Good afternoon, everyone, and welcome to this conference call and the presentation of Metsä Board's year-to-date results. My name is Mika Joukio, and I am the CEO of Metsä Board. Here with me are also CFO Jussi Noponen and Head of Internal Relations, Katri Sundström. Investor relations, not internal. So, first, the third quarter in a nutshell.
The overall development of paperboard business was favorable. The delivery volumes, especially in white kraft liners, grew from the previous quarter and were higher than we earlier estimated. Paperboard price levels remained stable, and lower wood costs supported our profitability.
This better-than-expected development led us to pre-announce our Q3 result at the beginning of October. The global pulp market remained weak, and prices both in Europe and China continued to slide. Obviously, this had a negative impact on our results. Q3 profitability was also affected by maintenance costs.
We had planned maintenance shutdowns in two of our integrated mills, Kemi and Husum. After the review period, yesterday in fact, we announced an update of the planned Husum pulp mill renewal. We will make financial commitments prior to the final investment decision, which we estimate to take place in the second quarter of next year at the earliest.
I will return to this later in this presentation. Before moving on to the financials, I want to go through some other important events that took place in the third quarter. At the beginning of August, we launched our new ambitious sustainability targets for 2030. So, based on our new targets, we aim to have 100% fossil-free mills and raw materials by 2030. In addition, we are aiming for further reductions in process water use and further improvements in energy efficiency.
Our recently signed bank financing facility is linked to the sustainability targets and specifically to the use of water and energy. This is just a small sample of all our new targets and commitments. You will find more information on our webpage. Another big event during the third quarter was the introduction of our new plastic-free Eco-barrier paperboard.
This paperboard has been developed especially for food and food service use, and it has a medium barrier for grease and moisture. Most importantly, this Eco-barrier paperboard can be recycled in paper or paperboard streams. Our customers have already shown a strong interest towards this product, and I have high expectations for its commercial success. Then to the financials, and I will start with the paperboard delivery volumes.
Our paperboard deliveries in the third quarter grew by 5% compared to the previous quarter and by 4% compared to the same quarter last year. Delivery volumes in white kraft liners, in particular, picked up back to the levels they were before the slowdown in the summer of last year. We have been defending our prices, and for that reason, we have lost volume.
But now the customers have been buying bigger volumes again, which is good news. Earlier this year, the production of white kraft liner was curtailed in our Kemi mill to reflect market demand. Since August, production has been at normal levels. However, if we look at the year-to-date development from January to September, the total volumes are lower compared to the corresponding period last year. Then a closer look at year-to-date delivery split by region. In folding boxboard, the changes are quite small.
In Americas, we have continued our actions to improve the sales mix, meaning that we emphasize profitability over volumes. Our actions have paid off, and our average selling price in folding boxboard has improved by more than EUR 100 per ton at the same area within a year. In white kraft liners, the biggest drop in volumes has been in the EMEA area.
In Americas, demand for coated white kraft liner has been stable, and our volumes have even increased. Then the sales and operating result. January-September 2019 sales were only slightly lower compared to the corresponding period in 2018. Higher paperboard prices compensated for lower delivery volumes to some extent. Out of total sales, 60% came from folding boxboard, 26% from white kraft liners, and 40% from market pulp. The year-to-date operating result was weaker compared to the last year's level.
Operating margin fell nearly 3 percentage points to 10%. Nevertheless, it's still a two-digit figure, which I think is a good achievement in this economic environment. Let's take a closer look at the items that particularly impacted our result in the third quarter. In the third quarter, the favorable development of the paperboard business improved profitability.
Delivery volumes were higher and costs were lower. In particular, the price of wood imported from Baltics decreased. Also, some other paperboard production costs, like energy and other raw material costs, were on a lower level compared to the previous quarter. The main negative item continued to be pulp, and our share from Metsä Fibre's result was nearly EUR 10 million weaker than in the second quarter. The third quarter also included a lot of maintenance, which impaired profitability.
