Good afternoon and welcome to this presentation on Metsä Board's R esults for January to September. My name is Mika Joukio and I'm the CEO of Metsä Board. Together with me here today, I have our CFO, Jussi Noponen, and our Head of Investor Relations, Katri Sundström, so let's start by looking at the performance in the third quarter. Our profitability improved due to the higher average paperboard prices and a strong bulk market. This positive performance was also supported by higher production and delivery volumes from Metsä Fibre. Our total paperboard delivery volumes were down on the record high Q2 levels. We estimate that the high delivery volumes during the first half of the year, and especially in the second quarter, increased our customers' stocks, which had an effect on paperboard delivery volumes during the third quarter.
We also continued our actions to optimize the price mix of paperboard sales in the Americas as well as in Europe. That also impacted the delivery volumes. Wood costs remained high but steady compared to the previous quarter, then we had the planned maintenance shutdowns at Kemi and Husum integrated mills. Maintenance shutdown at Husum began at the end of September and ended at the beginning of October, then a brief look at the demand drivers for fresh fiber paperboards before we move on to the results. The demand for fresh fiber paperboard is supported by strong market trends such as globalization and urbanization, sustainability, food safety, and the growth of e-commerce. Fresh fiber paperboard is replacing plastic packaging materials and the use of recycled paperboard to an increasing degree, particularly in food and food service packaging. The importance of sustainability is constantly growing.
Metsä Board's lightweight paperboards are not only safe and recyclable but also resource efficient. Their production consumes less energy, water, and raw materials than before. The growth of e-commerce is especially supporting demand for linerboards. Paperboard prices have developed favorably. This picture here shows the market prices only in Europe, but development has been positive in the other market areas as well. Metsä Board has announced an increase of EUR 80 per ton in the price of folding boxboard in Europe, valid from November. We expect the effect of the announced price increase on the results to be visible at the beginning of 2019. The price development of kraft liner has also been strong within the past year.
As I said earlier, our paperboard deliveries declined in the third quarter, and we believe that one of the reasons for the drop was the record high delivery volumes and increased stocks of our customers in Q2. If you look at all European producers, delivery volumes among all folding boxboard and white kraftliner producers dropped by 5% in the third quarter versus the second. And in the year to date, total deliveries of folding boxboard rose by 6%, whereas total deliveries of white kraftliners declined by 3%. This slide shows the delivery split of our folding boxboard and white kraftliners. We have taken initiatives to optimize the price mix of paperboard sales, which have had an impact on delivery volumes. In Husum, the average selling price of folding boxboard is not yet at the level where we want it to be, even though it has developed nicely.
Overall, our aim is to find the most profitable customers and focus on the best-performing paperboard segments. Here you see the quarterly development of sales and operating results. Lower delivery volumes of paperboard and market pulp impacted our sales in the third quarter. In the year to date, higher volumes and prices in paperboard increased the sales. The decline in Metsä Board's market pulp deliveries is the result of an increase in Husum paperboard production. However, our net surplus in pulp, including Metsä Fibre holding, has gradually increased. Then profitability. The operating result in January to September improved by nearly 40% compared to last year. Positive contributors here, once again, higher prices and volumes that improved the result from Metsä Fibre and improved cost efficiency. On the negative side, we had higher production costs, especially wood costs, and a weaker U.S. dollar after hedging.
Favorable profitability development is visible in our return on capital employed, which is above our long-term target of 12%. The 12-month rolling return was 14.1%. Capital employed at the end of the review period was EUR 1.7 billion, then a closer look at wood costs. After a very turbulent beginning of the year, wood costs remained quite stable in the third quarter compared to the second. Stable but at a high level. The main contributor is still the expensive wood in the Baltics imported to our Husum mill in Sweden. The surplus in demand in the Baltic states is keeping prices high. In Sweden and in Finland, the balance in supply and demand is more or less normal. Despite the tightness in wood availability, which we have witnessed for a year now, we have not needed any downtime in our production. The pulp market remained strong and improved our profitability.
Production and delivery volumes at our associated company, Metsä Fibre, increased, and the new bioproduct mill in Äänekoski achieved its full capacity in August, exactly a year after its startup as planned. Metsä Board's annual pulp balance, including the share from Metsä Fibre, is approximately 550,000 tons long in 2018. The majority of that long position is softwood pulp and is sold mostly in Europe and in China. Foreign exchange had a negative impact of EUR 4 million in the third quarter compared to the second quarter. This includes hedging activities. The negative impact in the year to date was EUR 47 million compared to the corresponding period last year. The main contributor to both negatives was weaker USD. The 12-month rolling cash flow from operations was EUR 226 million. In January to September, working capital rose by EUR 59 million.
