Good afternoon, everyone, and welcome to Metsä Board's results update for the first half of the year. My name is Mika Joukio, and I'm the CEO of Metsä Board. Together here with me, I have our CFO, Jussi Noponen, and Head of Investor Relations, Katri Sundström. As usual, I will first go through the presentation, and after that, we will be happy to answer your questions. First, the second quarter 2019 in summary. In folding boxboard, the demand has been good, and average selling prices have increased year on year. In white kraft liners, the market situation has been clearly softer. After the very strong first half of 2018, demand, especially in Europe, has declined. This has been evident also in our delivery volumes, and in addition, during the second quarter, the average price in kraft liner sales decreased a bit, which was mainly caused by changes in our sales mix.
The pulp market has continued to weaken, both in Europe and China, and this had a big impact, negative impact, on our Q2 results. I will return to this later. As always, our second quarter was loaded with annual maintenance work, especially at our mills in Finland. This had roughly EUR 7 million negative impact on our operating result compared to the first quarter, which was almost a maintenance-free quarter. So all in all, the negative EBIT delta of roughly EUR 20 million in the second quarter compared to the first quarter was almost totally due to the weakened pulp market and the annual maintenance works. The big news during the quarter were our investment plans and those of our associated company, Metsä Fibre.
Starting with the latter, Metsä Fibre is planning to build a new bioproduct mill with an annual pulp capacity of 1.5 million tons in Kemi, Finland, to replace the existing pulp mill. In addition, they plan to build a new pine sawmill with an annual capacity of 750,000 cubic meters in Rauma, Finland. The total investment value of these two projects would be approximately EUR 1.7 billion. Then to Metsä Board. We are planning to renew our pulp mill at Husum Integrated Mill in Sweden. The current pulp mill is old, and we have had several technical problems with it during the past few years that have burdened our profitability. Instead of keeping the pulp mill running with higher maintenance costs, we are confident that the renewal is the best alternative to secure pulp production in Husum Mill in the future.
I will return to this at the end of this presentation. Then to quarterly paperboard delivery volumes. In the second quarter, the volumes were slightly up from the first quarter, but down by 9% compared to the corresponding quarter last year. However, during the first half of 2018, and especially in the second quarter, the demand for both folding boxboard and white kraft liners was really strong. So despite the fairly big decline from last year, this year's volumes have been on a good level. Then a closer look at the delivery split in the first half of the year compared to the corresponding period last year. In folding boxboards, 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 in that area within a year. In white kraft liners, our deliveries have developed nicely in Americas. However, the declined demand in the EMEA area can be seen in our delivery volumes. For this reason, we have adjusted the production levels of our coated white kraft liners to better meet demand. Then the sales and operating result. January-June 2019 sales amounted to EUR 964 million, 5% lower comparing to the corresponding period in 2018. The decrease was due to declined sales in market pulp and white kraft liners. Profitability in the first half was also weaker. The operating margin was at 10.7% compared to 12.7% in the first half of 2018. Let's take a closer look at the items which particularly impacted profitability.
As already said earlier, the Q2 operating result was mainly impaired by weakened pulp prices and more maintenance compared to the first quarter. Small positive items were the improved average prices of folding boxboard and slightly smaller energy costs. Then in the review period from January to June, the operating result was EUR 103 million, which was EUR 25 million less compared to the corresponding period 2018. Starting from the positive items, we had clearly higher average selling prices in paperboard and in folding boxboard in particular. Also, the impacts from FX were favorable to us, resulting in EUR 21 million positive impact year on year. Then to the negatives. The largest single item impeding our profitability was the weakened pulp market. Both the delivery volumes and price levels for market pulp decreased year on year.
Our share from Metsä Fibre's result was EUR 19 million smaller compared to the first half of last year. Also, the production costs for both paperboard and pulp were clearly higher, and in 2018, cost inflation was fast, and especially the wood prices increased. In addition, the decreased paperboard delivery volumes had a negative impact on the first half results. The global pulp market has continued to be under pressure. A small recovery was seen in the first quarter of this year, especially in China, but in the second quarter, the market situation weakened again. In Europe, pulp prices have been sliding throughout the whole year. The peak price for long-fiber pulp is over $200 per ton cheaper than it was at the beginning of the year. The second and the third quarter include a lot of annual maintenance shutdowns, which will decrease pulp supply to some extent.
