Report for January to March 2018. My name is Mika Joukio, and I'm the CEO of Metsä Board. Together here with me, I have our CFO, Mr. Jussi Noponen. So let's start by looking at the first quarter in brief. All in all, our performance was at a very good level, and the quarter was the best in many years. Market prices in both folding boxboard and white kraftliners improved, which fully compensated the unfavorable foreign exchange development of the US dollar. Our production and delivery volumes increased, both in paperboard and in market pulp, compared to the previous quarter. I want to remind you, though, that our first quarter is always strong production-wise, since this quarter, unlike all the other quarters, does not include any major maintenance shutdowns. Obviously, this is evident in our results too.
Also, the fourth quarter, our comparison period here, often has lower delivery volumes due to seasonality. Production efficiency was at a good level, and many of our production units set new records in their monthly production volumes. At the moment, the capacity utilization rate of Husum's folding boxboard is nearly 90%, and from now on, we won't be reporting that figure separately anymore. As we have earlier stated, we believe that full utilization will be achieved by the end of this year. The pulp market continued to go strong, and market prices kept rising. Obviously, we benefit from that with our annual 500,000 tons long pulp position, and good news is that the credit market also showed strong confidence in Metsä Board. In February, we were upgraded to investment grade by Standard & Poor's, then a closer look at top line and profitability development.
Higher production and delivery volumes, together with rising price levels, increased our sales, which were nearly EUR 500 million. Last November, we announced an increase in folding boxboard prices in Europe of EUR 90 per ton. On the average, we achieved roughly half of the announced increase. In white kraftliner, we have announced three price increases during the past year. Our comparable operating result in the first quarter improved by 27% compared to last quarter of last year and by 53% compared to the corresponding quarter last year. At EUR 69 million, it was on its highest level in many years. In mid-March, we had to raise our previously given result guidance, mainly due to stronger than expected pulp market development. As earlier stated, the profitability was also boosted by the strong paperboard market and the high production efficiency rate of our mills.
In addition, the tailwind in the first quarter from being a maintenance-free quarter was roughly EUR 10 million . Even though our profitability is now developing in the right direction, we still have a lot of potential to improve it, especially in Husum. We will continue our work to improve the sales mix in folding boxboard in Husum. Our total paperboard deliveries in the first quarter were roughly 470,000 tons. That is 9% growth compared to the previous quarter and also compared to the same quarter last year. So we are still growing faster than average market growth, which is 3%-4%. Among all the European producers, folding boxboard deliveries in the first quarter increased by 5% compared to the previous quarter and by 8% compared to the same quarter in 2017. Correspondingly, white kraftliner deliveries grew by 3% and by 2%.
The stronger European economy and discussion around the recyclability of packaging materials has driven paperboard demand growth. Moreover, demand for fresh fiber grades is supported by the concern over mineral oil migration from recycled fiber-based board into food. In white kraftliners, increasing demand in point-of-sale solutions in retail and growing e-commerce are the main factors driving demand in the near future. Also, there are no major capacity additions planned on the fresh container board side, and operating rates are expected to remain high. During the first quarter, the negative impact from foreign exchange rates, including hedges, was EUR 12 million compared to the previous quarter and EUR 50 million compared to the same quarter last year. The US dollar, which has the biggest impact on our total transaction exposure, will continue to cause headwind.
The total currency impact after hedging will be quite small in the second quarter compared to the first, but will further increase in the third quarter. Improved profitability was also reflected in the return on capital employed. In the first quarter, our return on capital employed was almost 16%, and even though it's not shown in here, the 12-month rolling figure was 12.7%. This was above our long-term annual target level of 12%. Our capital employed at the end of review period was EUR 1.8 billion. Our 12-month rolling cash flow from operations was EUR 241 million, and free cash flow was EUR 183 million. During the first quarter, the cash flow from operations was EUR 30 million. Together with our sales, the receivables grew compared to the fourth quarter and resulted in a negative impact from working capital.
