U.S. Markets close in 3 hrs 21 mins

Edited Transcript of MUNK1.HE earnings conference call or presentation 13-Feb-20 9:00am GMT

Q4 2019 Ahlstrom-Munksjo Oyj Earnings Call

Helsinki Feb 20, 2020 (Thomson StreetEvents) -- Edited Transcript of Ahlstrom-Munksjo Oyj earnings conference call or presentation Thursday, February 13, 2020 at 9:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Hans Sohlström

Ahlstrom-Munksjö Oyj - CEO & President

* Johan Lindh

Ahlstrom-Munksjö Oyj - VP of Communications & IR

* Sakari Ahdekivi

Ahlstrom-Munksjö Oyj - Deputy CEO, Executive VP of Corporate Development & CFO

================================================================================

Conference Call Participants

================================================================================

* Antti-Pekka Viljakainen

Inderes Oy - Analyst

* Harri Taittonen

Nordea Markets, Research Division - Senior Director & Sector Coordinator

* Linus Larsson

SEB, Research Division - Analyst

* Marjo Liukkonen Lazaro

BNP Paribas SA - Country Head for Finland

* Markku Järvinen

Handelsbanken Capital Markets AB, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Johan Lindh, Ahlstrom-Munksjö Oyj - VP of Communications & IR [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and welcome to Ahlstrom-Munksjö's fourth quarter and full year results presentation. My name is Johan Lindh. I'm Head of Group Communications and Investor Relations. We will start with a presentation from our CEO, Hans Sohlström; and then followed by our CFO, Sakari Ahdekivi. Hans, please.

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [2]

--------------------------------------------------------------------------------

Thank you, Johan. Good morning, ladies and gentlemen. So last year was characterized by strategy execution with speed and determination. We integrated successfully our businesses. First of all, we completed the Ahlstrom-Munksjö merger in Q1 of last year, and we exceeded the originally announced cost synergies with about 50%. We also completed the integration of the acquired Expera and Caieiras businesses into our company. And also there, we exceeded the run rate of announced cost synergies by about 50% at -- towards the end of the year.

We also announced a new organizational structure, which is a final step in the integration of Expera and Caieiras into Ahlstrom-Munksjö. This new organizational structure is based on the global business area and global business unit structure that we have in place since earlier in Ahlstrom-Munksjö, and this new organizational structure is then effective as from the 1st of January of this year.

We move forward also in strengthening our company culture, which is a very important part of integration of our company. We identified through a interactive process with our employees, our culture, cornerstones. We also defined 4 leadership principles and launched last year, 4 leadership training programs from young potentials up to senior leaders. And also, this works as a very important part of sharing best practices, integrating the company and operating as a unified effective organization.

We also identified profit improvement actions during Q3 and announced those, and we are now working on implementing the cost-savings action in order to achieve at least EUR 50 million of cost savings this year compared to last year. These cost-saving actions, they are based on a long list of various action points in the area of procurement, operational efficiency, and they're mainly related to variable costs and reduced waste and improved productivity.

We also actively developed our business portfolio in order to create a structure, which brings higher shareholder value. And we completed 4 strategic investments throughout the year: 2 pulp mill renewals, both of them in Sweden, Billingsfors and Aspa; as well as 2 paper mill renewals, 1 in Germany and 1 in Brazil. These strategic investments amounted to a total of EUR 53 million of capital expenditure. And we launched innovative new products to the market.

Generally speaking, you can say that last year was characterized by stronger-than-expected market headwind. This resulted in about 4% lower sales volumes compared to the previous year. And -- but having said that, we -- despite the fact that variable costs for the year were higher than 2018, we saw some positive impact or positive influence of decreasing raw material costs and energy costs towards the end of the year. But despite that, we managed to, through our commercial strategy and price increases, to more than offset the increase in raw material costs. So when it comes to our gross margin per ton, we were at a higher level than the previous year. And thus, that had a positive impact on our EBITDA.

When it comes to our fixed costs, they remained on the same level as 2018. We -- our workforce was reduced with about 3% throughout the year. And through the synergies and improved cost efficiency, we managed then to offset inflation. So all in all, our EBITDA was close to 2018 year's level. We were about 5% below 2018 year's EBITDA.

We are actively developing our portfolio in order to maximize shareholder value. This is the way how we analyze our businesses. Every bubble here in this chart is representing a business or a subsegment of a business. And of course, we are, for every business and subsegment, we have a strategy in place in order to improve the competitiveness of that business and profitability, either through bolt-on acquisitions, mergers, joint ventures, organic investments, or then if we don't see that we have the possibility to improve the competitiveness and profitability, we will exit those businesses and find an owner for whom that business is more valuable.