Also, some producers have announced production curtailments. However, many of these have already materialized, and the weakened pulp prices will continue to burden our profitability, at least in Q3. Then to production costs. In the first half of the year, our profitability was still burdened by higher wood costs compared to the corresponding period last year. Wood costs have remained at a high level, and we don't expect to see any major changes in the coming months. In the second quarter, the costs remained at a high level, however, we saw slightly lower energy costs compared to the first quarter. January-June cash flow from operations amounted to EUR 67 million. During 2019, working capital has increased due to increased inventories and trade receivables. Investments in the first half of this year were EUR 24 million. Our net debt increased from the previous quarter and was EUR 380 million.
The increase was mainly due to dividend payment, 103 million EUR. Leverage was at 1.2, so well below the targeted maximum level. Then an update of our ongoing pre-engineering phase of Husum's pulp mill investment or renewal. At the moment, we are waiting for the Swedish authorities to make a decision on the environmental permit for the renewed pulp mill. We expect to get more information on this during August. When the environmental permit is confirmed, we will finalize the competitive tendering for the main equipment. We estimate that the final investment decision for the first phase of the investment could be made in the fourth quarter of this year at the earliest. Earlier today, we launched our new sustainability targets for 2030. And here is a summary of selected highlights. Our main target is to achieve fossil-free mills by 2030 with zero fossil CO2 emissions.
This ambitious target includes both emissions from our own energy production as well as those from purchased energy. Currently, 82% of the energy consumption at Metsä Board mills is free from fossil CO2 emissions. These new targets demonstrate our commitment to mitigate climate change supporting the United Nations' Sustainable Development Goals. The renewal of Husum Pulp Mill will take us one step closer to this ambitious target. Then news from our R&D and innovation work, which are both strongly based on sustainability. Our recently renewed and improved Folding Boxboard portfolio answers to increasing demands for sustainability, product safety, and brand promotion. Our light and high-quality paperboards help customers save resources and reduce their own carbon footprint. Our Eco-barrier products, replacing plastic materials, have been well received by the markets, and we continue our R&D work with this.
In June, we announced that we will establish an R&D excellence center in Äänekoski to boost the development of new paperboard and packaging solutions in the future. I'm very excited about this new center, where we will be able to organize packaging design workshops and innovation days together with our customers and partners in order to demonstrate the full potential of our lightweight, fresh fiber paperboards. How do we see the near-term outlook? We expect our Q3 paperboard delivery volumes to remain roughly at the Q2 level. We see good demand and stable pricing for folding boxboard to continue, but for white kraft liners, the outlook is more mixed. On the other hand, we see demand gradually picking up and our order books to improve, but at the same time, we can't rule out the possibility of further decreases in average selling prices.
Throughout 2019, we have seen pulp prices to weaken, and this will have a clear negative impact on our results in the coming months. The Q3 annual maintenance shutdowns will take place in Kemi Integrated Mill and partly also in Husum Integrated Mill. The rest of Husum's maintenance work will then take place at the beginning of Q4. All in all, the negative impact from the maintenance is around EUR 5 million higher in Q3 compared to Q2. And we expect the production costs and FX impacts to be fairly flat in Q3 compared to Q2. Based on these assumptions, we expect that our comparable operating result for the first quarter will weaken compared to the second quarter. And to summarize, the outlook for our end products is somewhat mixed.
In folding boxboard, we see a good market situation continuing, but in white kraft liners, the demand looks stable, yet a clearly lower level compared to last year. And there is still pressure in pricing. The global pulp market will remain uncertain in the second half of 2019. Based on our new sustainability targets, all our mills are fossil-free by 2030, and we think this is a very ambitious target, and naturally, it means actions and investments in order to fulfill it. The renewal of Husum pulp mill would take us closer to this target. So this was the presentation part from my side, and now we are ready for your questions. Please.
Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad.
If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. And again, star one to ask a question. We will pause for just a moment to allow everyone an opportunity to signal for questions. And we take our first question from Linus Larsson from SEB. Please go ahead.
Thank you very much, and a good day to everyone. If I may start with the question of dividend, your policy is based on net earnings, and it seems now pretty clear that 2019 is very likely to be weaker than 2018 in terms of net profits. I just wonder if you could spend a minute or two on the prospects for dividend, not least given your CapEx plans ahead, and if you could provide us with any sort of reassurance on your dividends going forward, please.
Okay, [Foreign language] . So dividend policy is clear, so 50% of the net result, and that has been this year's policy, and no reason to believe that it would be something else next year at this stage. And if you think about our EPS during the first half of this year, it's pretty much at the same level as last year, so I can't tell much more about that.