The first quarter cash flow also included advance payments of employment pension contributions in Finland, which always impairs January-March cash flows against the other quarters. Our financial position is strong, and the amount of interest-bearing net debt is approaching equal to our 12-month EBITDA. Our net debt at the end of March was EUR 335 million, which is more than EUR 100 million less than a year ago. For Metsä Board, lightweighting and new barrier solutions are the key focus areas for product development. In January, we launched a bio-based, fully recyclable, and biodegradable eco-barrier paperboard, especially for food service use. We will continue the development work to make our boards even lighter, but we are also focusing on new barrier solutions. And then to the near-term outlook, we believe that the good momentum in the paperboard market will continue.
A big part of the announced price increase announcements have gone through, and we expect the prices to be steady or even continue to rise in certain grades. We also expect that our paperboard delivery volumes will be at a slightly higher level in the second quarter compared to the first one. And again, I want to highlight that the second quarter, as well as the third and fourth quarters, will include maintenance shutdowns, which will impact our results. In April-June, we will have maintenance shutdowns at nearly all our Finnish mills, and also our associated company, Metsä Fibre, will have shutdowns at two of its pulp mills in Finland. Negative impact from the weaker dollar against the euro will continue. And production costs increased in the first quarter, especially driven by wood costs in Sweden and imported wood from the Baltics.
Even though we don't see significant cost increases for the rest of the year, our full-year production costs will increase from 2017. And then our result guidance. We expect that our operating result in the second quarter of 2018 will weaken compared to the first quarter. We have simplified our principles with regard to result guidance. The result guidance is issued on forecast changes in comparable operating result between the current quarter and the previous quarter, and there are three levels: weaker, roughly at the same level, and better. Previously, there were seven levels. Then to summarize, we had an excellent start for the year 2018, and we expect the strong performance to continue. The pulp market has remained strong, and the market price of long fiber pulp, which impacts on Metsä Board's result, has continued to rise.
In addition, the paperboard market has good momentum, and the production efficiency of Metsä Board's mills has been high. The weaker US dollar is still causing headwind, but at least during the first quarter, the higher sales prices of paperboards offset this negative impact. We still have potential to improve the result, especially in Husum. We will continue to improve our sales mix in folding boxboard by selling bigger volumes to the Americas. We expect the good market situation to continue. Demand for ecological paperboards is growing, and price levels are expected to stay stable or even rise. Ladies and gentlemen, this was the presentation of Metsä Board's first quarter results. We are now happy and ready to answer any questions you may have. Thank you.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your equipment. Again, press star one to ask a question. We'll pause for a moment to allow everyone an opportunity to signal for questions. Now we will take our first question from Robin Santavirta. Please go ahead, sir. Your line is open.
Yes, thank you. And good afternoon. First of all, related to the maintenance stops you will have now in Q2, could you specify the results or the earnings impact you expect those to have Q- on- Q and also year on year? So do you have now more maintenance work, maintenance stops this year in Q2 compared to last year in Q2?
Yeah. So, Mika Joukio here. So the tailwind in Q1 from being practically maintenance-free quarter was roughly EUR 10 million compared to the other quarters, so second, third, and fourth. As far as the annual number of the maintenance shutdowns or days, this is a very normal year. Now in the second quarter, all the mills in Finland except Kemi will have the maintenance shutdown normal length, and then Kemi will have quarter three and then Husum quarter four. So nothing special as such, but the tailwind in Q1 was significant due to the fact that we didn't have any maintenance shutdowns.
Okay, good. Thanks. And then related to the guidance of Q- on- Q declining earnings or comparable EBIT, do I get it right that you expect volumes to improve somewhat, then you expect prices to be at the same level or improve somewhat, and then be better mix from Husum, but you still expect earnings to decline? I do understand the maintenance, but is there something underlying that I am missing, something that burdens your earnings now going into Q2? Because from your presentation, it seems as basically all the others of the operational businesses look set to improve Q- on- Q in Q2. So could you comment on this?
Yes. Yeah, you're right that volumes will slightly, our estimation is that they will slightly improve. And then prices will be at the same level or slightly higher in certain grades. But then we have this negative impact from maintenance shutdowns as well as then from US dollar against euro comparing the first quarter. Not much, but somewhat anyway. So as a result, then that is our guidance. But nothing special as such or something that we didn't expect.
Okay. Okay, that is clear. Then related to effects, could you comment on what is the impact the Swedish krona has weakened significantly now over the past few weeks? So I assume you have some positive impact from that. Or would you mind to perhaps Jussi could comment on what would the annual effects impact on EBIT be if spot rates would remain at the current level?
