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Edited Transcript of METSB.HE earnings conference call or presentation 31-Oct-19 1:00pm GMT

Q3 2019 Metsa Board Oyj Earnings Call

METSÄ Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Metsa Board Oyj earnings conference call or presentation Thursday, October 31, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jussi Noponen

Metsä Board Oyj - CFO

* Mika Joukio

Metsä Board Oyj - CEO

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Conference Call Participants

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* Harri Taittonen

Nordea Markets, Research Division - Senior Director & Sector Coordinator

* Linus Larsson

SEB, Research Division - Analyst

* Markku Järvinen

Handelsbanken Capital Markets AB, Research Division - Analyst

* Mikael Doepel

UBS Investment Bank, Research Division - Executive Director & Analyst

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Presentation

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Mika Joukio, Metsä Board Oyj - CEO [1]

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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 to third quarter in a nutshell. The overall development of Paperboard business was favorable. The delivery volumes, especially in white kraftliners, grew from the previous quarter and were higher than we earlier estimated. Paperboard price levels remain stable, and lower wood costs support better profitability. This better-than-expected development led us to preannounce 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 2 of our integrates, 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 the 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 processed 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 web page. 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. The delivery volumes in white kraftliners, 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 kraftliner 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 emphasized profitability over volumes. Our actions have paid off, and our average selling price in folding boxboard has improved by more than EUR 100 per tonne at the same area within a year. In white kraftliners, the biggest drop in volumes has been in the EMEA area. In Americas, demand for coated white kraftliner 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 kraftliners and 14% 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 2-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 for 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 review period, January to September, where the operating result was almost 25% weak 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 pulp 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 PIX 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 EUR 111 million. Year-to-date, the CapEx was EUR 42 million. And estimated full year CapEx is EUR 90 million to EUR 100 million, including the first installments related to Husum pulp mill renewal. Our net debt decreased slightly from the previous quarter and was EUR 352 million. 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 EUR 150 million term loan and EUR 200 million 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 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 will create a solid foundation to increase paperboard capacity in the integrate 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 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 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 reduced duration of the shutdowns. This in turn would increase the pulp and paperboard production volumes. All in all, investment is expected to generate an increase of approximately EUR 35 million in annual cash flow, of which roughly EUR 30 million is EBITDA improvement and EUR 5 million is reduced maintenance CapEx. And our financing costs are expected to increase by some EUR 2 million per year from the startup of the recovery boiler and turbine. In addition, we expect to record an impairment loss of approximately EUR 19 million 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 the 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 plant maintenance compared to the 2 previous quarters, so that will have a positive impact. And we expect the production costs and FX impact 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 kraftliners increased from the previous quarter and price levels were stable. Over the past year, we had defended our kraftliner 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Linus Larsson from SEB.

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Linus Larsson, SEB, Research Division - Analyst [2]

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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.

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Mika Joukio, Metsä Board Oyj - CEO [3]

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The answer is simple. It's slightly lower, slightly worse.

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Linus Larsson, SEB, Research Division - Analyst [4]

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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?

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Mika Joukio, Metsä Board Oyj - CEO [5]

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Yes. So far, we have seen in China some $10 to $20 per tonne price increases. So not yet very -- not 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, it remains to be seen.

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Linus Larsson, SEB, Research Division - Analyst [6]

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But at least you have achieved some price increases, and they at least seem to be sticking for now.

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Mika Joukio, Metsä Board Oyj - CEO [7]

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Yes. That is the case, but of course, not very fast. So slow development.

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Linus Larsson, SEB, Research Division - Analyst [8]

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Right. Right. 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 Baltic wood sourcing. Could you update us on that trend in the Baltics? But also -- and maybe more importantly in Finland?

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Mika Joukio, Metsä Board Oyj - CEO [9]

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Yes. Starting from overall development. So wood prices -- so wood costs were slightly lower in Q3 compared in 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 it remains to be seen what will happen next year. But now the situation is kind of moving to right direction from our perspective.

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Linus Larsson, SEB, Research Division - Analyst [10]

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And so the price agreement that you conclude this time around, how are they compared to 6 months ago, let's say?

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Mika Joukio, Metsä Board Oyj - CEO [11]

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Where? What do you mean price agreement?