Then, moving on to the reviewed period, January to September, where the operating result was almost 25% weaker compared to the corresponding period last year. Starting from the positive items, our paperboard prices, especially in folding boxboard, were clearly on a higher level. Changes in FX have also been favorable to us. The year-on-year positive impact was EUR 38 million. And then to the negative items, which obviously played a bigger role in this comparison.
Weakened market prices all over the world, together with lower delivery volumes, had a big negative impact on profitability. Our share from Metsä Fibre's result was EUR 44 million, so roughly half compared to the previous year. Also, production costs in both paperboard and pulp were higher. The global pulp market has continued to be under pressure. Especially in Europe, pulp prices have been sliding throughout the whole year.
The fixed price for long fiber pulp has weakened by 30% in Europe and by 40% in China from the highest levels in 2018. At the same time, the gap between European and Chinese prices has now clearly narrowed. We usually see higher demand for pulp towards the year-end. Also, there have been announcements of pulp price increases by some producers, especially in China.
So, a few positive triggers in the pulp market. Nevertheless, the producers' inventory levels are still on a high level. January-September cash flow from operations amounted to 111 million EUR. Year-to-date, the CapEx was 42 million EUR. An estimated full-year CapEx is 90-100 million EUR, including the first installments related to Husum pulp mill renewal. Our net debt decreased slightly from the previous quarter and was 352 million EUR. Leverage was at 1.2, so well below the targeted maximum level, which is 2.5.
At the end of the quarter, we signed a new financing facility consisting of a €150 million euro term loan and €200 million euro credit facility to replace our existing loan and RCF, which both would have expired next spring. The new financing facility is linked to our sustainability targets and specifically to water and energy consumption, which demonstrates our strong commitment to reaching our recently announced 2030 sustainability targets.
Then, an update of our planned renewal of Husum pulp mill. First, a little bit of background. Earlier this year, we announced that we will launch a pre-engineering for the first phase of the renewal of our Husum pulp mill in Sweden. The first phase of the renewal consists of a new recovery boiler and a new turbine.
The technical age of the pulp mill is already high, and most importantly, the renewal would create a solid foundation to increase paperboard capacity in the integrated in the future. It would also secure cost-efficient pulp and energy production and enable us to reach our ambitious sustainability targets for fossil-free mills.
The total investment value for the first phase would be roughly EUR 320 million divided over 2019 to 2022. At the moment, we are applying for an amendment to the environmental permit and expect to receive that in the second quarter of 2020 at the earliest. Our intention is to minimize the delay in the startup of the new recovery boiler and turbine due to the environmental permit process.
For that reason, we will make certain financial commitments for the implementation phase of the project already now, although no final investment decision will be made prior to receiving the environmental permit. The total amount of commitments will be a maximum of EUR 100 million, and it is included in the total investment value of the first phase of the renewal, EUR 320 million.
Then the estimated impacts on the first phase of the investment. As we have earlier stated, self-sufficiency in electricity would increase in the mill from the current 40% to over 80% and be entirely based on renewable biomass. At current electricity prices, that would result in annual cost savings of approximately EUR 12 million. In addition to increase in electricity generation, the investment will reduce oil consumption.
Also, the annual CapEx and costs would be lower thanks to the longer intervals between the shutdowns and reduce duration of the shutdowns. This, in turn, would increase the pulp and paper production volumes. All in all, the investment is expected to generate an increase of approximately 35 million EUR in annual cash flow, of which roughly 30 million EUR is EBITDA improvement and 5 million EUR is reduced maintenance CapEx.
And our financing costs are expected to increase by some 2 million EUR per year from the startup of the recovery boiler and turbine. In addition, we expect to record an impairment loss of approximately 19 million EUR on the assets of the Husum pulp mill in our 2019 financial statements. Then moving on to the near-term outlook. Due to the seasonal impacts in December, we expect our Q4 paperboard delivery volumes to decline from the Q3 levels.
