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Edited Transcript of METSB.HE earnings conference call or presentation 12-Feb-20 1:00pm GMT

Q4 2019 Metsa Board Oyj Earnings Call

METSÄ Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Metsa Board Oyj earnings conference call or presentation Wednesday, February 12, 2020 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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* Antti Koskivuori

Danske Bank Markets Equity Research - Analyst

* Harri Taittonen

Nordea Markets, Research Division - Senior Director & Sector Coordinator

* Linus Larsson

SEB, 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 Webcast Presentation of Metsä Board's Q4 and Full Year Results of 2019. My name is Mika Joukio, and I'm the CEO of Metsä Board. And together here with me, I have our CFO, Jussi Noponen; and Head of Investor Relations, Katri Sundström.

So let's start with the main events in the fourth quarter. Our operating cash flow was strong, roughly EUR 90 million, supported by lower level of working capital. As always, seasonality had a small negative impact on the paperboard delivery volumes. In Europe, market pulp prices were some 10% lower compared to the previous quarter. However, the pulp demand, especially in China, was strong, which was reflected in higher delivery volumes. The price level in China remained stable. Our profitability was supported by less maintenance and lower production costs comparing to Q3. According to our announcement on 30th of October, we started our first investments to the renewal of the Husum pulp mill. Let's have a closer look at that project later on this presentation. And then our Board of Directors proposes a distribution of EUR 0.25 per share to be paid for the year 2019.

Before moving on to the results, I wanted to highlight our commitments in sustainability and actions to mitigate climate change. We have set a very ambitious target for ourselves. By 2030, our CO2 emissions have to be 0, meaning that all our mills will be fossil-free by then. In order to reach that target, we have identified the investments and other actions needed in our mills, both in Finland and Sweden. In 2019, the share of fossil-free energy out of all the energy we used was 83%. And today, just a while ago, we announced that our emissions reduction targets have been approved by the Science Based Targets initiative. Our targets meet the most ambitious goals of the Paris Agreement and are in line with reductions required to limit global warming to 1.5 Celsius degrees.

And then a few other sustainability highlights from 2019. In addition to our new sustainability targets launched, we also received a lot of external recognition for our actions in the field. Sustainability is strongly integrated into our research and development work. In 2019, we improved our folding boxboard portfolio, enabling brand owners to lightweight their packaging and, thus, reducing their carbon footprint. In September, we introduced our new plastic-free paperboard with a medium barrier against grease and moisture for food and food service packaging end uses. In the use of process water, we achieved a remarkable decrease of 11% compared to 2018. Our energy consumption grew slightly compared to last year or previous year.

Then the paperboard deliveries. The fourth quarter shows the impact of seasonality. That's business as usual for us. However, if we compare Q4 to the corresponding period last year, we saw a 3% growth. For the full year, the delivery volumes declined by 2%. The drop was mainly in white kraftliners.

Then a closer look at sales development by market area, starting with our main market area, EMEA. In folding boxboard, we saw stable demand throughout the year and improved prices compared to 2018. In white kraftliners, the soft market situation that started in the second half of 2018 continued until the second quarter this year -- sorry, last year, 2019. After that, demand has improved. And as seen in the graph, our volumes in white kraftliners were clearly lower in the EMEA region in 2019. However, we managed to keep the price level, which even improved slightly from 2018 levels.

In Americas, our total paperboard delivery volumes were fairly stable, a small decrease in folding boxboard and an increase in white kraftliners. Market price levels for both grades were stable, but thanks to our own actions, mainly in the sales mix, the average price in folding boxboard improved clearly. In Asia-Pacific region, somewhat softer market situation had an impact on our sales volumes.

Then sales and operating result. Successful price increases, especially in folding boxboard kept 2019 sales almost at last year's level. Profitability was burdened mainly due to decline in market pulp prices. Negative impact that pulp had on the result was only partly offset by lower pulp costs in the paperboard business.

Total production costs of paperboard and pulp grew from the previous year. Wood costs did not accelerate as fast as they did in 2018, but remained on a high level, especially in the first half of the year. FX had a positive impact on our results, EUR 48 million year-on-year.

The fourth quarter operating result, EUR 39 million was almost at the same level as in the third quarter. Profitability was improved by less maintenance, slightly lower wood costs and the sales of emission rights. Negative impacts were caused by lower paperboard delivery volumes and weakened market pulp prices.

Our long-term financial targets aim for profitability and strong balance sheet. In 2019, our comparable return of capital employed was at 10.4%, a little lower than our target level of 12%. The balance sheet remained strong, leverage being at 1.1x at the year-end. And the board's proposal of EUR 0.24 distribution for 2019 represents 59% of our net result.

In Europe, the market price of long-fiber pulp decreased by 16% compared to the previous year. And in China, by 28%. Regardless of the sharp price decline, pulp demand, especially in China, remained strong throughout the year.

