Metsä Board Oyj (METSB) Earnings Call Transcript & Summary

Good morning or good afternoon to everyone, depending on your global location, and welcome to the presentation of Metsa Board's half year results. My name is Mika Joukio, I'm the CEO of Metsa board. With me are our CFO, Jussi Noponen; and Head of Investor Relations, Katri Sundstrom. As always, let's start with the main events during the second quarter. Demand for our paperboards was at a good level, and average selling prices remained fairly stable. Demand was further boosted by the coronavirus outbreak and the Finnish strikes -- the strikes in the Finnish paper industry at the beginning of the year. Our total production volume of paperboards reached a record high level in the second quarter, being 489,000 tonnes. This, in turn, led to the improved efficiency of the mills, which reduced production costs. Our cash flow generation remains strong. In April-June, our operating cash flow was EUR 72 million. This is already third consecutive quarter with exceptionally strong cash flow. Regarding our ongoing investment in Husum pulp mill, we are still ready for the environmental term issued by the Swedish authorities to allow the installation of the new recovery boil to start. Naturally, we are disappointed with the longer than expected processing time, but the big picture in the investment remains the same. And our new excellence center in Aanekoski, Finland, which combines packaging design competence and R&D activities was completed on time in June. Now an update of how the coronavirus has impacted us so far. Let's start with paperboard demand and sales. The impacts of the coronavirus outbreak in fresh fiber paperboard demand have been neutral, or slightly positive on aggregate level, but there have been differences between end-use segments. We have seen a strong demand, especially in end uses like food, beverages and pharma. At the same time, the demand for graphic end uses luxury products packaging has declined. During the pandemic, we have had substantial precautionary measures in place both in our mills and offices, ensuring the safety of all employees and business continuity. We have managed to avoid the spread of infection, and our production has been in full swing throughout the year. To avoid close contacts, some of the maintenance work planned for Q2 was postponed to the second half of the year. Although the impacts of the coronavirus on Mexico's operations have been minor or even positive so far, we must be prepared for tougher times. A global recession would also have negative impacts in Metsa Board's profitability. To accelerate the development of future paperboards and packaging solutions, we have established an excellence center in Aanekoski, Finland. The excellence center enables collaboration throughout the value chain, and will help us explore the potential of lightweight fresh fiber paperboards now and in the future. Operations at the new premises began, according to the original schedule, in June, but virtually. Physical events and meetings with stakeholders will be initiated as soon as the situation allows. Now for the results. Starting with the total delivery volumes of our paperboards. In March-April, the coronavirus outbreak increased the demand for pure and safe paperboards. The strikes in the Finnish paper industry in January, February further accelerated the remark. As a result, our paperboard delivery volumes increased by 3% quarter-on-quarter, and by 3% also year-on-year. Strong demand normalized towards the end of the period and the order books returned to the normal levels. And now, for a closer look at the sales big and sales development by market area. In the EMEA region, delivery volumes in both folding boxboard and white kraftliners grew compared to the corresponding period last year. The price levels for folding boxboard remained stable but declined slightly for white kraftliners. In the Americas, total paperboard delivery volumes increased and average selling prices in euros were higher. Especially in North America, booming e-commerce has increased the demand for white kraftliners. In the Asia PacificJregion, our paperboard delivery volumes decreased compared to the first half of last year. Now a few words about production and safety. Our total paperboard production volume was at an all-time high in the second quarter at 489,000 tonnes. The high production volume improved the energy and material efficiency of the mills, thus reducing paperboard production costs. We also managed to improve our occupational safety during the first half of the year. Our main safety KPIs developed well and were at significantly lower levels compared to the full year 2019. The trend is in the right direction, although we still have to make an effort to achieve our long-term safety target of zero accidents. Our operating result in the second quarter was strong at EUR 60 million. As I already mentioned, a large part of this profitability improvement was derived from lower production costs, especially in paperboard production. Compared to the corresponding period last year, the result was also improved by favorable changes in FX but weakened by the EUR 5 million carryover impact of the strikes at our Finnish mills. The total negative impact of the strikes was approximately EUR 20 million, of which EUR 15 million impacted the first quarter and EUR 5 million the second. The operating result for the first half of the year, EUR 94 million, was a little lower than in the corresponding period. The main negative items were lower market pulp prices