This was mainly due to the growth in business volumes. In the current pulp market conditions, a bigger share of our result is generated by Metsä Fibre, and that share of the result is a non-cash item. The dividend from Metsä Fibre will be received in the first quarter. Our financial position is strong, and our leverage ratio is at 1.0. Our interest-bearing net debt at the end of September was EUR 345 million, and then to the near-term outlook. The market prices of folding boxboard and white kraftliner in local currencies are expected to remain mainly stable or to rise slightly. In Europe, we have announced the price increase in folding boxboard, and we expect to see impacts of that at the beginning of next year. We will continue our own actions to improve the average price of folding boxboard by optimizing the sales mix.
We believe that the pulp market will remain strong. Foreign exchange will have a positive impact on our Q4 result due to the stronger U.S. dollar and weaker Swedish krona. We expect our paperboard deliveries during the fourth quarter to remain roughly at the level of the third quarter or to decline slightly. Delivery volumes in the fourth quarter are affected by the seasonally slower December. We see that cost inflation has slowed down, and we don't expect significant changes to production costs in the near future. Net impact of energy costs and sale of emission rights will have a positive impact in the fourth quarter. Part of the shutdown at the Husum integrated mill took place at the beginning of October, and the result impact from that has been taken into account in our result guidance for Q4.
Based on the near-term outlook, we expect that our operating result in the fourth quarter will improve compared to the third quarter. Let's summarize. The overall market situation still looks good. Market trends such as urbanization, sustainability, and food safety are all supporting the demand for ecological fresh fiber paperboards. We estimate that the global annual growth rate in demand for folding boxboard and white kraft liners will be 3% on average. We see good demand in pulp. Demand is supported by limited new capacity in the coming years, especially softwood pulp, as well as restrictions on recycled paper imports in China. After a strong start to this year and the record high delivery volumes in the first half of 2018, we expect our delivery volumes to decline in the second half of the year.
Metsä Board's performance during 2018 has been good, but we still see further potential to improve it. We will continue our actions to improve the price mix in our paperboard sales, especially in Husum's folding boxboard. We will have a strong focus on profitability. Before finishing, I want to remind you of our upcoming Capital Markets Day 2018. It will be held in London, Haberdashers' Hall, on 14th of November, so next week. You will find more information on this on our web page. Those of you participating, see you next week. So this was the presentation of Metsä Board's results for January to September. We are now happy to answer any questions you may have. Thank you.
Thank you. If you'd like to ask a question, please press star one on your touchtone telephone.
If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, it is star one to ask a question. Our first question is from Harri Taittonen. Go ahead.
Yes. Good afternoon. Harri Taittonen, Nordea. If you look at the cost side and if you can give any color on the sort of any sort of changes early next year, I know that you're guiding a fairly flat sort of environment for the fourth quarter, but is it typical or are there many sort of supply contracts that you are negotiating that there is a possibility for a sort of bigger change when the new year starts, or is it more like a business ongoing basis?
Yeah. I'm okay. I'm Mika Joukio here. So we don't expect any major changes when comparing Q1 to Q4.
So of course, when the economy is strong, there is a kind of tendency to have some cost inflation, but we don't expect any major ones.
Okay. Okay. Very good. And on the wood sourcing from the Baltics, I recall from this some years ago, it's been around a quarter of your wood sourcing overall or thereabouts. But I mean, is there something you are planning or should do about the volume imported from the Baltics, and is that sort of how much is the percentage these days of the total volume in wood sourcing?
Yeah. At the moment, we don't see any major changes here either. So overall, only roughly 17% of our wood supply is coming from Baltic countries.
Okay. Okay. Okay. All right.
Maybe the last question, if I may, on the linerboard markets, is that there's been some sort of concern about, well, not concern, but some indications of market perhaps becoming more balanced than sort of being in really short supply, and also some concern on the linerboard increases in North America. But are you seeing any sort of changes in the market dynamics there as you see it?
Yeah. So as far as our products are concerned, they are based on fresh fiber, so we are not using any recycled. And in that category, we haven't seen any major changes or even smaller changes, mainly on the other kraft liner board.
Very good. Yeah. Exactly. Thank you very much.
Moving on, we have a question from Robin Santavirta.
Thank you. Thank you. Starting off a question related to volumes in the paperboard segments, qualities.
You said you suspect customers' inventories are a bit elevated at the moment. Is it a concern for you that this might sort of impact volumes further on than Q4 going into next year? Could you just comment a little bit more on what is going on with customer inventories of your linerboards and folding boxboards?