In Europe, demand weakened, and it was still a bit sluggish at the end of the year. Global stock levels peaked in the summer, but have clearly declined towards end of the year. Chinese prices showed signs of improvement in the early weeks of 2020. But right now, the coronavirus outbreak is causing uncertainty.

Our total investments in 2019 were EUR 99 million. Out of this, roughly 60% were investments in maintenance and 40% investments in development. The main items in development investments were the new sheeting line in Äänekoski, EUR 11 million; and first CapEx payments to the Husum pulp mill renewal, EUR 21 million. 2020 investments depend on the timing of the environmental permit process related to Husum.

Here is the development of cash flow, which clearly improved in the fourth quarter, thanks to the lower working capital. The full year's operating cash flow was roughly EUR 200 million some EUR 50 million higher than in 2018. During the next 2 years, free cash flow will be impacted by CapEx payments to the Husum pulp mill renewal.

And speaking of which, let's have a closer look at that project now. First, an overview of the renewal, which consists of 2 phases. The first phase of the investment has started, and it includes installation of a new recovery boiler and turbine in the mill. However, we are still waiting for a decision from the Swedish authorities regarding the environmental permit. Once we reserve that -- receive that, which we estimate will happen during the second quarter this year, we will make the final investment decisions. At the end of next year, we expect to have the new recovery boiler and turbine in operation.

The second phase of the renewal includes the building of a new fiber line in the mill, and that will take place sometime during this decade. The whole renewal will create a solid foundation for increasing our paperboard capacity in the Husum integrated mill in the future. In addition, it will secure cost-efficient pulp and energy production and enable us to reach our ambitious sustainability targets, which I went through earlier.

And then the renewal figures. The full investment value of this first phase is EUR 320 million, divided over the years 2019 to '22. The largest payments will take place this year and 2021. We have not specified the investment value for the second phase, but it will be roughly at the level of the first phase. We estimate that after the first phase, annual cash flow improvements will be approximately EUR 35 million, of which EUR 30 million is EBITDA improvement and EUR 5 million lower Capex. Increase in financing costs will be minimal.

And then how do we see the first quarter development? The Paper Union workers' strike in Finland that lasted for over 2 weeks will obviously have negative impacts on our business. We estimate that it will burden our operating result by roughly EUR 20 million, affecting mainly the first quarter. Rest of the impacts will be evident mainly in the second quarter. The strike affected negatively also on our paperboard delivery volumes, which we now estimate to be flat compared to the fourth quarter. Without the strike, they would have increased.

Then the overall market situation, we see stable price levels for both folding boxboard and white kraftliners. And it's not ruled out that the strike will even tighten the market situation. In pulp, we already started to see signs of improving price levels in the beginning of the year. But now the coronavirus is causing uncertainty, especially in China.

And as always, Q1 will have no major planned maintenance shutdowns, which will support profitability. Also, the production costs, we estimate to remain stable. However, in the mild winter, if it continues, might cause problems in harvesting and increased wood costs. And due to these expectations, we estimate that our comparable operating result for the first quarter of 2020 will be weaker compared to the fourth quarter of 2019.

Then to summarize. Fourth quarter in 2019 went pretty much as we expected, a bit lower paperboard deliveries but less maintenance. Decline in pulp prices burdened the overall profitability, even though lower pulp costs reduced the negative impact a little bit. First investments to Husum pulp mill renewal were made during the fourth quarter, a total of EUR 21 million. For this year, the investments are expected to be much higher. The strike in Finland is now over, but it will have a significant negative impact on our results, affecting mainly the first quarter. And the market outlook, we see stable situation for high-quality paperboards in all our main markets. In pulp, we are not expecting the prices to decline anymore. However, the coronavirus outbreak is causing some uncertainty.

Okay. Ladies and gentlemen, that was my -- that was the presentation of our Q4 and full year results. We are now ready for your questions. So please go ahead. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Antti Koskivuori from Danske Bank.

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Antti Koskivuori, Danske Bank Markets Equity Research - Analyst [2]

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It's Antti from Danske. Few questions. And the first one would be on the Q1 guidance that you give for EBIT. I was just -- could you give us a bit more color on the kind of bridge quarter-on-quarter, what do you see there? Obviously, strike, as you said, is going to be a big negative driver. Then you have, I guess, on the positive side, you have less maintenance and slightly more favorable FX. So how should we think about the kind of the positives here going into Q1 compared to Q4? That would be my first question, if I go maybe one at a time.