and the impacts of the strikes. On the positive side, we had higher delivery volumes in both paperboard and pulp and again, lower production costs. The price of imported food to Sweden came down and lower market prices for all products reduced energy costs. Changes in FX after hedging had a positive impact on our profitability of some EUR 18 million. During the first half of the year, market prices for long fiber pulp weakened by 24% in Europe and 17% in China compared to last year. The coronavirus outbreak has accelerated the demand for tissue and hygiene products, but at the same time, there has been a rapid decline in printing and writing paper consumption. Also, this has led to reduced availability of recycled paper, which in turn emphasizes the need for virgin fibers. It has not been enough to balance the demand and supply situation for long fiber pulp. In the second half of the year, the pulp supply will be reduced due to production curtailments announced by certain pulp producers and several planned annual maintenance shutdowns. Globally, inventory levels remain quite high. Now an update on the Husum pulp mill renewal. In March, we obtained the building permit for the foundation work of the new recovery boiler, and the work has progressed as planned. Unfortunately, the environmental permit process has taken longer than we expected, which prevents us from starting the installation of the new recovery boiler We therefore now estimate that the new recovery boiler and turbine will be in operation during the first half of 2022 at the earliest. Our previous estimate for a start-up was the fourth quarter of 2021. JI still want to emphasize that there has been no material disagreement on the permit conditions between the company and the Swedish authorities. Our operating cash flow continued its strong performance and was EUR 152 million during the first half of the year. There are 2 main reasons for this strength. First, the strong working capital growth typical for the first half of the year did not occur due to production losses caused by the strikes at Finnish mills. Second, the lower pulp price has increased the share of Metsa Board's own board mills, and correspondingly reduce the share of the associated company, Metsa Fiber, in generating cash flow. Total investments in January-June were EUR 73 million. We estimate that the total investments for the full year 2020 will be around EUR 200 million, of which EUR 140 million is allocated to the Husum pulp mill renewal. The timing of the environmental permit issuance affects the distribution of investment value between years. The positive result development during the second quarter was also reflected in the return on capital employed. In the first half of the year, comparable return on capital employed was at 10.7%. And during the second quarter, it was even higher at 13.9%. Our financial position is strong. At the end of June, our leverage was at 1.1, so there is a lot of headroom with our selling target of 2.5. Our dividend policy is to distribute at least 50% of our net result to shareholders. From 2019, the profit distribution was EUR 0.24 per share or 59% of the net result. The distribution was paid according to the Board's original proposal. And moving on to the outlook. First, I will repeat our view in our previous earnings call. The negative impacts of the corona pandemic on Metsa Board business operations are still difficult to estimate in the long run. We don't know how long the situation will last and what the final impact on the global economy and first on Metsa Board's profitability will be. We see that the peak in paperboard demand has now passed, and the length of our order books has returned to normal. We, therefore, estimate that our paperboard delivery volumes in the third quarter will decline from the second quarter. And we expect paperboard prices to remain stable. We will have many planned maintenance shutdowns during the third quarter. For example, at the Kemi and Husum integrative mills. As usual, part of Husum's maintenance will be allocated to early October. In addition, some smaller maintenance work has been postponed from the second quarter to the third quarter. Uncertainty in the pulp market continues, and we expect that our market pulp deliveries will decline in the third quarter. And we don't expect production costs to decline further. Based on these assumptions and current visibility, we estimate that our operating result in the third quarter will be weaker than the second quarter. Now to summarize. In the first half of the year, Metsa Board's business performed well. Demand of our fresh fiber paperboard increased, especially at the beginning of pandemic, because consumers were stocking up on essentials, food, beverages, pharma, and so on. Strong demand increased our paperboard delivery volumes. The coronavirus has not affected our mills and our paperboard production volumes, we're at an all-time level in the second quarter. During the first half of the year, the total production volumes were even higher compared to the previous year, despite the negative effect of the strike at the beginning of the year. And during these exceptional circumstances, our profitability has remained good and cash flow strong. But looking ahead, we need to prepare for a slowdown in demand. It's difficult to estimate the extent of the pandemic's negative impacts both on the global economy and on Metsa Board's business. That concludes the presentation part of our half year results, and we are now ready for your questions. Please go ahead. Thank you.

