Metsä Board Oyj (METSB) Earnings Call Transcript & Summary

Good morning or good afternoon to everyone, depending on your location. And welcome to the presentation of Metsä Board's January-September 2020 results. My name is Mika Joukio, I'm the CEO of Metsä Board. And here with me are our CFO, Jussi Noponen; and Head of Investor Relations at Katri Sundström. First, a summary of development in the third quarter, which went better than we had earlier expected. Our paperboard sales volume exceeded our expectations and was at the level of the strong second quarter. In folding boxboard and coated white kraftliner, our production capacity was in full use and sales prices remained stable. Our order books were on a good level throughout the quarter, and therefore, we can expect solid sales performance to continue in Q4 and beyond. The end uses of our paperboards are mainly in consumer and retail packaging, where the demand has remained good despite the uncertain economic situation. Our mills continued their strong performance. During the third quarter, there were several annual maintenance shutdowns, for example, at Kemi integrated mill and at Husum integrated mill, and part of Husum's maintenance continued into October as planned. All maintenance work went well, and negative profit impacts remained at the lower end of the estimated range. The total negative impact from the maintenance was roughly EUR 10 million compared to the second quarter. Our cash flow generation remains strong. In July-September, our operating cash flow was EUR 74 million. This was already the fourth consecutive quarter with strong cash flow. The global pulp market is still negatively impacted by the sharp decline in paper consumption, especially here in Europe. However, in China, softwood market pulp demand increased somewhat during the third quarter. Then an update on the COVID -- on the impact of COVID-19 on Metsä Board so far. Overall, the negative impacts of the pandemic have been smaller than we had expected. The pandemic has increased the demand for food, beverage and pharmaceutical packaging. However, at the same time, the demand in graphic end uses and luxury products packaging has declined. We have managed to avoid the spread of infection, and our production has been in full swing throughout the year, except for the strike. And as I already mentioned, annual maintenance shutdowns have also proceeded as well. 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. And good demand can also be seen in our paperboard deliveries. Our total paperboard delivery volume was 461,000 tonnes in the third quarter, slightly exceeding the Q2 level. But compared to the second -- to the same quarter last year, this is a bit lower. Year-to-date, delivery volumes were almost 1.4 million tonnes, which is higher compared to the corresponding period last year. And as you can see from the graph, total delivery volumes have been rising throughout the whole year. This is a good performance during these uncertain times, and I am particularly pleased about this. And then, a closer look at the sales split and development by market area during the review period. In the EMEA region, delivery volumes grew in folding boxboard but declined in white kraftliners. There has been occasional oversupply for uncoated white kraftliners, and for that reason, we have also curtailed our production somewhat. The price level for folding boxboard remained stable but declined slightly for white kraftliners compared to the corresponding period last year. Americas, and especially in the -- the U.S., have performed well. This good development has been supported by robust demand for food, beverage and pharma packaging, together with growth in e-commerce. We have been successful in our actions to improve our sales mix and customer base, which nowadays includes brand owners, too. Our delivery volumes in both folding boxboard and coated white kraftliners to Americas grew from last year's levels, and prices remain stable in local currency. Our operating result in the third quarter was EUR 62 million, EUR 20 million higher compared to the third quarter last year. Profitability was supported by lower production costs, especially in paperboard business. Also, the corona pandemic has brought savings in fixed costs such as travel costs. Changes in FX after hedges had a positive profit impact of EUR 7 million compared to the third quarter in 2019. The operating result for January-September was EUR 157 million. Again, the wood costs in pulp production and pulp costs in paper pulp production were clearly lower compared to last year. So were energy, other raw materials and fixed costs. The operating result was also improved by increased delivery volumes and positive FX impacts after hedges. For both periods, the operating result was burdened by clearly lower market pulp prices and the smaller result share from our associated company, Metsä Fibre. Our return on capital employed exceeded 14% in the third quarter. The 12-month rolling ROCE being at 11%. So we are reaching our targeted level at least 12%. Again, a good achievement in a very uncertain economic environment. Then to market pulp. During the review period, January-September, the average market prices for long-fiber pulp weakened by 19% in Europe and 12% in China compared to the corresponding period last year. The corona pandemic has accelerated the decline in demand for printing and writing paper, a large