And during last year, we completed -- or we announced 2 divestments and 2 acquisitions. First of all, in December, we completed the divestment of our glass fiber fabrics business in Finland in Mikkeli to ADCURAM. I think this is a typical example where a very -- a business within Ahlstrom-Munksjö that doesn't have any synergies with the rest of the business, which is a very differentiated technology without, let's say, connection points to the other technologies and the core competencies we have in our group as well as with a low conversion margin and actually, slightly negative EBITDA. We managed to find a buyer for this business where this business fits exactly into the strategy of the buyer. And therefore, they are also a better owner for this business than we are.

We continue to produce glass fiber tissue in 2 plants in Karhula and Tver. This is a completely different business where there are also clearly synergies with the rest of also Ahlstrom-Munksjö's operations. They are -- it's a attractive business, highly attractive business, highly profitable business, and we have a globally unique product and technology and IPR in this area. This is an area we want to build on and expand in the future.

We also announced and completed the acquisition within our highly attractive area of Liquid Technologies business. Liquid Technology business within Ahlstrom-Munksjö is a relatively small but fast-growing, highly profitable, roughly 30% EBITDA business. And thus, this was -- even if it was a small acquisition, it was, for us, a very important step to grow this highly attractive business, establishing a platform for Liquid Technologies in China and strengthening our position in the U.S. And we see also here that there will be clearly significant synergies for our Liquid Technologies business moving forward.

We then also announced our nonbinding memorandum of understanding when it comes to the divestment of our fine arts business. This is, as such, a good and profitable business. But on the other hand, it's not in the core of our strategy. There are also very limited synergies with the rest of Ahlstrom-Munksjö, and there is a buyer. We found a buyer, F.I.L. A., for whom this is just in the center and core of their strategy, and therefore, they are also prepared to pay about 11x EBITDA valuation for this business. We expect this deal to be concluded by the end of this quarter.

And then last but not least, we announced in December the nonbinding letter of intent to acquire a Chinese decor paper producers -- producer, Minglian. This is a state-of-the-art greenfield decor paper plant, which started up end of 2018. And this actually strengthens clearly our Decor business by providing presence in the world's largest decor market, China, which is also the world's fastest-growing decor market. And then, at the same time, provides us with very cost-efficient capacity to serve the Chinese market as well as certain, let's say, segments of the decor business outside of China. We expect the transaction to be completed during the first half of this year. Of course, now due to the coronavirus epidemic in China, our due diligence and SPA negotiation and defining process is somewhat delayed.

We have also announced earlier in September of last year that we are looking into creating the world-leading stand-alone decor business, into which we are also looking to attract investors. We have started the marketing project for attracting third-party investors into the -- this stand-alone world-leading Decor business. And I have to say that the initial interest has been really good. We have lots of interested parties in the process.

We have worked actively on innovations. Here is a list of new products that we have launched into the market throughout the roughly last 1 -- last year. And we are continuing to intensify our efforts when it comes to innovation, new product development because we see that from new products, we can clearly strengthen our competitive position, and we also get a higher margin than for older products. So when we look to products that have been launched into the market during the last 3 years, they generate a turnover of about EUR 300 million.

So all in all, we can see that throughout last year, the decline in deliveries and sales volumes leveled off. Throughout the year -- the percentages here actually show the year-on-year change for each quarter in terms of sales volumes. In the last quarter, we were at roughly the same level as the previous quarter -- or as the Q4 quarter in 2018. And we can see now clear signs also of improving demand moving forward.

With these words, I hand over now to our CFO, Sakari, please.

--------------------------------------------------------------------------------

Sakari Ahdekivi, Ahlstrom-Munksjö Oyj - Deputy CEO, Executive VP of Corporate Development & CFO [3]

--------------------------------------------------------------------------------

Thank you, Hans, and good morning to all of you also from my side. Take you through the financials of mainly the quarter but also referring to the full year. I think one thing that we can say that signified the fourth quarter was, again, a very strong cash flow. Actually, we've been able to produce a strong cash flow all through the last 3 quarters from Q2 onwards this year. And this has been as a result of a lot of work and focus on working capital and all of the items of working capital.

Then when we go to the P&L side of the business, yes, the gross margin on products did improve. Profitability, however, if you look at it year-on-year, was impacted by somewhat higher fixed cost in the quarter, and I'll come back to that later on in the presentation. And also, still, even though less of an impact compared to previous quarters, there was still an impact from lower volumes. However, profitability was stable. And if you look at it from a comparable EBITDA margin, we actually slightly improved the comparable EBITDA margin year-on-year.

Market environment, as Hans described, remained uncertain. However, the volume decline did level off compared to previous quarters. And we made, as Hans described, a lot of progress in building the Decor platform for the future and also working on the rest of our portfolio.