Okay, so Jussi will open a little bit our hedging policy and so on concerning different currencies. So, please.
Yes, this is Jussi Noponen. Our hedging duration in average is about six months. So the recent weakening of Swedish krona, we will start seeing the positive impacts of that only in the fourth quarter this year, and especially we'll be getting a good start for next year. So no positive from that yet in the second quarter.
Okay. And Jussi, could you comment on the full-year effects impact on EBITDA if we would have the current spot rates for the full year?
We have not hedged the full year yet, and we are not giving full-year guidance for anything, so the answer is no.
Okay. Thank you, and then finally on the wood raw material costs, if I recall correctly, you provided a sort of an estimate of the cost inflation for the full year in full after Q4. Is that what you expect now still, or has that assumption changed?
Yeah. If we compare year- on- year, so 2017 and this year to 2017, so the only wood costs, there is remarkable increase. And okay, even though we don't give any kind of annual estimates, but still at this point I can say that now it seems to be more than EUR 20 million the impact year on year. And then we need to remember that there are other cost inflation elements like salaries, for example, in Finland. So there is a slight increase also there. So inflation is clear this year. Cost inflation on.
Okay. Okay. But in terms of wood costs, do you expect them to increase Q2 year- on- year Q- on- Q?
A slight increase in Q2 compared to Q1, but shouldn't be anything remarkable.
Okay. Thank you.
Year- on- year, this is clear.
All right. Thank you.
Thank you. And our next question is from Linus Larsson from SEB. Please go ahead. Your line is open.
Many thanks and a good day, everyone. I'd like to ask about the Husum ramp-up and the profitability improvement potential that you previously outlined comparing 2019 versus 2016. You've said that EUR 100 million result improvement could be achieved provided that you reach a 95% operating rate. Now, I wonder how far we are in that ramp-up, and I wonder if you could help us also understand maybe what to expect in 2018 versus 2017 on a full-year basis in terms of earnings or volumes or something else that you can help us with. Thank you.
Yeah. So as you remember, there are three elements in this Husum profit improvement. First of all, the lost pulp production or the pulp production that we lost back in 2016 when we had these investment shutdowns and startup issues. So that's roughly EUR 25 million. Then we launched an efficiency program concerning fixed costs. That was another EUR 5 million. And then full capacity utilization at normal sales prices was the remaining EUR 70 million.
So last year, we already reached the positive impact from pulp volumes and efficiency program, but only slight improvement in sales. And now we estimate that we reach the rest of the EUR 70 million. So remembering that last year we reached the EUR 30 million. So reach the rest of the EUR 70 million then during next year and this year quite evenly. So still, this profit improvement year- on- year 2016 versus 2019 is valid.
That's great, and I guess the pulp and the efficiency improvement came gradually during last year, and so my question is, do you have a rough figure for the full year 2018 versus the full year 2017 as an improvement figure?
So as I said, last year, roughly we achieved one-third of that profit improvement, and then rough estimation for this year is another third, and then the rest of the improvement next year. So this is just at this point very rough estimates, but that's the case at the moment.
Okay. That's very helpful. Thank you. And if I then ask about the Äänekoski ramp-up, you previously said it's been ahead of schedule. I think I read today that it was more like according to plan. How far has that ramp-up come? How much improvement potential is there from the Q1 2018 level still?
That's too early to say. The ramp-up this year has proceeded according to plans. As you said, last year we were slightly ahead of the ramp-up curve, and this year more or less precisely on the ramp-up curve. But then what will be the final impact on our result, that remains to be seen because we are not there yet. So it remains to be seen. But so far, everything goes as planned.
And then just one final question, if I may, regarding folding boxboard pricing. We put quite a bit of attention on that in our last quarterly call. Now in hindsight, could you maybe summarize for us how the folding boxboard price negotiations ended up in the beginning of 2018, please?
Yeah, so as I said, the announcement was EUR 90 per ton, and on the average, we achieved 50% of that, so let's say between EUR 45 and EUR 50 per ton, depending on the customer, of course, but on the average, that was the result for European business.
Excellent. That's very helpful. Thank you very much.
Once again, if you would like to ask a question, please press star one. We will take our next question now from Harri Taittonen from Nordea. Please go ahead. Your line is open.
