(The following statement was released by the rating agency)
Nov 29 -
Summary analysis -- Metsa Board Corp. ----------------------------- 29-Nov-2012
CREDIT RATING: B-/Stable/B Country: Finland
Primary SIC: Paper mills
Credit Rating History:
Local currency Foreign currency
23-Aug-2010 B-/B B-/B
16-Jan-2009 CCC+/C CCC+/C
The ratings on Finland-based forest products producer Metsa Board Corp. reflect Standard & Poor's Ratings Services' view of the group's weak business risk profile, including historically below-average operating efficiency, which has created a need for significant historical and ongoing restructuring charges. They also reflect our assessment of the group's highly leveraged financial risk profile, which although recently improved still falls into this category due to high levels of debt and weak cash flow generation. These factors are only partly offset by Metsa Board's sizable shares of the European paperboard and uncoated fine paper markets, past and ongoing operating and strategic initiatives, and its adequate liquidity following refinancing in May 2012. On Sept. 30, 2012, Metsa Board had nominal debt of about EUR1.1 billion.
S&P base-case operating scenario
Metsa Board has undertaken significant restructuring activities in the last 12 months to eliminate underperforming assets and refocus its business portfolio on virgin-based fiber packaging in Finland. The group has closed loss-making paper mills in Finland, France, and Germany and at the same time expanded capacity within paperboard (folding boxboard) in Finland. Post restructuring, the group consists of five board mills and two stand-alone pulp mills in Finland, one integrated paper and pulp mill in Sweden, and one paper mill in Germany. About 55% of Metsa Board's sales are currently from the paperboard segment while 45% are from the paper and pulp segment.
The restructuring has led to significant costs, which we believe will still be visible in the coming quarters and make forecasting difficult. In our base-case scenario, we believe that the paperboard segment will continue to deliver a largely stable performance, with EBITDA margin of about 13%-15%, while the paper and pulp segment will continue to be burdened by generally low pulp prices and a strong Swedish krona (which weighs on the Sweden-based Husum mill's cost base) that we forecast will result in an EBITDA margin of about 6%-8%. This combined will likely lead to adjusted EBITDA of about EUR140 million-EUR150 million for 2012 (adjusted for the gains on the sales of PVO and Metsa Fibre shares and Metsa Board's share of results in associated companies). In 2013, however, we think that EBITDA of about EUR200 million (which is about the same level as in 2010) is possible, taking into account the group's increased paperboard capacity and eliminated losses in the paper segment. Downside risk in 2013 relates primarily to the uncertain macroeconomic environment and the impact this could have on Metsa Board's key products. Any input cost inflation could also negatively impact operating performance, although this is mitigated through the group's position of net seller of pulp and generally high electricity self-sufficiency.
S&P base-case cash flow and capital-structure scenario
Although we have revised our base case up slightly, we still believe that Metsa Board will generate negative free operating cash flow (FOCF) in 2012, primarily due to significant cash restructuring costs. This is based on neutral to slightly positive funds from operations (FFO), a working capital release of some EUR55 million, and capital expenditures (capex) of about EUR60 million-EUR70 million. We believe that cash flow generation will improve in 2013 on the back of increased paperboard capacity and lower cash restructuring charges.