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Linus Larsson, SEB, Research Division - Analyst [12]

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Well, in general, your wood purchasing now, is that at a different price compared to, say, 6 months ago, which should then have an impact, I'm thinking 1 or 2 quarters down the road?

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Mika Joukio, Metsä Board Oyj - CEO [13]

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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.

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Linus Larsson, SEB, Research Division - Analyst [14]

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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?

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Mika Joukio, Metsä Board Oyj - CEO [15]

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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 and then something happens, of course, it's very difficult to foresee or estimate. So if everything goes without any kind of challenges, then it 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.

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Linus Larsson, SEB, Research Division - Analyst [16]

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Right. Right. Okay. And then just finally and not least taking into account what you're saying about Husum and the permit process, could you please give us an update on guidance for CapEx? What do you expect for 2020 and 2019 as well?

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Mika Joukio, Metsä Board Oyj - CEO [17]

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So earlier we said that 2019 was EUR 70 million to EUR 75 million, so now it's EUR 100 million -- or EUR 90 million to EUR 100 million. 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.

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Linus Larsson, SEB, Research Division - Analyst [18]

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Okay. And the delay, it doesn't -- there isn't a delay, so to say, with regards to CapEx due to the permitting process?

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Mika Joukio, Metsä Board Oyj - CEO [19]

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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.

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Operator [20]

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We will now take our next question from Mikael Doepel from UBS.

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Mikael Doepel, UBS Investment Bank, Research Division - Executive Director & Analyst [21]

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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 change to the board inventories in Europe?

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Mika Joukio, Metsä Board Oyj - CEO [22]

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Yes. Concerning the demand in Europe, so we do not see any major changes there during the coming months. And then on 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 end -- high side. But of course, due to these shutdowns and curtailments, inventory levels are now healthier than they used to be like 3, 4 months ago.

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Mikael Doepel, UBS Investment Bank, Research Division - Executive Director & Analyst [23]

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Okay. Then in terms of the European folding boxboard market, we are hearing some comments from key peers and industry sources that the market seems to be quite competitive, right, and -- market's competitive right now and the pricing are under pressure. What's your take on the markets right now? How would you describe the situation?

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Mika Joukio, Metsä Board Oyj - CEO [24]

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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 it remains to be seen.

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Mikael Doepel, UBS Investment Bank, Research Division - Executive Director & Analyst [25]

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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?

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Mika Joukio, Metsä Board Oyj - CEO [26]

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So in that market, as also mentioned in the 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.

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Mikael Doepel, UBS Investment Bank, Research Division - Executive Director & Analyst [27]

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Okay. Just a final question on the linerboard market. We saw some renewed weakness in October for brown kraftliners in Europe. Do you see any spillover into the white linerboard markets? Or is that fully immune to what's happening on the brown side? Overall, what's your take on that market right now?

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Mika Joukio, Metsä Board Oyj - CEO [28]

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Yes. The white kraftliners, they are -- I mean, there is no clear connection between this brown or grays. So it's a niche business where we're operating, and that's good for us.

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Operator [29]

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We will now take our next question from Markku Järvinen from Handelsbanken.

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Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [30]

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Yes. I had a few more questions. I guess folding boxboard pricing, how does that look for next year? This is the question. You recently reported that you're seeking a GBP 65 pound increase in the U.K., but I haven't seen anything on other markets. Is the U.K. an isolated incident? Or are you seeking such an increase?

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Mika Joukio, Metsä Board Oyj - CEO [31]

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The U.K. pricing increase is also then due to the currencies and not that much on the demand itself or so. So there is -- that is clearly the reason for that. And as I already mentioned, of course, I mean during last 2 or 3 years, we have been able to increase prices. And our intention is to continue to do so also in the future, but it remains to be seen when and where.

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Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [32]

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Good. Good. And then just on pulp, as was discussed earlier, the earnings in the Metsä Fibre were fairly low in Q3 and were moving down for Q4. I was just wondering how are the earnings in your own pulp business, primarily from Husum and Kaskinen? I suppose where 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?

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Mika Joukio, Metsä Board Oyj - CEO [33]

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Yes. 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.

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Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [34]

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And is Husum primarily hardwood or softwood that is on the market?