Yeah. So our understanding is that the stocks at the customers, they have increased, and also then what has affected on our volumes is that we have optimized our price mix both in Americas and in Europe. So at the end demand, so to say, we haven't seen any major changes.
All right. Thank you.
And then in terms of the folding boxboard, the price increase announcement you have made, how would you, if you would compare sort of the market balance, the order books you have and the order backlog in the industry this year compared to last year, how would you sort of compare this year compared to last year?
Yeah. The situation is pretty much quite close to last year, so it's very difficult to kind of specify any differences between the situation a year ago and now. Demand is good, and price negotiations are ongoing.
Okay. Okay. In terms of linerboard, could you just remind me the price increases you have had in 2018, when and where have you gained higher prices in linerboards while it is 2018 now?
So in linerboard, we have raised prices during the last 12 months, so to say. We have increased prices at least four times, three or four times in Europe, and then also once in North America. I can't remember by heart how much altogether, but altogether.
And the one in North America was when?
Let me think. It was in the first half of this year, so sometime in spring. I can't remember anymore.
All right. Thanks. And in terms of wood cost now.
Yeah. Sure. About the folding boxboard, of course, you know that we increased prices here in Europe in the beginning of this year, and then we have now this second price increase ongoing.
Exactly. Exactly. And in terms of wood cost, obviously, this year has been challenging in many ways, but also due to the weather and the high prices in Baltics.
Is there a possibility that we will have 2019 with actually flat or even lower wood cost for you guys, or do you expect the sort of underlying inflation still? I mean, even though the weather conditions, the harvesting conditions would be normal or even good, but still the underlying cost inflation will push up wood cost 2019 compared to 2018?
I would say that at the moment, it's a bit too early to answer precisely to your question, but I do not expect any major changes, at least upwards. As I said, it remains to be seen what kind of weather we will have in November, December, January, because that really has an impact on those prices or wood harvesting costs at least.
Okay. Good. Thanks. And then a final one, more technical, perhaps to you would say about the tax.
Obviously, you book Metsä Board Metsä Fibre post-tax in the EBIT, so the normalized tax rate is 10%-12%, what you normally have, but now it's really low in this quarter. Was there something special happening there?
Yes. This is Jussi Noponen , so yes, your observation is right. So on top of this consolidation effect from Metsä Board Metsä Fibre, we also booked some small tax receivables related to earlier reporting periods now in the third quarter.
Okay. And now when you're on the line, could you just shed some light on what kind of positive effects, the impact you will have in 2019 if we would use the current spot rate? When I do the math, it's EUR 35 million-EUR 40 million sort of cost. The hedges, is that sort of roughly the number you're looking at, or?
Now, for the fourth quarter of this year, we estimate about EUR 5-7 million positive from FX that we have largely hedged already, so that we know pretty precisely. I would not like to give any number for next year because that is largely unhedged at this point of time.
Sure. Thank you very much. Thanks.
Just a reminder, it's star one if you'd like to ask a question. Our next question comes from Markku Järvinen.
Yes. Good afternoon. This is Markku Järvinen from Handelsbanken. I was wondering if I just continue on the FX, so that's EUR 5-7 million positive for Q4 compared to Q3. Is it positive year- on- year as well?
The exact figure, I don't have here with me now, so perhaps we can come back to this for instance in next week's event.
Sure. Sure.
Then could you give some more flavor on the sort of optimization you've done on price customer mix? Which customers or which markets have you reduced, and which products, or how does that work?
Mika Joukio here. So because our operating rate has been very high, so of course, then we have by saying that we are optimizing the price mix or customer mix, it means that we are constantly looking for, so to say, better customers who are paying the higher prices, and then when the operating rates are high, then we need to then let go of the less profitable customers. That happens in all areas. I mean, that happens in Asia-Pacific, that happens in Europe, and that happens in Americas.
And then if you think about the geographical or from a geographical point of view, then of course, the Middle East area is the area where the prices are not as good as elsewhere. So that is also then the fact that we have produced or sold less to that region. But it happens both between the regions as well as inside the countries and regions, both in linerboard and folding boxboard.
Okay. Thank you. And I guess Metsä Board now, a significant part of your result. Do they have any maintenance in Q4?
No. No, they don't.
No maintenance. Good. Thank you. And perhaps I missed it, but did you give a figure for the emission rights impact mentioned?
The year has not ended yet, so we will not give an exact figure now, but in any case, it will be a single-digit number in millions.
Okay. Thank you.
We'll take a question from Linus Larsson.