If we then break down the -- what happened on the net sales side, we had a 4.8% drop in net sales year-on-year to EUR 699 million in the quarter. We had a 1% negative in the volume. We had a minus 3% in price and mix and a positive 1% from currency.

On the comparable EBITDA, I will actually go into more detail on the next slide, where we show the bridge for Q4. Here, you see that the -- there was still a slight negative volume impact, although the volume decline did stabilize. The ratio between our selling prices and our variable costs was a positive for us, so we've more than offset, well, the lower selling prices by lower variable costs. However, we did have somewhat higher fixed costs in the quarter. But as Hans said, fixed costs for the full year was stable, and we were able to mitigate inflation on a full year level. And the quarterly fixed costs were impacted by some single events, such as a prolonged startup in 2 of our strategic investment projects in Billingsfors and in Jacareí in the Industrial Solutions business area and also pulp outages in our Wisconsin pulp mills.

And also, of course, driving down inventories as a part of a push for lower working capital does have some impact on the fixed cost as well. So I think my message on the fixed cost side is to look more at the full year development, not so much on the single quarter, which shouldn't be projected necessarily into the future.

Then back to the variable cost side. So just maybe as more as a reminder, the breakdown of our operating costs where fibers, mainly wood pulp, is the largest impact. And also, as a reminder, the sensitivity of -- on the impact on our P&L from a 10% increase in the main cost elements. I think one thing to maybe note because we always talk so much about pulp is that we did have a negative impact from energy costs quarter-on-quarter in Q4 of 2019.

If we then have a look quickly at the pulp price development. Yes, pulp prices continue to come down in Q4 before leveling off then into the new year. I think here, it's again important to remember that the pulp price decrease does hit our P&L with a time lag and the low pulp prices that you see there at the turn of the year, December, January, should hit our P&L then during the first half, first quarter, second quarter of this year. The other thing to note, of course, is that, for us, Europe and North America are the main areas. And the largest impacts from pulp are Europe and North America.

If we then do a dive into the business areas. We had 2 out of 5 business areas actually improving profitability, being Filtration & Performance and Specialties. In filtration, we had higher net sales due to higher sales prices. We had lower variable costs that led to improved margins in Filtration & Performance. In Industrial Solutions, I mentioned the costs related to the strategic investments. We had higher sales volumes but lower selling prices in that BA were only partly mitigated by lower input costs.

In Decor, the story was really lower sales volumes. The margins were largely stable. North America Specialty Solutions suffered from lower sales volumes. And there, we had higher fixed costs in the NASS BA. Specialties was a turnaround case and continued to improve, made a 9% EBITDA, which is a nice improvement from the 5.6% 1 year ago. We had lower input costs that more than offset the lower selling prices. And we benefited from the closure of the Stenay 1 production line in France, which we closed earlier in the year.

I mentioned the strong cash flow in the last 3 quarters from driving down working capital, leading to a very good cash flow for the full year, much better than in 2018. Our net debt-to-EBITDA was 2.8, and our reported gearing was 72% at the end of the year.

We were able to lower debt, of course, as a result of the stronger cash flow, but we also issued a hybrid bond in December of 2019, EUR 100 million, with a fixed rate of 3.879% per annum until February 2024. And that hybrid is to be treated as equity under IFRS.

If we then focus on this slide on the capital allocation, you can see that the trend in capital expenditure is downwards as we start to near the end of the large strategic capital investments program that we have been running. We still have 4 ongoing projects to be completed during this year and partly into '21. We had EUR 161 million of capital expenditure in 2019. That was lower than the pro forma EUR 176 million in 2018, and our estimate for CapEx is approximately EUR 140 million in 2020. And the Board is proposing a stable dividend of EUR 0.52 to the AGM.

At this stage, I would like to hand over to Hans again. Thank you.

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [4]

--------------------------------------------------------------------------------

Good. So Ahlstrom-Munksjö's comparable EBITDA reached EUR 313 million last year, 5% down from 2018. The decline in volumes, about 4%, had a negative impact on the result in 2019, but the decline leveled off towards the end of the year. And in the beginning of this year, there are signs of improvement in demand. Raw material and energy prices had a negative impact for the full year of 2019, while they started to have a positive impact in the second half. The ratio between average selling price and variable costs, or the gross margin for products, was at a good level at the start of 2020.

So we will continue our efforts to improve performance and competitiveness. We have identified cost savings, mainly related to procurement and production efficiencies, and we estimate this to have an impact of at least EUR 50 million during this year compared to last year. And Ahlstrom-Munksjö's comparable EBITDA this year is expected to be higher than last year.