And do you think your CapEx plans, even though your target is based on net profit payout, does it have implications?
Too early to say at this point.
Okay. Thank you. And then regarding Metsä Fibre, clearly, you've seen a weakness in terms of pulp pricing, but also it appears Metsä Board's pulp shipments came down quite a lot, actually. Regardless if you look sequentially or year on year, is there something that we should know about that?
Anything that any bounce back that we should expect in the third quarter? And also in connection to this, if you could maybe update us on the ramp-up at Äänekoski, how far is that? Is there more ramp-up ahead? And maybe also in terms of ramp-up, if you could just briefly touch upon the Folding Boxboard ramp-up schedule at Husum. Thank you.
Okay, starting from folding boxboard in Husum, so the board machine is running pretty much as targeted, so it's running full, and production is at a good level, so quite okay. Concerning then this pulp situation, of course, the volumes were lower, and that clearly had a negative impact on our result in Q2. And at the moment, we see that the price development in China, it has been quite dramatic, roughly more than 30% decline.
Now it seems that the prices have stabilized, but it remains to be seen what will happen then in Q3 and coming months. As far as Europe is concerned, still the price gap between Europe and China is quite high, so let's see what will happen here, but there is certain pressure in pulp prices in Europe. As far as Äänekoski Pulp Mill is concerned, it's running as targeted and as planned in the investment, so nothing special there.
Right. How much is there still to go in the Äänekoski ramp-up, or is it complete by now?
Of course, I can't remember by heart the exact figures, but as I said, it's really much as we originally targeted, so no drama.
Okay. And that aside, anything else to note regarding the weakened pulp shipments at Metsä Fibre in the second quarter?
Did Metsä Fibre take market-related downtime, for instance?
No. Not at all.
Okay. Thank you.
We take our next question from Gustaf Schwerin from Pareto Securities. Please go ahead.
A ll right. Thanks for taking my questions. Firstly, on the demand side for white kraft liners, you said that it's quite stable still, but state how you measure this negative mix effect. Could you elaborate a little bit on this? Is this just that you're selling less coated volumes? And then perhaps related to that as well, how much are you looking at curtailing production here? And also, can you say anything on sort of the expected price drop, quote-unquote, for Q3 at this moment?
Yep. So in linerboards, of course, the demand has been lower during this year than last year. Of course, we need to remember that last year was very, very hot, so to say.
The first half of last year, especially Q2, was really, really, really hot. At the moment, the order books have improved slightly comparing to the situation a few months ago, but still, there are some uncertainty in linerboard side. And the curtailments, they are not remarkable. We are both in Husum and Kemi, we are running pretty much as normal.
Just a follow-up on that, Professor. Just to understand the mix effect that we've seen, maybe larger price drops in, for example, testliner or uncoated or unbleached kraft liners. I mean, do you see that this is just really a substitution effect that you have to provide a lower quality grade in order to compete with those?
Yeah.
So we are the biggest producer of white kraft liners in Europe, and of course, I mean, how would I say, we act responsibly at the market, and we don't see any dramatic drop in prices during Q3. Maybe some influence on the price mix or customer mix, but nothing dramatic.
Okay. And then lastly, for me, on your wood cost, you mentioned that your costs for Q3. When do you foresee that we'll see some lower cost for wood? Is this by the end of 2019, or do you have to look further ahead?
No, that is very difficult to speculate. What we see is that Q3, if you compare Q3 and Q2, the production costs will be relatively stable, so no major changes there.
But what will happen then at the end of this year or early next year, that's. I don't have competence to look at that crystal ball. Well, I mean, the reason for you not seeing lower costs in Q3, is that not only a lag effect, or are you simply not seeing lower input cost for wood? So we are saying that the production cost will be stable in Q3 comparing Q2.
Okay. Thank you.
We take our next question from Mikael Doepel, UBS. Please go ahead.
Thank you. Good afternoon, everybody. A couple of questions here. Firstly, with regards to the folding boxboard volumes in the U.S., now looking at the first half, it seems as if volumes are down a bit in the U.S., which is, to me, maybe a bit surprising given your ambitions to grow your presence in that market.
So maybe you could start by talking a little bit of what's happening in the U.S. right now and how you are performing there.