Yes. Thank you. Good afternoon. Okay, where to start? There was news about Metsä Fibre examining potential investment in Kemi. I'm just wondering if the financing structure could be something similar to what you sort of did for Äänekoski, just theoretically, if these plans go ahead.
Yeah. Mika here. So at this point, it's far too early to say anything. This is just a kind of pre-planning or pre-feasibility study depending on different options or two different options, a totally new pulp mill or then modernized current pulp mill. And that's far too early to say anything concerning financing.
Yes. I understand. Well, maybe on the other one, on the volume side, on the sort of folding boxboard in Americas, just wondering why did the American sort of deliveries or sales, or even in volume terms, did not grow more than they did, given that it's been kind of a core of the Husum expansion? And looking at the EMEA growth, that was more, at least in absolute terms, year- on- year compared to what you achieved in the U.S. So just sort of wondering if you could put some color on the development on that front.
Yes. I mean, in the U.S., of course, growth continues, but in Americas market, but also there we put a lot of emphasis on sales mix that need to be remembered. And as far as the sales from Husum is concerned, production was really good. We had a production record in March. We had a production record in January. And the whole production has been sold, and prices are increasing. So I have no worries concerning the American market and our story there.
Okay. Great. The final question on the sort of the market pulp statistics and the deliveries. Just wondering what the sort of potential for you with sort of current capacity is, first of all, for your own sort of deliveries of market pulp. They were 124,000, a bit less than last year. And then also looking at the Metsä Fibre pulp deliveries at 177,000, obviously they were up. But just wondering what the sort of volume potential with the currently existing capacity would roughly be for your deliveries of market pulp and also the production of Metsä Fibre pulp of your proportion of that.
So it's higher level mathematics, so to say, that in Husum, when the pulp mill already is running practically full, so we are not able to very much increase that capacity, of course. But then the growth is coming from Äänekoski, so from Metsä Fibre side. And then how quickly that ramp-up will then be finalized to the target capacity, then of course we will get our share. But all the other mills, both in Metsä Fibre as well as in Husum, they were running full.
Okay. Okay. Well, just one more if I may, just quickly on the possibility to lengthen the maintenance intervals in the various mills. It sounds like is it so that most of the maintenance is still based on kind of an annual cycle, whereas it seems that sort of there are examples of more and more of longer periods between the maintenance stoppages?
Yes. During the course of the years, of course, the maintenance shutdowns are shorter and shorter, but as far as the interval is concerned, then there are also some legislations that we need to check different issues at the mills. And that puts certain limits on that. But what has clearly happened during the last, let's say, five, 10 years is that the length of one single maintenance shutdown is shorter today than back five years ago or 10 years ago. And that is something our production management is working every day to get them as short as possible, but still keep the machinery in good shape and efficiency is targeted.
Okay. Very good. Many thanks.
Our next questions come from Mikael Jåfs from Kepler Cheuvreux. Please go ahead. Your line is open.
Thank you, everybody. Congratulations to a good result. I have a question regarding the balance sheet. You have a very strong net debt to EBITDA level currently, 1.1, clearly below your target of being below 2.5. So my question is really, how should we think around this currently very strong balance sheet? That's the first part of the question, and then second part of the question, if you could perhaps give some color and flavor regarding potential new and additional investments. Thank you.
So I think these two questions are a bit combined. So as you said, our balance sheet is strong. Net debt to EBITDA is 1.1, as you said. And that, of course, gives opportunities to think different growth and investment options here. I also would like to highlight that this 2.5, maximum 2.5, should be the case also when we have heavy investments, if we would have. So we need to be below 2.5 in all times. As I said previously, and I repeat it here, that in management, we are planning different options. We are calculating different scenarios. And our intention is to continue to grow over the market growth year- on- year.
So we are working on that, but no results yet. I mean, as far as the new investments concerned, probably you asked our investment plans and not competitors because competitors, I don't comment. But as far as our investment plans are concerned, I already mentioned that they are in the drawing board or planning board at the moment. And then if and when we have decisions, then we, of course, tell about them.
Okay. Many thanks.
It appears that we've got no further questions at this point. I would like to turn the conference back to the presenter for any closing or additional remarks.
Okay. Thank you, everybody, for your attention, and I wish you excellent early summer and nice continuation of the day. Thank you.