So to sum up, very strong operating cash flow, close to EUR 300 million; relatively stable profitability throughout the year, thanks to where we managed with a higher gross margin per ton to offset the negative impact of lower volumes; we -- and we had stable fixed costs where we, due to various actions, synergies and let's say, workforce reduction, about 3%, managed to offset, let's say, inflation. We have successfully integrated acquired businesses and completed in the beginning of last year, the Ahlstrom-Munksjö merger.

We -- the market environment has stabilized, and we see some signs of improving demand, and we have the profit improvement actions ongoing in order to reach at least EUR 50 million cost savings this year compared to last year. We continue to develop our product and business portfolio in order to create -- maximize shareholder value, and we expect our comparable EBITDA this year to exceed that of last year.

So with these words, over to you, Johan.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Johan Lindh, Ahlstrom-Munksjö Oyj - VP of Communications & IR [1]

--------------------------------------------------------------------------------

Thank you, Hans. Thank you, Sakari. So now it's time for questions. And perhaps, we can start here in the audience in Helsinki. Do we have any questions? Harri, please?

--------------------------------------------------------------------------------

Harri Taittonen, Nordea Markets, Research Division - Senior Director & Sector Coordinator [2]

--------------------------------------------------------------------------------

Yes, Harri Taittonen, Nordea. On the fixed cost chart, I mean, that seemed to be a bit of an outlier from the earlier quarters. And visually, it look like it was maybe sort of EUR 5 million up or so compared to last year. Is that -- is it fair to say that, that was related to the, more or less, one-off-type items? Or how would you -- if you could give a bit more color on that and what you see as the sort of unusual or one-off-type operational items in Q4?

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [3]

--------------------------------------------------------------------------------

Yes, perhaps you take that, Sakari.

--------------------------------------------------------------------------------

Sakari Ahdekivi, Ahlstrom-Munksjö Oyj - Deputy CEO, Executive VP of Corporate Development & CFO [4]

--------------------------------------------------------------------------------

Yes. I think you've calibrated it roughly correctly. And yes, I would say that the bulk of that is related to what I mentioned earlier in my presentation.

--------------------------------------------------------------------------------

Harri Taittonen, Nordea Markets, Research Division - Senior Director & Sector Coordinator [5]

--------------------------------------------------------------------------------

Okay. Also, the other sort of related to this because the weakness was very much in Americas. And just wanted to confirm or hear your views on how the pricing -- usually it seems that pulp prices and sort of input costs are just -- they had just come down. But is it also that the sales prices are following suit on -- or is -- was this sort of -- how would you describe the pricing in the North American business compared to the input costs?

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [6]

--------------------------------------------------------------------------------

Well, I mean, generally speaking, as we said, we are moving into the new year with a good, healthy gross margin for products throughout -- in the company in general. And it is clear that during the end of the year or beginning of the year, there has been some price adjustments in our products, in our end products and customer relationships. But however, what is typical for us is that as a differentiated niche player with a very special and tailored value offering, our pricing, we can -- we have better possibilities to stick to prices. So we can -- we don't have to give away the advantage we get from lower raw material costs, let's say, like that.

--------------------------------------------------------------------------------

Harri Taittonen, Nordea Markets, Research Division - Senior Director & Sector Coordinator [7]

--------------------------------------------------------------------------------

Maybe finally on the EUR 50 million target that you sort of quantify, is that sort of -- because it's partly related to Stenay, which already happened before mid-last year. So if you compare the run rate, say, where the run rate was in Q4, how much would you say that your target is for this year?

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [8]

--------------------------------------------------------------------------------

That's...

--------------------------------------------------------------------------------

Sakari Ahdekivi, Ahlstrom-Munksjö Oyj - Deputy CEO, Executive VP of Corporate Development & CFO [9]

--------------------------------------------------------------------------------

Well, I'd say that the -- all of the actions that are in that EUR 50 million program should be completed during this year. And Stenay is actually not included in that EUR 50 million.

--------------------------------------------------------------------------------

Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [10]

--------------------------------------------------------------------------------

Markku Järvinen, Handelsbanken. Maybe I can continue on the EUR 50 million program. I guess that's sort of fairly extensive program. What kind of sort of run rate do you expect during 2020? Is it going to be sort of heavier towards the end of the year? Or are they sort of going to impact earnings from the beginning of the year? And from that perspective, what's the impact going to be on '21?

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [11]

--------------------------------------------------------------------------------

Well, first of all, yes, the -- at least EUR 50 million is the year-on-year comparison. And of course, as these are actions that we are implementing, there will be some impact already in the beginning of the year, but most of the impact will be then towards the end of the year. But I cannot really guide anything more accurate or more precise around 2021 then further.

--------------------------------------------------------------------------------

Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [12]

--------------------------------------------------------------------------------

But are they sort of one type -- one-off type of items that will only impact '20, and then they'll come back in '21? Or should we expect that this will continue through '21 and maybe even more in '21? Or what's the sort of thinking there?