Yes. Thank you very much. It's Linus Larsson with SEB. I'd like to ask about paperboard volumes and the deceleration that we see in growth and even a decline year- on- year. And first, if you look at linerboard, can you explain the reasons behind the decline that we've seen year to date? Shipments are down year- on- year, both to the Americas and to Europe. Which are the reasons for that, as you see it?
In linerboard, it's very clear.
At the end of 2016, so we had a very high stock for Kemi linerboard mill, and practically we sold in 2017 more than we produced. Now when we started 2018, the situation was the other way around, so the stock levels were quite low, and that explains simply the difference between 2017 and 2018.
Okay. When you look into next year, then should we how much if you let's split it between folding boxboard and linerboard, maybe what's the spare capacity that you still have? Is that the constraint in the next year, or is it still the market environment that is the limitation in linerboard and folding boxboard respectively?
So in linerboard, we are still able to slightly increase our sales because both Kemi and Husum's production will be slightly higher next year than this year, not remarkably, but slightly. And then as far as folding boxboard is concerned, we still have unused capacity in Husum, so because Husum has gradually increased and improved their production during this year, so the next year production will be higher in Husum than this year, and that will impact then also in delivery volumes.
And what's the expected Husum folding boxboard shipment for the full year 2018? Is that a figure that you could provide?
Able to say that yes. It will be clearly higher than last year, but then it remains to be seen how much.
What I'm getting at is how actually is what the increment might be 2019 versus 2018 on Husum folding boxboard?
In production?
In production and/or deliveries?
Yeah. As I said, growth continues, but again, it's because budget and plans are still open, so it's too early, it's early to say how much more we will produce and sell next year than this year, but it's clear that we will sell more.
Okay. And linked to this, something that we've discussed on previous calls, is there anything you can say about your long-term plans for potential new investments into organic growth in folding boxboard or linerboard for that matter?
At this point, no news, so no new news. We continue, of course, to go through different options, and it remains to be seen then what is the end result.
You previously said that you would come to the market with some kind of conclusion before the end of 2018.
Is still the case, or would you rather suggest that we might need to wait a bit longer for a conclusion on that?
Yeah. I think by end of this year is probably not too early, so let's see. We are coming out when we are ready. I don't want to give any clear deadline or timeline for that.
That's great. Thank you very much.
Our next question comes from Antti Koskivuori.
Yes. Thank you. Most of my questions have already been answered, but maybe two from my side still. First of all, on the U.S. folding boxboard deliveries, it seems that you've been letting go of some of the customers or volumes in that market. In coming quarters, are you planning to kind of seek new customers or grow within the existing customer base? That's the first question.
Then secondly, still coming back with the emission rights and the sales that you see, the sales gains you see in Q4, to understand this, do you see that the volumes that you are going to be actively selling on the market, is it kind of going to be kind of a normalized level, if you will, compared to other years, or have you been able to bank this somehow and now benefit from that when the prices have doubled more or less? Could you open that up a bit? Thank you.
Okay. I will take this first question, and then Jussi Noponen will take the second. So in the U.S., our target is the same as before, so to reach the level of 300,000 tons folding boxboard, and we are not yet there, so we have plans to grow further.
Of course, we are planning to grow with existing customers if the price levels are right, and then we are seeking and looking for new customers. You're right that we have let go of certain customers where the price levels have not been good enough, but the growth targets are still the same. No reason to change things.
Could you comment anything about the kind of do you see that there's a new kind of customers potential to be signed in incoming quarters? Is there a demand for? Yeah. Sorry. Yeah. I was just wondering if you could comment anything about the kind of potential new customers in that market?
I can only comment that we have potential new customers at the market.
We are constantly negotiating with the customers and trying to find better and better deals, and obviously, we will have new customers, no doubt. I mean, this is normal.
Yeah. Then the emission rights question. So there is nothing extraordinary about the volume of emission rights that we are selling. Each year, we get a small surplus of emission rights, and this kind of sale is ordinary cost of business. Now, just the price happens to be higher than in previous years, and for that reason, it has an impact on our quarterly result that we wanted to point out.
Yeah. Absolutely. And so then the fair assumption is that positive impact in this Q4 will be more or less double than it has been in past years?
As I said earlier, the year has not ended, and we don't know the exact volume, how much we are selling, and so we can come back to this afterwards.
Absolutely. Fair enough. Thank you.
And once again, it's star one to ask a question. And it appears there are no further questions at this time. Speakers, I'll turn the conference back to you for additional or closing remarks.
Okay. Mika Joukio here. So thank you very much, everybody, for participating, and I still remind you that next year we will have this Capital Markets Day , so you are all warmly welcome. So thank you and have a nice afternoon. Thanks.