Metsä Board Oyj (METSB.HE) Earnings Call Transcript & Summary

Good afternoon, and welcome to Metsä Board's Half Year Report Webcast and Conference Call. My name is Katri Sundström, and I'm responsible for Investor Relations at Metsä Board. As you may notice, our format has changed. From now on, we will be holding our result presentations as live webcasts instead of audiocasts. Otherwise, the structure remains the same. CEO, Esa Kaikkonen; and CFO, Henri Sederholm, will present the results, after which we will open the conference call for questions. [Operator Instructions] And an important reminder and disclaimer that the presentation includes forward-looking statements. But now we are ready to begin. Once more, thank you for joining us today, and I will now hand over to Esa.

Thank you, Katri, and good afternoon, everyone. Before moving on to the results, let's take a moment to review the current market landscape we are facing. Weak consumer sentiment and cautious spending have continued to hold back demand for packaging materials. Geopolitical instability, U.S. import tariffs is adding further uncertainty, even though there is a preliminary deal between U.S. and EU now. The market balance, especially in the EMEA area has been disrupted by capacity growth. And lastly, high wood costs are putting pressure on our competitiveness. To strengthen our competitiveness and adapt our cost structure what we announced earlier today that we are launching a transformation program focused on improving profitability. In addition to the cost savings, we aim to enhance our commercial capabilities and leverage our core competitive strengths. I will return to the details of the program later in my presentation. In a very tough market situation, Metsä Board has several competitive advantages, which have secured our leading position in high-quality packaging materials. First and foremost, our employees are not only highly skilled, but also motivated and deeply committed to Metsä Board's development. Our paperboard production is based on the years of deep expertise, and our product quality constantly receives high ratings in customer surveys. We have also numerous long-term customer relationships that value the high performance of our boards and the wide range of services we offer. And finally, customers appreciate our high sustainability level and the transparent value chain, which is supported by being part of Metsä Group. Together, all of these form a solid foundation for the transformation. But now let's move on to the results, starting with a brief overview of Q2. Our comparable operating result was clearly negative at minus EUR 23 million. The decline from Q1 was greater than we had anticipated earlier. The main reasons were the continued weakness in the pulp market and more extensive production curtailments, the main reasons. In particular, U.S. tariffs have increased uncertainty and negatively affected order inflows. Cash flow remained negative as it did in Q1. Looking ahead, we will place particular emphasis on improving cash flow with the progress expected already Q3 through tighter operative working capital management. There was also a long repair shutdown at Metsä Fibre Kemi mill where the damaged evaporator units were replaced with the new ones. During the shutdown, Metsä Board's kraftliner production was also halted. Finally, the closure of Tako mill was completed at the end of June. Production was successfully transferred to Kuura, where operations were also streamlined. These measures are expected to improve our EBITDA -- annual EBITDA by approximately EUR 30 million starting from Q4. Total paperboard delivery volumes reached 360,000 tonnes in Q2, slightly below our earlier expectations of stable volumes compared to Q1. Our delivery volumes remain clearly below the capacity. To return to the growth path, we must take proactive steps, sharpening our commercial focus and making more effective use of our services. The year-end -- the year-to-date sales split for both FBB and white kraftliner showed no major deviations between the review periods. However, total volumes were lower than in the same period last year, even though deliveries in 2024 were negatively impacted by political strikes in Finland. Then market pulp. Metsä Board's market pulp deliveries in Q2 totaled just 86,000 tonnes. The lowest quarterly volume in several years. Year-to-date deliveries also lagged behind the corresponding period last year. In contrast, Metsä Fibre's deliveries increased compared to the same period in 2024. We also curtailed production at the Husum pulp mill and BCTMP mills more than initially anticipated at the beginning of the quarter. Demand for softwood market pulp has remained weak in both Europe and China with no clear sign of near-term improvement. In June, Metsä Fibre announced the temporary shutdown of its Joutseno pulp mill to adjust inventory levels in response to low order volumes, particularly from Asia. In addition to the sluggish market, European pulp producers' competitiveness has been impacted by high wood costs and the weakening of the U.S. dollar against the euro. Now over to Henri for a closer look at the financials.