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [13]

--------------------------------------------------------------------------------

Yes, they are part of our continuous improvement. So there are, I would say, I cannot think about any of the several big number of various actions we are working on that wouldn't be continuing also into the coming years. So it's a -- they are of a continuous improvement type of nature.

--------------------------------------------------------------------------------

Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [14]

--------------------------------------------------------------------------------

Okay. And just to be clear, this doesn't include any sort of changes in market prices of your raw materials? Or any sort of changes in the...

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [15]

--------------------------------------------------------------------------------

No, no.

--------------------------------------------------------------------------------

Sakari Ahdekivi, Ahlstrom-Munksjö Oyj - Deputy CEO, Executive VP of Corporate Development & CFO [16]

--------------------------------------------------------------------------------

No, no. No, that's excluded from that.

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [17]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [18]

--------------------------------------------------------------------------------

Or changes in the discounts?

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [19]

--------------------------------------------------------------------------------

There are some discount-related impact elements there, yes, but not market-price-related elements. And then there is a -- I mean, the way how we have built up this EUR 50 million program is that we started already -- during Q3, we worked intensively with our businesses to define bottom-up various actions to reduce costs. So we have -- there are, let's say, waste- and efficiency-related impacts. There are, let's say, change of recipes, there are, let's say, also some, let's say, supplier-rebate-related elements there and also some fixed-cost-related elements, but mainly, these are regarding variable costs.

--------------------------------------------------------------------------------

Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [20]

--------------------------------------------------------------------------------

Okay. And then just continuing on that, and I'll let other people ask questions. But the discounts, I guess, market talk has been that discounts for pulp are higher this year compared to 2019. Could you give some sort of idea what the magnitude is there? And then your sensitivity to pulp, it seems that it's now EUR 31 million, which seems a bit lower number than what has been previously discussed. Could you say what's sort of behind that?

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [21]

--------------------------------------------------------------------------------

Do you want to take that, Sakari?

--------------------------------------------------------------------------------

Sakari Ahdekivi, Ahlstrom-Munksjö Oyj - Deputy CEO, Executive VP of Corporate Development & CFO [22]

--------------------------------------------------------------------------------

Well, I think that we shouldn't get into discussing our discounts in the pulp. But coming back to the EUR 50 million, yes, there are procurement savings in there. No, market price fluctuations are not included, but there are, of course, activities related to getting better discounts included in that EUR 50 million.

What was the rest of the question?

--------------------------------------------------------------------------------

Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [23]

--------------------------------------------------------------------------------

The pulp sensitivity.

--------------------------------------------------------------------------------

Sakari Ahdekivi, Ahlstrom-Munksjö Oyj - Deputy CEO, Executive VP of Corporate Development & CFO [24]

--------------------------------------------------------------------------------

Pulp sensitivity.

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [25]

--------------------------------------------------------------------------------

Yes, that's because the sensitivity is calculated on the real cost of pulp. And as the real cost of pulp has been coming down...

--------------------------------------------------------------------------------

Sakari Ahdekivi, Ahlstrom-Munksjö Oyj - Deputy CEO, Executive VP of Corporate Development & CFO [26]

--------------------------------------------------------------------------------

Makes the sensitivity smaller.

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [27]

--------------------------------------------------------------------------------

, It also changes the sensitivity.

--------------------------------------------------------------------------------

Sakari Ahdekivi, Ahlstrom-Munksjö Oyj - Deputy CEO, Executive VP of Corporate Development & CFO [28]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [29]

--------------------------------------------------------------------------------

So is the conclusion that your pulp spend last year was EUR 310 million net?

--------------------------------------------------------------------------------

Johan Lindh, Ahlstrom-Munksjö Oyj - VP of Communications & IR [30]

--------------------------------------------------------------------------------

Yes, it is. Sensitivity table there shown it's calculated in the last year's usage and the fourth quarter market prices. So because volume has come down, like 5% last year in terms of total production and then that the prices are clearly down, as a result, our sensitivity is also smaller.

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [31]

--------------------------------------------------------------------------------

So because it's calculated on the Q4 average cost of pulp, you cannot draw the conclusion that what would have been the net pulp cost throughout the whole year.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, just sort of Q4 market price or Q4 effective price for you?

--------------------------------------------------------------------------------

Johan Lindh, Ahlstrom-Munksjö Oyj - VP of Communications & IR [33]

--------------------------------------------------------------------------------

In the -- of course, it's an illustrative table, first of all. And yes, we used the full year usage, and the fourth quarter average European price, but please remember that we, of course, have a global kind of exposure. And of course, Europe is, by far, the most -- or let's say, very important here. So it's illustrative.

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [34]

--------------------------------------------------------------------------------

Yes. Did it -- but the question was, is it price or cost in our case? I think it has been calculated actually based on the price.