end use for pulp. The sharp decline has been offset by increased demand for tissue and high -- products, but it has not been enough to balance the demand and supply situation for long-fiber pulp. However, during the third quarter, the market situation picked up slightly in China with increasing demand. Towards the end of the year, the pulp supply will be reduced due to production curtailments announced by certain pulp producers and several planned annual maintenance shutdowns. Also, the fourth quarter is seasonally the strongest quarter for pulp business. However, at the same time, the global inventory levels are still high. Our operating cash flow continued its strong performance. In January-September, the operating cash flow was EUR 227 million, and over the past 12 months, cash flow generation has been over EUR 300 million. Let's repeat the main reasons for the strength. First, the strong working capital growth typical for the first half of the year did not occur due to production losses caused by strikes at Finnish mills. Second, the lower pulp price has increased the share of Metsä Board's own board mills and correspondingly reduced the share of the associated company, Metsä Fibre, in generating cash flow. Total investments in January-September were EUR 118 million. The total investments for the full year 2020 will be around EUR 180 million, of which EUR 120 million has been allocated to the Husum pulp mill renewal. And now an update on this project. The environmental permit process has taken longer than we expected, and this prevents us from starting the erection of the new recovery boiler. The foundation work of the new boiler, which we started in March, is already completed. The good news is that there has been no material disagreement on the permit conditions between the company and the Swedish authorities, and we are still expecting to make the final investment decision by the end of this year. However, we have slightly revised our earlier estimates. The new estimate for this investment for this year is roughly EUR 120 million, and it was EUR 140 million. And we 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 start-up was the fourth quarter of 2021. So no major changes considering the significance of this investment to Metsä Board. It will create an excellent platform for us to develop our paperboard capacity in the Husum integrated mill in the future. In addition, it's an important step for us to take us closer to our ambitious target of fossil-free mills by 2030. Our balance sheet is strong. And net debt reached its lowest level in several quarters, EUR 277 million, despite large investments this year. This, together with good profitability, pushed our leverage to the level of 1.0. This is well below our targeted ceiling level, which is a maximum of 2.5. And moving on to the outlook. We estimate that our paperboard delivery volumes in the fourth quarter will slightly decline from the third quarter. This dip in deliveries is quite typical this time of the year and is caused by seasonally slower December. We expect paperboard prices to remain stable in local currencies. The mills' maintenance work will continue to have an impact on the fourth quarter profitability. First, the annual maintenance shutdown in Husum integrated mill was partly in September and partly in October. In addition, Metsä Fibre's 3 pulp mills will have maintenance shutdowns in the fourth quarter. Maintenance works will also be carried out at our nonintegrated mills in Finland. We estimate that the positive delta from maintenance between Q4 and Q3 operating result will be some EUR 2 million to EUR 3 million. Metsä Board's market pulp deliveries are expected to increase in the fourth quarter compared to the third. This is mainly driven by increased demand in China. And both production costs as well as FX impacts after hedges are expected to remain stable. Based on these assumptions and current visibility, we estimate that our operating result in the fourth quarter will remain roughly at the same level as in the third quarter. Now to summarize. Metsä Board's business has performed well, and the negative impacts of the corona pandemic have so far been smaller than we have earlier expected. And for this reason, at the beginning of October, we had to raise our earlier estimate of our third quarter results. The demand for our fresh fibre paperboards has remained on a good level. We have been able to maintain the health and safety of our employees at our mills, our production has been running smoothly and the annual maintenance works have been carried out without any major hiccups. And what is more, our profitability has remained good and cash flow strong. We have started to see some signs of a recovery in the Chinese pulp market. Demand for softwood pulp has picked up and price levels have slightly increased. Despite this recovery, we still can't expect that the pulp market has permanently improved. In Europe, the market situation still remains somewhat uncertain. As regards our Husum pulp mill renewal in Sweden, we expect to make the final investment decision during the fourth quarter. This is an important investment to us as it will take us closer to our ambitious target of fossil-free mills by 2030, and create a solid platform to develop our paperboard business in Husum integrated mill in the future. Ladies and gentlemen, that was the presentation. And now it's time for questions, please.