Thank you, Esa, and good afternoon, everyone. Let's start with the top line. Our Q2 sales declined by 5% compared to Q1 and by 10% year-on-year. The main driver behind this decline was lower delivery volumes in both paperboard and pulp. Profitability in the second quarter was very unsatisfactory and worse than we had anticipated. The first half of the year resulted in breakeven. Next, let's look at the bridge analysis of items affecting the operating result. The main result drivers were fairly consistent across both comparison periods. Metsä Fibre's negative earnings contribution was smaller than in the corresponding period last year, and this led to a positive impact. In Q2, paperboard prices rose slightly in local currencies. However, this positive effect was offset by the weakening of the U.S. dollar. On the negative side, lower delivery volumes, production volumes of both paperboard and pulp, along with adverse currency effects burdened the result. Fixed costs and depreciation were higher in both periods. During the review period, wood and logistics costs rose, while chemical costs declined. And as a result of full profitability development, our return on capital employed remains well below our target level of 12%. At the end of the review period, capital employed amounted to EUR 2.6 billion. And now the cash flows, which have been in the red for several quarters, although the decline is showing signs of stabilization. In addition to weak earnings, our operating cash flow has been particularly impacted by capital tied up in product inventory. We have already initiated measures to release working capital, and we expect the results to be reflected in cash flow on the second half of the year. Furthermore, investments in 2025 will be clearly lower than during the last 5 years. It is also worth noting that our operating cash flow is affected by dividends received from our sister company, Metsä Fibre. Negative cash flow has impacted our interest-bearing net debt, which stood at EUR 430 million at the end of the period. Combined with weak profitability, this pushed our leverage above the target level, reaching 2.9. Despite exceeding our target of 2.5, our financial position remains stable. During the review period, we issued a new 6-year EUR 200 million green bond. This transaction extends our debt maturity profile and supports our ambitious 2030 sustainability targets. And that concludes the financial review. So back to you, Esa.