--------------------------------------------------------------------------------

Johan Lindh, Ahlstrom-Munksjö Oyj - VP of Communications & IR [35]

--------------------------------------------------------------------------------

Yes, it's the market price.

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [36]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Antti-Pekka Viljakainen, Inderes Oy - Analyst [37]

--------------------------------------------------------------------------------

Antti Viljakainen, Inderes. What is actually driving improving demand that you see right now? And do you see improved demand in all businesses and all geographic areas?

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [38]

--------------------------------------------------------------------------------

The -- yes, the signs of improved demand also varies between geographies and business. And what is driving that is that clearly, throughout last year, we saw an immense destocking effect, which actually continued quite long and longer than we anticipated. Now of course, we have a situation where everybody can see that pulp prices have stabilized on a low level. So our customers, they don't expect any, let's say, further -- most of the customers don't expect any further, let's say, product price reductions. So therefore, they can also now, after the end of the year, they can start, let's say, building up normal stocks and inventories. So that's certainly one part of it.

The second part is that -- yes, I think that is probably the main part of it. So the long destocking effect that was happening throughout last year has then finally stopped. And we know from our sales force and our discussions with customers that their stock levels are on a very -- inventory levels are very low levels or were on a very low level at the end of last year.

When it comes to demand, it varies by segment. And I would say, in general, that those end-use areas, which are related to consumer type of products, which represent about half of our sale there, we can see healthy demand development. These are typically, for instance, our food, beverage applications, let's say, release liner for labels. Also, Decor is showing positive demand development and then our Medical, Advanced Liquid Technology business. So these are closer to the consumer type of business. The areas where we still see, let's say, quite slow demand relates to industrial end-users like steel interleaving, glass interleaving, the heavy-industry type of end-use areas.

--------------------------------------------------------------------------------

Antti-Pekka Viljakainen, Inderes Oy - Analyst [39]

--------------------------------------------------------------------------------

And could you discuss a bit how did your recent organic investments contribute sales and EBITDA last year? And what should we expect this year?

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [40]

--------------------------------------------------------------------------------

I think generally speaking, we can say that the organic investments, they had a small, if any, impact on EBITDA throughout last year because we have -- if we think about the 13 projects, out of which we have now implemented 9, they have been basically started up throughout 2018 and 2019. So the ones from 2018, you can see some positive impact in EBITDA in 2019. But then, on the other hand, the big ones we have implemented throughout 2019, there is mainly a negative impact. So I would say it's -- you haven't seen the -- we haven't seen the impact really yet.

--------------------------------------------------------------------------------

Marjo Liukkonen Lazaro, BNP Paribas SA - Country Head for Finland [41]

--------------------------------------------------------------------------------

Marjo Liukkonen, BNP Paribas. Could you give some more color on the strategy concerning the Decor business? You have announced that you're actively looking for a partner, even potentially to divest the majority. At the same time, you have the acquisition of the Minglian. So how do these link together? Is this acquisition to make the bride more beautiful? Or what is the strategy?

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [42]

--------------------------------------------------------------------------------

Well, yes, I mean, we have clearly identified that when it comes to improving the competitiveness of our Decor business, we need to have a strong foothold in China. And we already long time ago identified that we -- and started to work on finding a way to establish our Decor platform in China, which will help our position in, and support our position in China in the fastest -- in the biggest market and fastest-growing market as well as also provide us with cost-efficient capacity. So it's just something that the Decor business clearly need as such.

And we see that there are further opportunities there. And of course, this is, we feel, a very attractive business case because we can build on the world's strongest decor brand, the best quality, the largest sales network, the largest product offering in the world, combined then with the Chinese cost-efficient capacity and presence. So we see that this is a very attractive business case as such.

And -- but when we look at our -- when we think about our balance sheet, we want to be prudent there. And of course, in such a situation, the alternatives is either that you sit and wait just to strengthen your balance sheet, and then you do the investments and acquisitions yourself, or then you go out and attract, let's say, external investors and capital into the business as such. And I think it is clear that for the business, it's much better that instead of just strengthening our own balance sheet and preparing room for this type of acquisition and expansion, we want to accelerate the strategy implementation by going out and search investors who can bring in money into the business and then accelerate the execution of the -- of this Decor strategy.

So you can call it dressing the bride. I would call it that it's a necessity. It's a strategic necessity, and it makes the business case highly more attractive. So we feel we have a very, very attractive business case. And as you know, there is a lot of money out there. Private equity companies, they have more dry powder than ever before, and they are looking for attractive business cases where you can build value.