[Operator instructions] Our first question comes Antti Koskivuori of Danske Bank.

Yes. First of all, congratulations on a good report. First, I would like to ask about the production volume and -- which was super high in Q2 and improved efficiency, as you explained. Could you quantify the positive impact in Q2 EBIT versus Q1? That would be the first part of my question. And the second part of the question would be that, how should we think about the production and efficiency going forward? Is there -- has there happened -- a step change, or was this Q2 a quarter where all the stars were aligned perfectly, or how should we think about that? Of course, taking into that maintenance, of course, is impacting a bit in every quarter. Can you please talk about that topic, firstly?

Okay. Yes. First of all, of course, we need to remember that during Q2, we didn't have as much maintenance as normal during the quarter, as you pointed out also. But then, the fact is that the production was running very smoothly and operating efficiencies at the mills were at a high level, good level. And of course, that is really -- I mean, it's coming from the mills themselves, and they have done excellent work. It's difficult to say whether it's a step change because, again, then in third quarter, we have these maintenance shutdowns and so. And as you said, all the stars were in the right position, a good position during second quarter. We did a very major hiccups during the -- that period, at the mills. And then coming back to your profit kind of impact, we don't quantify how many million euros, it's a bit difficult to--actually to estimate, but it's clearly a positive impact, comparing, for example, to the so-called previous quarters.

All right. And on paperboard volumes, you described the demand during early part of Q2 better than kind of usual, now getting on a bit more on a normal level towards the end of the quarter. Again, on Q3 kind of outlook, you guys -- the demand has come down, but very helpful if you could give us kind of an indication of the magnitude of the drop that you expect to see in Q3.

Yes. During the Q2, there were 2 main reasons why the order book really, really increased as much as they did. So first of all, the Finnish strikes. And after that, of course, the order inflow was high, and then this coronavirus case or situation, that, again, pushed the order inflows quite nicely. But then during the, let's say, May and especially June, then the order inflows normalized. They are not lower than normally, but they also -- they are not higher than normal, so they are pretty much normal. And quite often, the third quarter is -- the volumes in third quarter are lower than in second because the European holidays are typically taking place in August, and that has an impact on the volumes. And then, of course, the visibility concerning this coronavirus, all in all, is not very good, and the estimation is that the volumes -- delivery volumes will go down, or come down. But how much, it's difficult to estimate. I don't want to give any of magnitude for that.

Yes. Fair enough, fair enough. Then last question maybe goes to Jussi on FX. We've seen quite a bit of movement in the FX rates during the recent weeks and months. Is it -- you've been hedging next six months quite -- with a quite high rate previously, is it fair to assume that the current kind of less favorable FX rates won't be visible in the earnings, say, before Q1 2021?

Yes, that's the correct assumption. So with the U.S. dollar, we are currently hedged about six months forward, and with the Swedish krona, even slightly longer than that.

Our next question comes from Robin Santavirta. Our next question comes from Harri Taittonen Nordea.

Well, maybe just sort of continue a bit on the Antti's question about order books. And I think this week earlier, some carton board sort of end users on the converter side, there's been comments that there's been quite heavy kind of inventory cycle and that this is kind of gone through the whole supply chain, and that's why the second half will be clearly lower than the first half. But I mean, are you seeing -- just sort of double confirming, are you seeing the sort of inventory cycle in the supply chain among your clients? Or are we -- I should say that it's more like a normal situation?