Thank you, Henri. Before moving on to the outlook, let's take a quick look at our investments as well. The major investment projects are now behind us, and our focus is shifting to making the most of the recent capacity expansions. This means sharpening our sales and marketing efforts, which I will touch on shortly. We are lowering our CapEx guidance for 2025 and estimate that our investments will be landing approximately to EUR 100 million. The renewal of the Simpele paperboard machine will be completed this year with a major shutdown scheduled for September. We are also critically reviewing ongoing reengineering projects, and we'll provide an update on them latest in Q3 interim report. Now on to the near-term outlook, which remains uncertain. Weak consumer goods demand and the U.S. tariffs continue to reduce the predictability of paperboard sales. We expect our paperboard delivery volumes in Q3 to remain relatively flat compared to Q2. Variable costs, excluding pulp, are expected to stay stable. In Q3, there will be more planned annual maintenance than in Q2. At Simpele, an investment-related shutdown lasting approximately 1 month is scheduled. We will also continue market-related and working capital reduction-driven curtailments at nearly all mills, which will negatively impact the results. The weak pulp market is expected to continue. The total impact of pulp will be significantly weigh on Q3 profitability. Based on this outlook, we estimate that our comparable operating result in Q3 2025 will be weaker than in the last quarter. That concludes the review of our results. Let's now turn our focus to the future and the transformation program we announced this morning. We cannot simply wait for the market conditions to improve. Instead, we must take decisive immediate actions to cut our cost base, improve the profitability and drive focused value creation. It's essential that we actively leverage our core strengths. Those I highlighted at the beginning of my presentation and concentrate on the markets and customer segments that deliver the greatest value. We must improve our profitability and strengthen our cash flow, as I stated, without delay. We are launching a profitability improvement and cost savings program aimed at achieving an annual EBITDA improvement of EUR 200 million, fully realized by the end of 2027. On the cost side, we are implementing a broad set of measures, including optimized sourcing and use of raw materials as well as reduction in unit costs, some of which are already underway. In terms of fixed cost, we see clear potential for savings in overheads, group level shared services and ICT expenses. To improve profitability, we are sharpening our commercial focus by redefining key customer segments and aligning our sales efforts to support the profitable growth. To succeed, we must also make better use of our service offering. Supply chain efficiency will be enhanced by streamlining the product portfolio and reducing the complexity. Strengthening the cash flow is now a key priority. Our target is to release EUR 150 million in working capital by the end of this year with a particular focus on optimizing inventory management where we see significant opportunities for improvement. Key performance will be followed and improvement program will be defined during the third quarter. Progress will be reported as well on a quarterly basis. Alongside profitability improvements, we need sustainable growth and must consistently deliver value, especially to our key customers. Given the current high level of uncertainty in the U.S. market, we are shifting our focus also towards accelerating growth in Europe. In the past years, we have been too dependent on the growth in the U.S. market. The U.S. will remain our core market where our goal is to maintain the strong position we have built over the decades. Growth in the U.S. will be primarily come from deepening relationships with our existing customers. Reducing complexity in our product portfolio means sharpening on our focus on food, food service, health care and other strongest growing brand segments. Supported by our strong sustainability credentials, regulation is still one of our most important growth drivers. We must leverage this more effectively, particularly in our product development efforts. And to support this transformation, we are also reshaping our leadership team. I'm very happy about receiving new people into my management teams. These changes will ensure that we have the right capabilities in place to achieve our targets, strengthen the cash flow, improve the profitability and ensure the sustainable growth. The new members joining the management team bring valuable expertise to support the company's strategic priorities. Erja Hyrsky strengthens the team with her local commercial -- with her commercial excellence. Minna Bjorklund brings strong industrial leadership, and Laura Remes will focus on the execution of key transformation initiatives. So welcome new members as well. And then, of course, here are the next steps, what is to be expected. During the third quarter, we will move forward with more detailed planning and execution of the transformation program. We will be defining also clear indicators and set clear targets for each initiatives. Progress will be tracked and reported on a regular basis. We will be critically reviewing our ongoing investment pre-engineering projects, including the ERP program that we have been informing you earlier. In addition, we will be updating our overall strategy and financial targets as well, aiming to present this by the end of the first quarter of 2026. With this, I conclude my presentation, and we are ready now for your questions. Thank you.

[Operator Instructions] The next question comes from Linus Larsson from SEB.

On these incredibly ambitious cost savings and profit improvement measures that you are launching today, could you please share some more detail what are the main buckets here? And is it right to understand that half of the EUR 200 million is across the board cost savings and half of it is commercial measures like more sales, which will have an impact on operating rates and top line. A bit more detail would be super helpful.

Okay. Thank you. Thank you for the question. I would say that this -- as I was actually elaborating earlier, the EUR 200 million is divided both in cost savings and then profitability improvement. And I think that we were actually opening in our press release also quite extensively those items that we have been looking at as there are very, very many different items throughout the whole value chain where we have to improve the profitability, but it's not only those issues or you were referring to the top line. I think that, that is, of course, the aim at the end of the day to grow the business. As I said, we have been too dependent on the U.S. growth earlier in the past 10 years. And now we are shifting the focus also to the European market. And I think that we have been identifying a lot of new, let's say, initiatives throughout the value chain where we can really -- if you look in the sales, for instance, sales side, I think that we are not currently using our services to leverage the services for the growth initiatives. And then through that also actually to the product development. And then in the supply chain, just an example on the product development when we really can develop the recipes in a way that they would be more efficient than they are today, still keeping the good quality that is appreciated by the customers. And then if you go to the supply chain side, we have been dealing with our customer base. We have -- as you understand that we have plenty of customers, and we have been dealing with them decades. And then through those decades, there is a lot of complexity coming on regarding the offering and also how we operate in the markets where we are having the warehouses, how the logistics is operating. And then through that, you go to the production side and you aim to have production runs that are more efficient from the cost perspective and also from the runability point of view, getting the ORs and OEEs higher level. But that's in a nutshell. I think that plenty of discussions will be now actually carried on in our internal discussions to have a detailed plans. But this is based really to a robust analysis that we have been doing together with my management team and also with the senior management. And I think that we have plentiful, let's say, task list now on these initiatives. And I'm pretty sure that we can really carry out the good results out of this program.