Our objective, of course, is to remain as a as-big owner as possible in this business moving forward. But at the same time, I think it's also realistic to say that could very well be that an investor would require a majority and is prepared to pay for it. So that could be also a scenario. But we see that it's an attractive business case, and therefore, we want to have a significant stake in the business also moving forward. Normally, it's always like that. What is good for the business is also good for its owners.

--------------------------------------------------------------------------------

Johan Lindh, Ahlstrom-Munksjö Oyj - VP of Communications & IR [43]

--------------------------------------------------------------------------------

Thank you. Thank you for a lot of questions. Do we have further questions here in the audience in Helsinki? If not, then do we have questions on the line?

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

Sure, sir. (Operator Instructions) We will now take your first question.

--------------------------------------------------------------------------------

Linus Larsson, SEB, Research Division - Analyst [45]

--------------------------------------------------------------------------------

It's Linus Larsson with SEB. Volumes did hurt you quite badly in 2019, and it seems to me that it's of critical importance that you increase your operating rates or your -- the gap that the volume decline has caused in your business. Now on the one hand, you say that you are seeing signs of demand improvement. That's encouraging. But you also say in the report that the gross margin, which has been the bright spot now during this time of volume decline, is actually declining in the fourth quarter compared to the third quarter. So my question is when are you expecting to see this gap closing. And will that occur before gross margins have come down again?

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [46]

--------------------------------------------------------------------------------

Okay. Yes. Linus, thank you for your question. Well, yes. I mean we don't give any guidance regarding -- or closer guidance regarding volume development in this year. And -- but we also say in our report that moving into this year with all the, let's say, looking at the raw material costs as well as our sales prices, we are moving into this year with a good gross margin for products. So that's what we are saying.

--------------------------------------------------------------------------------

Sakari Ahdekivi, Ahlstrom-Munksjö Oyj - Deputy CEO, Executive VP of Corporate Development & CFO [47]

--------------------------------------------------------------------------------

And actually, in Q4, the ratio between selling prices and variable costs was still a positive.

--------------------------------------------------------------------------------

Linus Larsson, SEB, Research Division - Analyst [48]

--------------------------------------------------------------------------------

Right. Now -- I'm just reading what you write in the report. You say margin -- the gross margin was down sequentially in the fourth quarter. Now if you look at price in the fourth quarter on a year-on-year basis, they were down in all business areas, except in filtration. So could you please discuss a bit more about the sequential price development going into the first quarter? We touched on it earlier. But are you seeing price pressure in all of your business areas? Only in some subsegments? Or how is that looking?

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [49]

--------------------------------------------------------------------------------

Yes, the biggest -- clearly, the biggest impact on net sales prices from Q3 to Q4 came from the Aspa market pulp mill. That was a big part of the quarter-to-quarter price development. And there has been some price adjustments around the end of last year. But as said, our strategy that is based on leading positions in niche markets and a differentiated product offering really gives us a good possibility also to keep our pricing relatively stable.

But some adjustments across the board. But typically, if you look at the history of the dynamics of our company, moving back in history, you can see that in a situation where raw material costs are declining, I mean, we can always keep an advantage in terms of gross margin in our company. That's the kind of basic element of our differentiated niche leadership strategy.

--------------------------------------------------------------------------------

Linus Larsson, SEB, Research Division - Analyst [50]

--------------------------------------------------------------------------------

And when it comes to this that I referred to, that you might not have -- I mean, the market has come down. You've seen volume declines in the market. Might there also be an element ahead of us where you will close capacity and actually adjust your own footprint? Or are you rather keeping what you have and then awaiting this demand upturn that you are now seeing some early signs of?

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [51]

--------------------------------------------------------------------------------

We are not planning any capacity closures at this time.

--------------------------------------------------------------------------------

Linus Larsson, SEB, Research Division - Analyst [52]

--------------------------------------------------------------------------------

Okay. And then just 1 final question, please, on the CapEx side. So this year, 2020, I mean, will be the third year of high CapEx. Is CapEx coming down quite a lot in 2021? And would you even get you to put a figure on that, please?

--------------------------------------------------------------------------------

Sakari Ahdekivi, Ahlstrom-Munksjö Oyj - Deputy CEO, Executive VP of Corporate Development & CFO [53]

--------------------------------------------------------------------------------

Well, we've given guidance on the 2020 CapEx, which was the EUR 140 million, but we're not giving out a CapEx guidance at this stage for '21. But the high CapEx, of course, has been a result of the 13 announced strategic larger CapEx projects, of which 9 have been completed, and the remaining 4 will be completed during this year and partly in '21.

--------------------------------------------------------------------------------

Johan Lindh, Ahlstrom-Munksjö Oyj - VP of Communications & IR [54]

--------------------------------------------------------------------------------

Thank you, Linus. Do we have more questions on the lines? Okay. If no further questions on the line, then we have 1 in the audience. Markku, please?