We also believe that price levels for both folding boxboards and white kraftliners will remain stable. The pulp prices are expected to remain low globally. However, we see some positive triggers, particularly in Chinese pulp market, so producers' announcements of price increases, production curtailments, and seasonally stronger year-end.
At the same time, inventory levels remain on a high level, and in Europe, pulp prices have been declining after the review period. All in all, the market pulp business will have a negative impact on our profitability in the fourth quarter. The fourth quarter includes less planned maintenance compared to the two previous quarters, so that will have a positive impact. And we expect the production costs and FX impacts to be fairly flat in Q4 compared to Q3.
Based on these assumptions, we expect that our comparable operating result for the fourth quarter will be roughly at the same level as in the third quarter. Then to summarize, against our earlier expectations, the paperboard business developed positively in the third quarter. The delivery volumes, particularly in white kraft liners, increased from the previous quarter, and price levels were stable.
Over the past year, we have defended our kraft liner prices in a weakening market situation, which has led to lower delivery volumes. Now the customers are returning back to us. We see that a stable market situation for paperboard will continue, even though the year-end delivery volumes can be impacted by a seasonally slower December. The pulp prices are expected to remain low, which will have a negative impact on our fourth quarter result.
We have recently launched a new Eco-barrier paperboard, which is fully recyclable with paper and paperboard streams. It offers a sustainable alternative for packaging materials that use plastics. Our R&D work in this area will continue, and the Husum pulp mill renewal is progressing. We will make financial commitments prior to the final investment decision.
With this, we want to enable the introduction of new, cleaner, and more energy-efficient technology as quickly as possible and to minimize the production interruption risk related to the old recovery boilers. That was the presentation of our January-September results, and now we are ready for your questions. Please go ahead.
Thank you. If you wish to ask a question at this time, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will now take our first question from Linus Larsson from SEB. Please go ahead.
Yes, thank you very much, and a good day to everyone. I'll start with your fourth quarter guidance and whether you could in any way share with us what kind of expectations you've baked in with regards to the contribution from your associate company, Metsä Fibre. Metsä Fibre had pretty strong volumes in the third quarter, but weak prices and maintenance, like you said. What's the net going into the fourth quarter? Is Metsä Fibre a stronger or a weaker contribution compared to the third quarter? That's my first question, please.
The answer is simple. It's slightly lower, slightly worse.
Thank you very much. That's very helpful. And also regarding Metsä Fibre, could you also share with us how the price hikes have gone in China? You took part in the price initiatives going on in October. Are those prices sticking? And is there also an initiative now in November, possibly?
Yeah, so far we have seen in China some $10-$20 per ton price increases, so not yet very remarkable. It's very difficult to estimate how this price development will continue, but of course our expectation and estimation is that now we have seen the bottom and prices start to increase in China. But how quickly remains to be seen.
But at least you have achieved some price increases, and they at least seem to be sticking for now.
Yeah, that is the case, but of course not very fast, so slow development.
Right, right. Thank you. And also on the raw material cost side, you said in the third quarter you had some benefits from some easing when it comes to Baltics wood sourcing. Could you update us on that trend in the Baltics, but also, and maybe more importantly, in Finland?
Yeah, starting from overall development, so wood prices or wood costs were slightly lower in Q3 comparing to Q2, and expectation and estimation is that they will remain quite stable now in Q4. The prices from Baltic countries, they have declined slightly, and remains to be seen what will happen the next year. But now the situation is kind of moving to the right direction from our perspective.
And so the price agreement that you conclude this time around, how are they compared to six months ago, let's say?
Where? What do you mean price agreement?
In general, your wood purchasing now is at a different price compared to, say, six months ago, which should then have an impact, I'm thinking, one or two quarters down the road?
So I would say that the first half of this year, the prices were slightly higher than the second half of this year on the average.
And am I right in thinking that that should then feed into your P&L in the first quarter, or when should we be able to see that?