And how much is a higher operating rate part of the EUR 200 million that you're targeting? Is that at all a part of it?

Well, I think that it's not something that we can today predict what would be the clear impact on the operating rate as such. We aim to have as high operating rate as possible, but we'll be seeing then the results when we are collaborating with the customers and internally as well in order to get best out of this program.

Right. And then maybe on more of the short-term market dynamics. And if we talk about the U.S. market for a moment, looking at your slides, the paperboard shipments in the first half were clearly down when it comes to linerboard, but actually not so much for folding boxboard. I wonder what you're seeing, experiencing in the U.S. market in terms of current order books and your anticipation for the third and the fourth quarters in the U.S. market, please?

Yes. Yes, if you're looking at the overall market situation, I think that this uncertainty that is related to the tariffs, it was the greatest in the last quarter. And now I think that we are basing our hypothesis that there will be a tariffs in the level of 15% as of 1st of August. And I think that, that is the level that we can live with clearly. We were able to push the prices in local currencies up during the Q2 based on the tariffs. FPP now further increases will be more difficult. WKL, I see better opportunities also going forward because there is no, let's say, substitute on WKL than FPPs fighting against SPS mainly in the U.S. market. And I see that we have an opportunity based on our, let's say, good commercial relationships, we can turn the trend upward again. I don't say that it comes in Q3, but eventually, it will be following, and we can get these tariffs absorbed to the prices at some point of time. I can't promise when it happens, but I see clear opportunities based on the discussions that we have had in the markets with our customers.

Right. That sounds good. And how far have you come in folding boxboard and kraftliner, respectively, in terms of absorbing this tariff at this stage?

WKL, I think that we have been able to push the prices and the cost of tariffs almost 100%. In FBB, it's been a bit tougher, and we had to make some concessions, but not substantial.

That's great. And finally, just one more question, and that's on paperboard in terms of production in the third quarter, what do you expect? Do you expect higher, lower or the same level of production as in the second quarter in paperboard specifically?

This is something that will be, of course, based hypothesis that we have 2 major shutdowns -- one is investment related in Simpele, where we have a 5 weeks shutdown in Simpele and then Husum annual maintenance break. Those are taking a toll on our capacity rates this quarter. And I think that the level of the production, precise numbers, we cannot give because we will be following the order inflow as well, and we will not be compromising our cash flow actually targets currently. So really difficult to estimate currently the exact amount of the production.

Okay. Sorry, maybe if I rephrase that, if you look at how should we say it, maintenance -- planned maintenance neutral, if that's -- if you see what I mean, I mean more from a neutral point of view, do you see rising operating rates or falling operating rates from the second quarter level?

The million-dollar question, I would say, because it is like that now we have to see that what will be the discussions with the customers in the U.S. and how this tariff situation will be resolving these uncertainties that we have currently in that market. Currently, it has a significant impact on our order inflow. So if you take rolling 4, 5 weeks, so it has a, let's say, significant impact -- negative impact on our order inflows. At the same time, I'm positive that we can turn this trend also that it can turn pretty fast also when this -- when the deal is sealed and the decisions are finally made and kind of a table has been settled. So after that, I expect that the order inflow is also catching up. So difficult to say Q3 order inflow.

The next question comes from Robin Santavirta from DNB Carnegie.

Yes. If I start with the question or a continuation from Linus' question related to North America. Looking at the deliveries in the quarter, roughly 100,000 tonnes of paperboard there. How much of those 100,000 tonnes did you already ship before the tariff increase? Is that half of that or 2/3? I'm trying to sort of understand where the profitability in a way hit or impact comes because I guess you have some inventory there sitting and some of the deliveries or sales in Q2 were actually paperboard as you had already shipped before the tariffs increased?