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Mika Joukio, Metsä Board Oyj - CEO [3]

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Okay. So we are -- we have not kind of clearly calculated or precisely calculated what are the positives. Of course, there are positives like maintenance, as you mentioned. And then without this strike, of course, the volumes would be higher, the prices are flat, demand is good. So the major element here is the strike. And as we have said, it's altogether EUR 20 million during the first half of this year. What I can say is that roughly, let's say, 75%. So lion's share of that is coming to Q1, so EUR 15 million roughly, and then the remaining EUR 5 million to Q2. But that is a rough estimate at the moment.

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Antti Koskivuori, Danske Bank Markets Equity Research - Analyst [4]

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All right. And then secondly, about the folding boxboard market and the sales mix in 2020, it seems that the U.S. market is quite attractive at the moment, yet the kind of share of deliveries to U.S. came down in 2019. It was 20%. Should we expect that share to U.S. to increase actually in 2020?

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Mika Joukio, Metsä Board Oyj - CEO [5]

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So our intention is to, of course, increase volumes, both in our main markets, which are Europe and North America. And of course, so it goes without saying that target is to increase volumes there. It's a good market. I just visited 3, 4 weeks ago that market, and I can underline and emphasize that you're right by saying that, that market situation there is good.

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Antti Koskivuori, Danske Bank Markets Equity Research - Analyst [6]

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All right. Very clear. Then maybe lastly, you mentioned the potential increase in wood costs if the winter remains mild. Could you talk a little about -- a little bit about the potential dynamics behind this? And maybe if you can comment your wood inventories at the moment compared to, for example, the historical levels? Or what's the appropriate...

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Mika Joukio, Metsä Board Oyj - CEO [7]

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Okay. If I start with the inventories, that is not an issue. We have wood enough to keep the mills up and running. So that is not an issue. The only issue is this mild winter here in Finland as well as in Sweden. And that might cause some extra costs in harvesting, but it's very difficult to say how much and how many millions, but that is a certain risk which is quite typical concerning weather.

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Operator [8]

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We'll now move to our next question today from Mikael Doepel from UBS.

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Mikael Doepel, UBS Investment Bank, Research Division - Executive Director & Analyst [9]

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A couple of questions, starting off with the guidance of stable pricing. So I was just wondering if you could elaborate a bit on that. Does that take into account any mix changes you have as well? I mean because if you're looking at the market prices of white kraftliners and folding boxboard in Europe, the pricing is down in the beginning of this year. I haven't heard of any price increase in the U.S. that would offset this. So if you could just talk a bit about how you think about the pricing vis-à-vis mix changes when you say that you see stable pricing going into Q1.

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Mika Joukio, Metsä Board Oyj - CEO [10]

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Yes, I think the sentence itself, those stable pricing, that says everything. So we do not have any other reason or no reason to say something else. So prices are stable here in Europe as well as in other markets. And when we say so, we don't kind of add or think any market mix or customer mix issue. For us, that is the case.

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Mikael Doepel, UBS Investment Bank, Research Division - Executive Director & Analyst [11]

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Okay. So essentially you disagree with market statistics showing declining price here. In terms of the mix, do you expect to see any mix improvement going into this year?

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Mika Joukio, Metsä Board Oyj - CEO [12]

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We -- our sales is constantly, of course, looking for that and trying to improve the sales mix as we were able to do last year. Of course, that goes also for this year. But when we say stable prices, we don't kind of refer to that, but that is a continuous attempt by our sales force.

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Mikael Doepel, UBS Investment Bank, Research Division - Executive Director & Analyst [13]

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Okay. Okay. And then on the dividend, if you could just maybe shed some light around that. It was cut a bit now. When we look ahead, you have a fairly high CapEx level? And based on that, I guess, you would more or less need to borrow to pay dividends going forward. How should we think about that? And also, I guess -- or should we just assume that the dividends follow the earnings development?

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Mika Joukio, Metsä Board Oyj - CEO [14]

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Okay. Mr. Jussi Noponen will take this.

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Jussi Noponen, Metsä Board Oyj - CFO [15]

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Yes. So our dividend policy is to pay a minimum of 50%, and this year's distribution will be 59%. And our intention is to stay within the dividend policy also during the higher CapEx period this year and next year.

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Mikael Doepel, UBS Investment Bank, Research Division - Executive Director & Analyst [16]

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Okay. And then just a final question. Can you say anything about CapEx going into 2021? I think you're guiding for about, I think, it's EUR 210 million to EUR 220 million for this year? Or should we assume more or less the same level in 2021?

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Mika Joukio, Metsä Board Oyj - CEO [17]

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Mika Joukio here. So at this point, pretty much at the same level. Of course, it's a bit too early to say. But anyway, that kind of assumption can be used.

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Operator [18]

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(Operator Instructions) We'll now take a question from line of Larsson from SEB.

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Linus Larsson, SEB, Research Division - Analyst [19]

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A couple of questions on the strike that has just recently ended. And when you guide on the EUR 15 million plus EUR 5 million impact in the first and the second quarter, could you please say how much is directly impacting Metsä Board and how much is only through Metsä Fibre? That would be my first question, please.

