operating profit and profit before taxes? And secondly, on the plywood market, could you just talk a little bit what you're seeing there in terms of demand and price trends?
Well, let's say, first on this IFRS 16, I think, basically, you have the figures in the quarterly release from which you can sort of estimate it or calculate it roughly. But as you know, what happens is that the operating lease cost has been above the EBITDA line and now it goes, so that part of it will be depreciation, which will be still part of the EBIT, and smaller part will be then interest, which is in the interest part of our financing cost. So below EBIT line, and you can get an idea of that if you look at the figures in the release that talk about the cash flow impacts and EBITDA impacts.
Yes, and if I take the plywood. I guess, that the plywood market is slowly growing and then our kind of -- if you remember, our main segments are transportation, construction and then the specialties like the LNG. We do -- we feel quite comfortable with that, and prices have been -- pricing to cover the cost of the raw material costs and we are looking forward. In our Chudovo mill, there will be an expansion project, which will be in operations in latter part of this year, which is the fourth quarter. And therefore, we are looking for quite nice business going forward. Obviously, that Chudovo expansion will be only visible for next year maybe.
Okay, you're not seeing any price pressure on that business right now?
I guess, that depends on the various markets and various products. Of course, you sometimes see more and sometimes less. But basically, we have had a very solid good market and the prices are rising as well. Ladies and gentlemen, thank you for your interest, and see you next time.