Yes, pretty much. It's normal situation at the moment after very, very strong spring months, I mean, in March and April especially. So now it's...

Yes, sure.

Much normal summertime situation, so to say, prior the Europe and holidays.

Okay. Okay. And obviously, it's very early still to start talking about the price negotiations for next year. So we will -- well, we will need to -- situation be at least as good as it is now to go, but I mean, it’s a little bit early to ask your ambitions for the pricing moves next year.

Interest is always, of course, higher, but what will be the kind of reality that [indiscernible].

Yes, yes, yes. No, this is because the wording in the guidance. that you were saying that the production costs are not expected to decrease significantly from the second quarter. And obviously, you had a fantastic quarter already. Do you mean more like that the variable costs are just flat and that's the idea there? Or at the same time, it doesn't look like -- I mean, the variable costs are not moving up either. I mean, it seems that there are no particular lines that -- where costs are moving a lot higher.

Yes. We mentioned eastern production -- I mean, variable costs to will be higher -- sorry, at the same level, stable.

That percent, same level. Okay, yes. Yes. Well, maybe just the last question on the comparison of the U.S. market that you are seeing, and compared to the European market. You commented a bit on the line about looking to pick up a bit. But I mean, if you could give a bit more color on what you're seeing there, and kind of the difference between the 2 main regions for you?

If we take the folding boxboard first, the situation is pretty much similar; so good in both markets, both in Europe as well as in Americas, and especially North America. And then the linerboard situation is slightly better in the U.S. compared to European situation. So that--that is pretty much the situation.

Right, right, right. So basically, even if there's been quite a lot of capacity increases, but in the U.S. side also, but it's been a bit in different grades in linerboard, obviously. So you are not seeing that.

No, that's true.

Our next question comes from Johannes Grunselius, Kepler Cheuvreux.

Yes. It's Johannes Grunselius here. To start off, I want to ask you about shipments to the U.S., and I can see from your presentation material, at least for numbers for the first half, that you have enormous growth when it comes to folding boxboard deliveries to the U.S. And you are saying that -- what I can see also, there is a positive development for kraftliner into the U.S., but much more so for FTP. Could you comment upon why this is the case?

Yes. So we have very systematically, and so last year and earlier this year, developed our sales, developed our customer base in that market. And we are moving towards our long-term target, 300,000 tons. Of course, we are not yet there, but we are moving to right direction. So in sales, we have made excellent work in that region, and now we can see the results. It's as simple as that.

Okay. Fair enough. But on kraftliner, I mean you're using very positive words for the demand. Would you say that demand is -- the development is as good for kraftliner and as for folding boxboard in the U.S?

Yes. For both, great, situation is good, good. And no reason to say something else.

Okay. Good. And obviously, you're selling more to sort of food end segments now, pharma also in Q2. And I suppose that's a positive trend that will continue. On kraftliner, can you just remind us about your sort of high grades there, and advanced grades and more bulk rates? Am I right that 1/3 is the coated material? And can you just remind us, I mean, about your capacity utilization, is there more free capacity that you can sell to the market on coated materials on the kraftliner side? And perhaps if it's possible, if you can give us any sort of idea, what -- about the profit difference between the 2 missions?

Yes. So concerning the U.S. market or the American market in general, North America in general, we are practically selling only coated crates to that market. And so close to these 200,000 tonnes, which is that annualized volume. So we are not selling -- practically nothing in uncoated versions. So it's only coated. And then your question concerning how we're able to then increase the volume. Of course, we still reduce uncoated crates also at Kemi mill, and then by then kind of producing less uncoated and more coated, that kind of action can be taken. But of course, we are not able to dramatically increase the volume of coated crates.

But I hear you right that you have ample more capacity on the coated crates, almost -- I mean, you can almost do terrifically all the volumes in the coated materials side, on coated materials here?

Every year in Kemi.

Okay. Okay. Then my final question is on the cost side. I mean, I think you're guiding here for largely flat input cost for the second half or at least the third quarter it on the right. But if you break out wood and if you break out electricity, perhaps chemical in this, how do you see the wood as components for the second half?