Again, you remember that I mean, we are just in the middle of the most difficult season. So I mean, if the winter will be very warm, for example, or wet, or then something happens, so of course it's very difficult to foresee or estimate. So if everything goes without any major kind of challenges, then remains to be seen what is the wood cost level. But at the moment, I do not see any special reasons why they should increase if the winter will be normal and autumn will be normal.
Right, right. Okay. And then just finally, and not least taking into account what you're saying now about Husum and the permit process, could you please give us an update on or guidance for CapEx, what you expect for 2020 and 2019 as well?
So earlier we said that 2019 was 70-75 million euros, so now it's 90-100. So that is the influence for this year, but it's too early to say what it is next year. Anyway, the lion's share of the cost will be next year and then 2021. But what is the split? It's too early to say.
Okay. And the delay, there isn't a delay, so to say, with regards to CapEx due to the permitting process?
No, we don't see that at the moment. So target is to get the new technology up and running by the end of 2021.
Great. Thank you very much.
We will now take our next question from Mikael Doepel from UBS. Your line is open. Please go ahead.
Thank you. A couple of questions. First of all, on the European pulp market, what do you see there right now in terms of demand trends? So far this year, it's been fairly weak, but do you see any changes now looking ahead? And also, do you see any changes to the port inventories in Europe?
Yeah, concerning the demand in Europe, so we do not see any major changes there during the coming months. Price levels, they are. I mean, the gap between the Chinese net prices and European net prices, they are getting closer to each other. So at least at the moment, the prices in Europe, they have still slightly declined, but hopefully they won't or they will stabilize and then starting to increase when the Chinese prices will start to increase again.
So that is the situation. The inventory levels are slightly on the high side, but of course, due to these shutdowns and curtailments, inventory levels are now healthier than they used to be like three, four months ago.
Okay. Thank you. In terms of the European folding boxboard market, we are hearing some comments from Qconverters and industry sources that the market seems to be quite competitive, right? The market is competitive right now and the pricing are under pressure. What's your take on the market right now? How would you describe the situation?
At the moment, demand is good, so the mills are running full, order flows are okay. So we do not kind of share that kind of opinion. And before you ask about the prices of next year, of course, we follow the situation very carefully and then act if we see possibilities, but remains to be seen.
Okay. Good. And then switching to U.S., the folding boxboard business there, how would you describe that in terms of pricing and mix now?
So in that market, as also mentioned in presentation, was that we have been able to improve the customer mix or sales mix. So average prices have nicely increased there, and we have been able to grow with the so-called better customers also. So there is good progress even though the total volumes have declined. But then with the so-called good customers, we have been able to grow, and intention is to continue to grow with them.
Okay. Just a final question on the liner board market. We saw some renewed weakness in October for brown kraft liners in Europe. Do you see any spillover into the white liner board markets, or is that fully immune to what's happening on the brown side? Overall, what's your take on that market right now?
Yeah, the white kraft liners, I mean, there is no clear connection between these brown or gray grades. So it's in a way a niche business where we are operating, and that's good for us.
Okay. That's clear. Thank you very much.
We will now take our next question from Mark Kirkovanian from Handelsbanken. Please go ahead.
Yes. Hello. Good afternoon. I had a few more questions. I guess folding boxboard pricing, how does that look for next year is the question. RISI reported that you're seeking a GBP 65 increase in the UK, but I haven't seen anything on other markets. Is the UK an isolated incident, or are you seeking such an increase?
Yeah, the UK pricing increase is also then due to the currencies and not that much on the demand itself or so. So that is clearly the reason for that. And as I already mentioned, of course, I mean, during the last two, three years, we have been able to increase prices, and our intention is to continue to do so also in the future, but remains to be seen when and where.
Good. Good. Then just on pulp, as was discussed earlier, the earnings in Metsä Fibre were fairly low in Q3 and are moving down for Q4. I was just wondering how are the earnings in your own pulp business, primarily from Husum and Kaskinen as a whole? So where do those sort of sit now with the market prices where they are, and what's the sort of cash cost level? What is the earnings level in those operations?