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Mika Joukio, Metsä Board Oyj - CEO [20]

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Okay. So that is quite easy to answer. So at this -- when the pulp prices are where they are, of course, the lion's share of the loss is coming from paperboard, so Metsä Board.

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Linus Larsson, SEB, Research Division - Analyst [21]

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Okay. Great. And then when it comes to the ramp-up, could you maybe comment on how the ramp-up is progressing? Are all of your production lines running at this stage? And is it -- are they running at even full capacity? And maybe if you would also be able to provide some rough figures on how many tonnes you estimate have been removed from the market during this labor conflict?

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Mika Joukio, Metsä Board Oyj - CEO [22]

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Okay. So at this point, my latest information is that all the mills are running. The first mills already started early night shift yesterday. And then the last one this morning or afternoon. So all the mills are running, and so situation is or has been normalized. Concerning the volumes. So we lost some 60,000 tonnes paperboard all together, together with -- I mean, folding boxboard and white kraftliners, so 60,000 and then 35,000 tonnes at BCTMP in Metsä Board. Metsä Fibre figures, I don't have here, but Metsä Board figures are, as I presented.

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Linus Larsson, SEB, Research Division - Analyst [23]

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Excellent. And then maybe just one final follow-up on the prior discussion when it comes to folding boxboard. Could you comment, please, on the visibility that you have now on folding boxboard? Have you concluded your negotiations for the 12-month contract that you have? And what proportion of your business is on that sort of validity, please?

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Mika Joukio, Metsä Board Oyj - CEO [24]

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Yes. In Europe, the business kind of very much is based on annual deals, and those deals have been done. And I don't have the figure how many percent. Of course, then in the in the U.S. as well as the Asia Pacific, it's a kind of different -- there are also annual deals, but then there are shorter deals. But pretty much normal situation. So deals have been done. And as I said, price-wise, our estimation is quite stable.

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Operator [25]

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We'll go to our next question now from Harri Taittonen from Nordea.

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Harri Taittonen, Nordea Markets, Research Division - Senior Director & Sector Coordinator [26]

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Where do you see your own kind of inventory levels? Because you had a positive cash flow contribution from working capital reduction, but some peers have had I'd say that even much stronger surprises on that side and looking at kind of agreement or as a percentage of sales, it still kind of looks to be higher than a couple of years before. But where do you see the potential in this sort of the working capital and inventory efficiency? Or are we now at a level that we should kind of anticipate going forward?

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Mika Joukio, Metsä Board Oyj - CEO [27]

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Okay. Jussi will take this.

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Jussi Noponen, Metsä Board Oyj - CFO [28]

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Typically, the first half of the year is negative in terms of working capital, cash flow. So working capital typically increases in the first half of the year. And then in the second half of the year, it's released. And we were quite satisfied with the working capital performance in the fourth quarter. But if you are asking is there further potential from working capital, I would say, yes, some, but it will not materialize in the first quarter or second quarter despite of the small impacts from the strike.

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Harri Taittonen, Nordea Markets, Research Division - Senior Director & Sector Coordinator [29]

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Exactly. So it would be more like an annual estimate, if any. And then -- okay, well, you talked about prices a lot already, but just sort of continuing from there that there have been this sort of price increases announced to linerboard, but you haven't sort of followed that trail or...

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Mika Joukio, Metsä Board Oyj - CEO [30]

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No. No. No. So last year, if you think about our -- I mean, price levels in white kraftliners, of course, they went down slightly last year for the whole industry. But now the estimation of forecast is stable, as I said, both in folding boxboard and linerboard.

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Harri Taittonen, Nordea Markets, Research Division - Senior Director & Sector Coordinator [31]

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Exactly. Yes. Okay. Fair enough. Finally, anything that you can add color on the environmental permit process? I mean, any sort of data points or sort of that you are kind of -- that your -- or dates that you are looking at or that you should be looking for?

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Mika Joukio, Metsä Board Oyj - CEO [32]

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You mean in Husum?

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Harri Taittonen, Nordea Markets, Research Division - Senior Director & Sector Coordinator [33]

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Yes.

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Mika Joukio, Metsä Board Oyj - CEO [34]

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So far everything goes -- has gone as planned, so no negative surprises, and the construction work is just about to start. Earthmoving work has started. So -- and our estimation is that we will get the permit then during the second quarter. So no negative surprises so far.

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Operator [35]

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It appears we have no further questions at this time. I'd now like to turn the conference back over to you for any additional or closing remarks.

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Mika Joukio, Metsä Board Oyj - CEO [36]

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Okay. Mika Joukio here. So thank you very much for everybody for your interest and attention, and have a nice day. Thank you.