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Mika Joukio, Metsä Board Oyj - CEO [35]

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Both and -- mainly softwood, but we are selling also hardwood but in Europe, in Europe only.

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Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [36]

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Good. Then still on FX. FX is now guided to be neutral for Q4 compared to Q3. Is there still sort of a positive FX impact at these levels that we should expect next year?

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Mika Joukio, Metsä Board Oyj - CEO [37]

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Jussi Noponen will take this.

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Jussi Noponen, Metsä Board Oyj - CFO [38]

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This is Jussi. Yes, small positives can be expected if we stay on today's spot levels.

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Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [39]

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Could you sort of quantify that at all?

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Jussi Noponen, Metsä Board Oyj - CFO [40]

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I don't have the figures here with me for next year.

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Operator [41]

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(Operator Instructions)

We will now take our next question from Harri Taittonen from Nordea.

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Harri Taittonen, Nordea Markets, Research Division - Senior Director & Sector Coordinator [42]

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On the linerboards, is there sort of changes in the supply side? Or are you seeing any -- well, there's some new capacity coming onstream in the 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?

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Mika Joukio, Metsä Board Oyj - CEO [43]

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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.

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Harri Taittonen, Nordea Markets, Research Division - Senior Director & Sector Coordinator [44]

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Okay. Okay. And then on the Husum investment and the second phase. And 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 estimates for kind of the following stages in that investment or the second phase?

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Mika Joukio, Metsä Board Oyj - CEO [45]

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No. No, not at the moment. We still keep this EUR 300 million as a best estimate at the moment. We are more concentrated on the first phase.

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Harri Taittonen, Nordea Markets, Research Division - Senior Director & Sector Coordinator [46]

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Sure. I 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 then now you're saying that the Q4 is a bit smaller. But how -- what is the reason? And how big is the difference roughly?

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Mika Joukio, Metsä Board Oyj - CEO [47]

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The reason is simple, we have less maintenance in Q4 than Q3. So maintenance costs are linked to maintenance. So there are less maintenance. We have this Kemi and Husum. Okay. Husum was partly October. But anyway, we have less maintenance now, and that has impact -- positive impact on result.

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Harri Taittonen, Nordea Markets, Research Division - Senior Director & Sector Coordinator [48]

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Yes. And I just remember from the past that it has been typically EUR 10 million per quarter roughly ballpark, but I mean, how different is it this year compared to those earlier years?

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Mika Joukio, Metsä Board Oyj - CEO [49]

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I mean, this year, it's -- I mean, Q4 to Q3, it's not as high as 10, but it's -- anyway, it's remarkable or clearly lower.

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Harri Taittonen, Nordea Markets, Research Division - Senior Director & Sector Coordinator [50]

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Yes. 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 a lower level. But on an annual level, we should be looking at sort of unchanged. But maybe the question is about fourth quarter, that it should be about the same level as in Q3.

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Mika Joukio, Metsä Board Oyj - CEO [51]

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Yes. It will be on...

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Harri Taittonen, Nordea Markets, Research Division - Senior Director & Sector Coordinator [52]

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Having come down by about EUR 10 million from Husum?

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Jussi Noponen, Metsä Board Oyj - CFO [53]

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Yes. You can expect third quarter levels for the fourth quarter as well. So about EUR 95 million for the full year.

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Harri Taittonen, Nordea Markets, Research Division - Senior Director & Sector Coordinator [54]

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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.

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Mika Joukio, Metsä Board Oyj - CEO [55]

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Yes. We post higher depreciation in the first half than in the second half.

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Harri Taittonen, Nordea Markets, Research Division - Senior Director & Sector Coordinator [56]

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Exactly. Exactly. Okay. Well, if I may, just one more on the sort of new barrier material. Is there -- with this commercializing on that, are there any reasons to -- or new sort of benchmarks? And what's the timetable there for getting it up to the -- onto the market?

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Mika Joukio, Metsä Board Oyj - CEO [57]

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So we just launched that during the last week of September. And now we are leaving last week of October. So the 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. Commercial -- I mean I'm positive concerning the commercial success of this product.

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Operator [58]

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There are no further questions at this time.

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Mika Joukio, Metsä Board Oyj - CEO [59]

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Okay. Okay. So thank you, everybody, for your interest, and I wish you an enjoyable evening. Thank you.