Yeah. So what we already mentioned in capital markets last year, so now we're really focused on profitability, and we have significantly been able to improve the price mix, customer mix, sales mix in the Americas market so that the average prices have increased roughly EUR 100 per ton. So that is a remarkable increase. And of course, we have then, I mean, lost some customers, but that has been pretty much by purpose. I mean, if they are not ready to pay the decent price for a good product, then we don't continue with them. And of course, we are targeting and searching new customers, and our original target, that 300,000 tons a year, it's still intact. No reason to change that.
But now we have been very strong and determined concerning the price mix improvement in that market. Demand is good.
Okay. But then on Husum and the pulp investment there and on CapEx overall, think about CapEx first, 2019, 2020, what kind of a CapEx level should we assume for these years if we're taking into consideration the Husum pulp investment? You mean this year?
This year and 2020, if you could say anything about that. So at the moment, the estimation is still this EUR 300 million, as we have said, roughly 300 remains to be seen. Of course, then we know more when we have studied more about this case. And then depending on when we are able to make the decision, so then it's, of course, some money will be used already this year, but I can't say precise figures at the moment.
But anyway, this EUR 300 million or whatever is the final sum that will be for 2019, 2020, and 2021, even some part of 2022, so. Three or four years.
Okay. And as I understand it, this is mainly a replacement investment. Is there any earnings benefits you expect to get out of this?
Yeah. It's mainly replacement investment. Of course, we probably are able to improve our energy generation, and then, of course, the less disturbances in pulp production means slightly higher pulp production, but we come back to these figures when we have the final decision in hand. But this is pretty much replacement investment.
Yeah. And a final question on FX. I think you mentioned the year-over-year positive impact in the first half of about EUR 21 million or so on a net basis on operating profit.
Assuming current spot rates, what would you expect to see in the second half of the year on a year-over-year basis? You mean what do we expect for FX?
That's correct. Maybe Mr. Noponen can look at the crystal ball.
Yes. As we are hedging on a rolling basis for roughly the next six months, the remaining months of this year have been hedged already, and we are guiding flat FX impacts Q3 on Q2. And also for the fourth quarter, you should not expect any massive impacts from FX.
All right. Thank you very much.
We take our next question from Robin Santavirta from Carnegie. Please go ahead.
Thank you. So to start with regarding the delivery volumes, now you seem to be quite happy with the performance in Q2 and state that demand is good in folding boxboard and stable in white kraft liners.
Yet when I look at the numbers, I see paperboard deliveries declining 9% year- on- year and 7% compared to Q2 2017, so quite significant declines also compared to deliveries in Q2 2017. What is explaining this, as I would assume, in folding boxboard and also in white kraft liners, the end demand or usage of these products are probably not declining in the same rates? No, that's true. Are your clients adjusting inventories? Are you losing market share? What is going on?
Yeah. So we must remember, and we have stated several times that last year, first half, and especially Q2, was super hot. I mean, the demand was really not normal. Now it's pretty much normalized the situation, and that is simply the case.
Of course, we need to remember that then Q3, the demand last year was slightly lower than Q2 or clearly lower than Q2 because then inventory levels went up both in linerboard as well as in folding boxboard, and that affected then Q3 and partly Q4 also. So now we see that the market situation is quite normal.
And do you see any de-stocking from your clients, or is it restocking, or could you talk a little bit about what you see sort of your clients doing in Europe and North America in terms of paperboard? Or do you have any visibility about this?
You mean at the moment?
Exactly.
No, no. We see that it's quite and demand is okay, and we don't see this kind of de-stocking or other kind of stocking-related issues at the moment.
All right. Thanks.
Then if I take your group earnings and then I deduct Metsä Fibre earnings, then I end up probably with something which reflects mainly your paperboard business a little bit, pulp sales as well, and something else. But then if I do this exercise, I can see sort of that the remaining part of the business or group earnings excluding Metsä Fibre are also down year on year and also down compared to Q2 2017. So it seems as the paperboard business profitability, despite the higher sales prices year on year and certainly compared to Q2 2017, are higher. So still, it seems as the profitability is weaker in the paperboard business. Is this only due to the volume and the cost sort of impact, or is there something else, and how should we expect this sort of to continue to evolve?
No, I mean, you are quite right.
So it's mainly volume-related, and then also, of course, the cost-related, so wood prices and also logistic costs, especially in the North America. So these are the elements, even though we have been able to increase prices quite nicely during these years, but still, that is the case, as you said and the main reasons are those that are listed.