Jussi Noponen here. I can take this question. So the positive development, I mean, cost deflation, it has fairly evenly been coming from -- I mean, between good costs, chemicals, and energy. And of course, especially in energy, it's mainly coming from the excellent production performance that we had in the second quarter because we are hedging commodities as well. So it was not as much a price impact in energy, but more efficiency impact.

Okay. Okay. So no major movements in any of them, more of a steady development, very important input variable?

Well, I would rather say that positive development in all those variable cost components, so it was -- the gain was coming evenly from these different categories.

Okay, understood. So what you meaning is that you -- because of the excellent production and so forth, your electricity, the tonne was very low, and that will more normalize. But there is basically a cost positioning on all the input costs together?

Yes. Prices have also come down, but especially in energy due to hedging there is a certain delay before that comes through. So now in the second quarter, it was more efficiency-related and price-related, whereas, especially in wood, we are not hedging at all, and also chemical costs are mainly coming through quicker.

Our next question comes from the line of Linus Larsson, SEB.

And I think I'll just continue with a follow-up on the previous question on production costs. And I understand that what we see in the second quarter is very much the fruit of internal efficiency. But do I understand it right, that you are still seeing positive trends in the external cost factors, be it energy, chemicals, wood costs, etcetera, in Q3-Q4?

I would say so, that we are not expecting any further price declines. There will be some rollover impact because of hedging from the earlier cost decreases. But then on the other hand, it would be very optimistic to assume that we can repeat such excellent production performance in every quarter that we had in the second quarter. So taking all those aspects into account, we are guiding fairly flat costs now quarter-on-quarter.

That's fair enough. Also on that note, maybe it looks as if you were building a bit of inventory in the second quarter. Is that part of -- should we expect that to reverse in third quarter to some degree? I understand there is a pickup after the finished strike, butt are your inventories at normal levels, or is there a bit of a reverse coming up?

Mika Joukio here. So typically, this time of the year, we are increasing our inventories because then we are preparing ourselves of these Q3 maintenance shutdowns. But that happens practically every year during this time of the year. So we are preparing, especially at Husum and Kemi, where we have these long integrate standstills.

Exactly, and you're going into that maintenance phase, your inventories are pretty much where they should be.

Yes.

Great. Great. And then just finally, another follow-up. On the FX side, if -- on the third -- on a sequential basis in the third and the fourth quarters, what to expect? If you could just please clarify what you said earlier?

Regarding the third quarter outlook, we are guiding flat FX impacts, I mean, third quarter versus the second quarter. And also, for the fourth quarter, you can expect minor or no impacts from FX. Wonderful, perfectly here.

Our next question comes from Joe Doepel (sic) [ Mikael Doepel ], UBS.

A couple of questions. Firstly, on the U.S. operations and to the point of FPP volumes growing into that market, is it fair to say that this growth also means that your mix and average price for your FPP sales groups on a group level average?

Okay. Mika Joukio here. So first of all, back 2019, we were able to increase our average selling price of Husum, roughly 100 million – EUR 100 per tonne. And then comparing the prices in that market first half last comparing first half of this year, they have been, in euros, slightly higher, but in dollars, quite stable. So our intention is to grow our business so that at the same time, the average prices stay flat or increase, but not so that they will come down. So we are looking for new volume yes, but not at any price.

Yes. I was mainly thinking about maybe you were selling some volumes in some lower-priced markets in Europe and being able to ship more to the U.S. could then actually increase the average price, not in the U.S. market as such, but for your average [indiscernible] pricing.

Yes. Actually, we are not -- from Husum, we are not selling to Europe that much. It's practically this peak of products that we are selling from Husum to European market. So it's pretty much then for Finnish mills to serve the European market.

Okay. All right, then another question on the paperboard business, I mean, both on the -- for the folding boxboard as well as kraftliners. In terms of your customer inventories, be it end users or converters, would you say that they are currently elevated or that they are on a normal level?