Yeah, I don't go specifically through the earnings levels, but of course, the pulp business from Husum as well as then the CTMP business from Kaskinen, they are pretty much linked to Metsä Fibre's business. Maybe the only difference is that from Husum, we are selling relative terms a little bit more to Europe than to China. But other than that, I mean, the price levels and so are pretty much following the Metsä Fibre business.
And is Husum primarily hardwood or softwood that is on the market?
Both. We are mainly softwood, but we are se lling also hardwood. But in Europe only.
Good. Then still on FX, FX is now guided to be neutral for Q4 compared to Q3. Is there still a sort of a positive FX impact at these levels that we should expect next year?
Yes, this is no problem with the exchange. This is Husum. Yeah, small positives can be expected if we stay on today's spot levels.
Could you sort of quantify that at all?
I don't have the figures here with me for next year.
Okay. Good. Thank you very much.
Thank you.
As a reminder to ask a question, please press star one on your telephone keypad. We will now take our next question from Harri Taittonen from Nordea. Please go ahead.
Yes. Good afternoon, Harri Taittonen, Nordea. On the liner boards, is there sort of changes in the supply side, or are you seeing any? Well, there's some new capacity coming upstream in Scandinavia, and also sort of trade flows have been kind of going back and forth. But are you seeing any sort of increase or sort of pulling out of supply in the European market on the white side?
No, no, we don't see any remarkable change there. I mean, the volumes that we lost in the beginning of this year, now they have nicely come back, and the customer base for us is pretty much similar today than, let's say, a year ago or earlier this year. Only the volumes are higher. So I don't see any major change.
Okay. Okay. Then on the Husum investment and the second phase, now that you get some very kind of very, very tentative estimates on the cost of the second phase, but now that you have moved on with the planning, is there any more accurate estimate for kind of the following stages in that investment of the second phase?
No, no, not at the moment. We still keep this €300 million as a best estimate at the moment. We have more concentrated on the first phase.
Sure. Understand. And on this maintenance, I mean, quite typically, I think in the past years, the cost has been quite flat or sort of similar in Q3 and Q4. And now you're saying that the Q4 is a bit smaller. But what is the reason and how big is the difference roughly?
The reason is simple. We have less maintenance in Q4 than Q3. Maintenance costs are linked to maintenance.
So there are less maintenance. We have this CTMP and Husum. Okay, Husum was partly October, but anyway, we have less maintenance now, and that has positive impact on result.
Yes. And I just remember from the past that it has been typically €10 million per quarter, roughly, ballpark. But I mean, how different is it this year compared to those earlier years? I mean, this year, I mean, Q4 to Q3, it's not as high as 10, but anyway, it's remarkable or clearly lower.
Yeah. Okay. Okay. And then maybe just sort of double-checking the depreciation because it sort of moves a little bit by the quarter. And I understood that in the fourth quarter, depreciation will also be at the lower level. But on an annual level, we should be looking at sort of an unchanged. But the question is about fourth quarter, that it should be about the same level as in Q3.
Yes, it will be on.
And it comes down by about EUR 10 million from what's there.
Yeah. You can expect third quarter levels for the fourth quarter as well. So about EUR 95 million for the full year.
Yes. And then maybe sort of moving back up again in Q1 and Q2 next year to the same levels as they were in Q1, Q2 this year, I suppose.
Yeah. We post higher depreciation in the first half than in the second half.
Exactly. Exactly. Okay. Well, if I may, just one more on this sort of new barrier material. With the commercializing on that, are there any reasons to new sort of benchmarks, and what's the timetable there for getting it up onto the market?
So we just launched that during the last week of September, and now we are in the last week of October. So customers have been, but several customers are trialing that at the moment, and the kind of feedback has been very, very positive. So as I said, I look forward to the commercial. I mean, I'm positive concerning the commercial success of this product.
Great. Thank you very much.
There are no further questions at this time.
Okay. Okay. So thank you, everybody, for your interest, and I wish you an enjoyable evening. Thank you.