All right. Thanks and two questions, still, if I may. Maybe for you to see in terms of inventories, it seems as you're sort of producing into inventory and driving up your earnings by that in a sense, at least technically, and your inventories are up almost 30% year on year. How do you plan to manage sort of working capital and inventories, and what is driving up those inventories?
Yes. I can take this question. So the increase in inventory, it's two parts: volume and value.
And there has been quite a lot of volume increase, and it has been in pulp and in linerboard, not in folding boxboard. And we have been confident that the volumes will start moving going forward, and for that reason, we have made the decision to increase the inventory levels slightly. There is also the seasonal impact. So every year in the first half, working capital has increased and then decreased in the second half. So if the demand stays normal in the markets, we could expect some release from working capital in the second half of the year.
All right. Good. Thanks. And related to the maintenance stoppages and the earnings impact of those, I guess you have talked about roughly EUR 10 million Q2, Q3, Q4.
But now, as it seems as you have a little bit more in Q3, and you were commenting about EUR 5 million up quarter on quarter in Q3, how should we look at Q4 if Husum has already started in September? Is Q4 a little bit lighter in terms of maintenance compared to Q3?
Yeah. So Q3, as you said, so we have Kemi and then Husum maintenance shutdowns. And this year, Husum shutdown will start a little bit a few days earlier than last year, for example. So it's more on the September side than October side. And that then affects on this plus EUR 5 million, as we said. Then concerning Q4, probably the maintenance cost will be a little bit lower, but it's a bit too early to say because everything, I mean, it's up to then startup of Husum mill after the maintenance shutdown.
But we don't have any other major shutdowns than this kind of tail from Husum.
All right. Thanks. And if I just made one final in terms of what was already touched upon, the dividend, I do realize and understand your dividend policy is crystal clear. But still, if you were to comment, you did not cut the dividend when you sort of had the cost ramping up Husum in 2016, even though your EPS declined. Is sort of is there something else that can sort of impact the dividend, with the wish to sort of remain predictable or stable in terms of dividend, or is it simply a raw EPS and then 50% of that? Or should we look at?
Again, I think it's too early to say, but you're right by saying that it's not always been precisely 50%. It has been something else also.
But I think we are now living in August still, so it remains to be seen what will be the case. But what we can say is that policy is a minimum of 50%.
Yeah. Yep. Yep. Thank you, Mika and Jussi. Thanks. Thanks.
Thank you. We take our next question from Marko Järvinen from Handelsbanken. Please go ahead.
Yes. Good afternoon. Just a few more questions from my side. Just basically regarding that production costs are stable and volumes are stable and lower prices for pulp and perhaps liner. On the cost side, should we just assume that the sort of only difference in cost is the EUR 5 million maintenance issue, or is there some seasonality in depreciation or fixed costs otherwise?
No, it's pretty much this maintenance extra cost, so to say.
So depreciation remained at the Q1, Q2 level in Q3, Q4, and fixed cost is the same?
It will be slightly lower in the second half of the year than in the first half.
Yes. Okay. Good. Good. And could you sort of, at this stage, comment how does folding boxboard pricing look for next year? We've seen sort of pulp prices moving down, liner prices moving down. Is folding boxboard immune?
Yeah. Again, it's too early. Of course, we will start during the autumn, the annual negotiations and discussions concerning next year. But in folding boxboard, the prices are based on demand and supply and not on the pulp prices or so. So that is a bit different comparing to, for example, linerboard business. But at the moment, market is good. Demand is healthy. So let's see what will happen next year.
But a little bit too early to say. Of course, we try our best and utmost to get positive development in that area also. But discussions and negotiations are just about to start.
Very well. Thank you very much.
Once again, ladies and gentlemen, if you would like to ask a question, please press star one. We take our next question from Henri Parkkinen from OP Financial Group. Please go ahead.
Yes. Good day for everyone. I have one question about the North American market and your comment that through this sales mix optimization, the average prices of folding boxboard has improved by around EUR 100 per ton over the past year. Is this like-for-like figure? So as we know that the dollar has strengthened against the euro during the last 12 months, and if you have figures in US dollar terms, that would be very helpful.
It's pretty much, I mean, comparable. I don't have the exact euro sorry, USD prices here, but it's pretty much comparable.
Okay. Okay. Very helpful. Thank you. Thank you.
It appears there are no further questions at this time. I would like to turn the conference back to our host for any additional or closing remarks.
Okay. Mika Joukio here. So thank you very much for good questions, and I wish you a nice afternoon and evening. Thank you.