I think that the specific answer, I will be handing over to Henri, but taking the first, let's say, steam out of the question because we really had, of course, landed stock there common stock and then made to order stock as well. And that was all, let's say, or partly tariff-free. And then we had to postpone some of the shipments, of course, and some of the production because of the order inflow. But maybe I will be handing over to Henri, if you have more specific information on these numbers.

Well, there's not much to add to that. So it was a mix of both tariff-free and then also production that already included the tariffs. So -- but we don't disclose the more detailed numbers.

But can I ask, when you say that the order inflow has been weak in the past 4 to 5 weeks, is that now reflecting in a way the price increase of your products? So essentially, when during the quarter did you raise the kraftliner and falling boxboard prices? Was it 5 weeks ago when in a way the sort of the -- what you sell there is carries the tariffs or was it before?

Well, in that sense, it also depends on the timing and everything depend a bit on the discussions with the customers. So we are not operating with our customers based on the one fits for all principles, but we had a dialogue, of course, especially with the FPP customers, and it is a customer-specific question, and it's difficult to say that what was exact timing of different price increases. But we did those price increases immediately when the tariffs came in. That was the basic principle, but then there were several exceptions as well.

I understand. And can I just ask related to Q3, now you look at roughly unchanged delivery volumes Q-on-Q. But then you state that over the past 5 weeks, the order intake has been quite weak in the U.S. Do I understand correctly that you expect this 15% now the decision in a way to reduce uncertainty and increase order inflow? Or do you expect to replace sort of those U.S. volumes in other markets?

In this time schedule, Robin, I think that it's really difficult to so fast swiftly actually allocate the new resources in this situation. Of course, supply-demand balance is challenging, et cetera. So it's not so easy in the current circumstances to do that fast, swift movements on a volume allocation. I would say, well, also in there. So in our view, we'll be prioritizing our cash flows, and that will have an impact and fall in the EBIT that we have. And that is something the compromise we will be taking at this time because of the uncertainty as long as we are seeing that the order inflows recovers.

I understand. And can I just ask on the big profitability improvement program. It seems to be like exceptionally big number. I looked at the past 4 quarters, you generated some EUR 150 million in EBITDA. And then EUR 200 million plus EUR 30 million from company-specific items. I assume that EUR 200 million plus the EUR 30 million from Tako and Kuura does not assume an improving market environment. So then it would be 150% increase in EBITDA simply from company-specific items. It's very, very seldom in this industry, we see those kind of improvements and only in 2 years. Is this a net number, the EUR 230 million or a gross number? Because quite often, when you cut costs and cut production, you also lose a little bit of top line and you might end up getting some other cost and so forth. So this is a net number or a gross number?

Well, can you, Henri elaborate this a bit from your perspective, you're looking at the numbers more in details.

Yes. I think as you define it, I think this is more like a net number. So this is EUR 200 million net on top of the current profitability level.

But then having said this, I think that the EUR 150 million EBITDA level is not our run rate currently. So that must be corrected in a way. So it's the current business, let's say, performance level that we are aiming to improve.

I understand. And just quickly checking production platform, we can see you're not producing at capacity, and we understand, for example, Husum is a quite efficient production facility, albeit a lot of that goes to the U.S. One would think that it could be smart to close more capacity and just run up the capacity utilization in the more efficient mills and by that, improving profitability. So does this program include potential closure of production capacity in paperboards?

Yes. I think that most of the producers these days have a capability on the multi-mill concepts. And I think that, that is exactly what we are doing as well, and that makes us partly strong as well. And I think that we can shift some of the businesses from the other mills, smaller mills to a bigger mill as well to some extent. But there are, of course, some quality issues and some structural issues in our offering that hinders us to do it in full. And that is something that, of course, is an issue that we have to elaborate further. So it was really good point that you made. But this plan is not actually including any closures. That's -- I'm stressing this. There is a weaker capacity in the market than our capacity. Our capacity is up to date and, let's say, modern and efficient.