--------------------------------------------------------------------------------

Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [55]

--------------------------------------------------------------------------------

Just on raw materials. I think in Q3, you said you had a positive impact year-on-year of EUR 4 million. What was that impact in Q4?

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [56]

--------------------------------------------------------------------------------

I think we said EUR 4 million raw material and energy included, so the variable costs.

--------------------------------------------------------------------------------

Johan Lindh, Ahlstrom-Munksjö Oyj - VP of Communications & IR [57]

--------------------------------------------------------------------------------

Perhaps we can come back to you on that one.

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [58]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [59]

--------------------------------------------------------------------------------

Okay. Good. Then still on the Decor restructuring or the strategic change there. Could you sort of talk about the structure now that you're marketing? How much debt are you going to put in that company? And will you keep the hybrid after you sort of move ahead with the transaction?

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [60]

--------------------------------------------------------------------------------

Yes. We don't disclose any further details about the structure as such. Regarding the hybrid, I think we don't have any specific plans. I mean we -- when we announced the hybrid, we said that we want to create certain flexibility for -- to have certain room for strategic maneuver. That's the basic idea there.

--------------------------------------------------------------------------------

Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [61]

--------------------------------------------------------------------------------

So the hybrid is not related to the Decor restructuring or reorganization?

--------------------------------------------------------------------------------

Sakari Ahdekivi, Ahlstrom-Munksjö Oyj - Deputy CEO, Executive VP of Corporate Development & CFO [62]

--------------------------------------------------------------------------------

Not directly related, no.

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [63]

--------------------------------------------------------------------------------

No, no.

--------------------------------------------------------------------------------

Markku Järvinen, Handelsbanken Capital Markets AB, Research Division - Analyst [64]

--------------------------------------------------------------------------------

Okay. Then just on pricing, I guess, UPM said they expect mid-single-digit price decreases in their specialty paper businesses. Do you see similar development in release?

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [65]

--------------------------------------------------------------------------------

Well, first of all, within UPM specialty paper, they have lots of other things than release liner. I mean there is a lot of also other products and fine papers within that segment. So we don't disclose any further details on price development.

--------------------------------------------------------------------------------

Johan Lindh, Ahlstrom-Munksjö Oyj - VP of Communications & IR [66]

--------------------------------------------------------------------------------

Thank you, Markku. Then we have, I think, a question also on the website.

--------------------------------------------------------------------------------

Unidentified Company Representative, [67]

--------------------------------------------------------------------------------

Yes, we have 1 question from our website followers regarding the market situation in China. So are you seeing any impact from lower Chinese demand at the moment?

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [68]

--------------------------------------------------------------------------------

Okay. Well, thank you for the question. First of all, China as a country represents about 5% of our turnover. We have 4 operations there. You could say, 2 larger ones, 2 paper mills, Binzhou and Longkou in the Shandong Province. They both -- operations were given the permission to startup operation early this week, beginning of this week, about 1 week delayed after the Chinese New Year. They are up and running. And we can operate those fairly normal. I mean there are some logistic challenges, I would say, especially when it comes to sales from these operations in China, but it seems that we are able to export from there.

But taking into account China as a market represents only 5% of our total sales, and so there is -- we don't expect any major impact of the current situation. Then, of course, nobody knows how the future will develop. I mean if this really, really breaks out to a major epidemic around the world, so of course, there will be impacts on all businesses and all companies. That -- we also see the advantages of having a really global manufacturing platform here. I mean we have been able to back up supplies from our, for instance, operation in South Korea and also, in some cases, from India, Europe and the U.S.A. So that really shows the strength of a global manufacturing platform.

We have also seen some increase in demand in our medical segment where we produce the virus protection material that are being used, among others, in -- as 1 layer in the face masks and in other, let's say, materials that are being used in hospitals.

--------------------------------------------------------------------------------

Johan Lindh, Ahlstrom-Munksjö Oyj - VP of Communications & IR [69]

--------------------------------------------------------------------------------

Thank you. All right. If there's no further questions, then thank you very much for this active dialogue here. And with those words, I hand over to Hans for closing remarks.

--------------------------------------------------------------------------------

Hans Sohlström, Ahlstrom-Munksjö Oyj - CEO & President [70]

--------------------------------------------------------------------------------

Well, thank you very much. And I think as a key takeaway, I hope you see that we really execute on our strategy with determination and speed. And we also now after, let's say, a year of low demand, we can see some light also in the tunnel moving forward.

So thank you very much for your interest and for your participation. Have a good day.

--------------------------------------------------------------------------------

Sakari Ahdekivi, Ahlstrom-Munksjö Oyj - Deputy CEO, Executive VP of Corporate Development & CFO [71]

--------------------------------------------------------------------------------

Thank you.