[Operator Instructions] Our first question comes from Antti Koskivuori from Danske Bank.

Few questions from me. Starting with folding boxboard and the pricing outlook. You imply quite good strong demand in Europe and in the U.S. However, some comments from the producer side imply pressure for the European folding boxboard prices. And I was just wondering how would you describe the market balance and the pricing outlook for 2021? That would be the first question. I'll start with that then we can take it further.

Okay. Mika Joukio here. Yes, of course, the contract negotiations concerning next year, they are ongoing at the moment in Europe. The demand and supply balance here in Europe is healthy. Our order inflows has been good, so we do not see any major difficulties here in this market. And then the U.S. market, there, the situation is strong. I mean demand is very good. And we know that some players, they have closed the -- some competitors, they have closed the capacity in SPS side. So also there, the outlook for price is not that negative at all. So all in all, we are -- we don't see any kind of major pressure on prices at this point. It remains to be seen then when the negotiations are over.

Yes. Second question on FX. I guess you've now hedged more or less the next 6 months fully when it comes to FX, and you guide neutral impact in Q4 versus Q3. I was just wondering if you could give us an indication, what you see as a profit impact from FX going into Q1 next year compared to the current level?

Okay. Jussi Noponen will take this.

Yes. So in the U.S. dollar, we will see more or less the full negative impact from the recent development already in the first quarter, whereas in Swedish krona, not so much yet in the first quarter. So I would say, all in all, you can expect about EUR 5 million to EUR 10 million negative versus the fourth quarter.

All right. Clear. Still one question on maintenance. I was just wondering if -- looking at next year, Q1 is typically very quiet when it comes to maintenance for you. Should we expect the same to happen in 2021? Or is there something that you have postponed from H2'20 into next year?

Yes. So no -- Mika Joukio here. So next year, we'll be pretty much -- I mean, we are planning next year as a normal year. So during the first quarter, we won't have any major maintenance shutdowns. But then second, third and fourth, then we will see them.

Yes. But those will be kind of normal, nothing extraordinary as such?

That's true.

Our next question comes from Robin Santavirta from Carnegie.

You say demand of folding boxboard in Europe and North America is good at the moment. What do you see regarding linerboards, both coated and uncoated? And I was wondering about the development in Q3 and the current market situation.

Yes. Starting from folding boxboard. So as you said, demand and supply balance is good. And we see that the demand will continue to be good also, also in Q4 as well as the next year. Then linerboard, so especially coated white kraftliner and especially in the U.S., the demand has been very, very good. And we do not see any reason why it wouldn't be the case also in the near future. As far as then the uncoated white kraftliners are concerned, there has been some oversupply here in Europe. But now the -- and we, among other producers, we curtail production also during the first half of the year. But now the situation has improved also in coated -- uncoated white kraftliner's side.

All right. Then I have a question related to costs in the paperboard business in general. It seems as the cost per tonne is down some 10% year-on-year if you look at the past 2 quarters. What is driving such a big decline? And what is the cost outlook in that business for the end of the year and for the winter?

So the estimation for the Q4 is that production cost will be pretty flat comparing Q3. No reason to believe something else.

Right. I mean -- what are -- I understand. What are the key reasons for the large decline? I assume you have clearly lower wood raw material costs, especially in Sweden, and you have lower pulp costs in the paperboard business, perhaps low energy as well. But is there anything else? Or is it just input cost being low at the moment? Or is it something exceptional over the past couple of quarters in costs in the paperboard business that we should not expect for Q4 or for Q1?

I think you listed quite nicely the main elements of the costs. As you said, wood prices, pulp prices and then energy, they are the key elements. So your assumption was right.

And looking at the key element, fiber costs now for the end of the year, I would assume -- is it tailwind? Or is it unchanged quarter-on-quarter?

Yes, you are right.

But is it -- will it be lower Q4 compared to Q3, the fiber cost in the paperboard business? Or is -- do you expect it to be stable?

Quite flat. Quite stable. No...

Our next question comes from Mikael Doepel from UBS.

Just a question on demand, I'm trying to get my head around what's really happening there. What we have seen now, I guess, both in Europe and the U.S. is a better-than-assumed demand trend overall. I was wondering if you could give some details on where in particular you see strong demand? And if you expect a reversal once the impact of the pandemic fades perhaps some time next year? And also, do you see any indications of a strong pre-buying ahead of the Christmas season? And perhaps some inventory build among customers driving demand currently, which could soften ahead. Any thoughts around this would be highly appreciated.

Yes. If you take folding boxboard, so our delivery volumes this year here in Europe are 13,000 tonnes higher and Americas even 18,000 tonnes higher than last year. And we have seen extremely good demand especially in food, beverage and then pharmaceutical sector or packaging. But then, of course, lower demand in graphical end uses as well as in the luxury packaging -- packaged products. But demand has been good both here and Europe as well as in the Americas. And we do not see any reason why it wouldn't continue to be so also in the near future.

Okay. So you haven't seen any indications of some prebuying ahead of Christmas or inventory build or anything like that. Just basically good normal demand?

Of course, December is always lower comparing to the other months because of the Christmas. But I mean, if you think about production for Christmas purposes, of course, then this production is made already in summertime and early autumn and not in December as such. So December very seasonally low and much lower and that's it.

Okay. Okay. And then on the U.S., you mentioned a very strong U.S. market and good progress on increasing your folding boxboard volumes in that particular market. If I remember correctly, you have a target to reach 300,000 tonnes of FBB there. And I guess you are running close to that target, perhaps already this year. But when do you expect to reach the full 300,000? Could you expect to see that already next year? Or how should we think about that?

Okay. Planning for next year is ongoing. And we won't reach that this year. That's clear. But whether it will be next year or 2022 remains to be seen. As I said, planning is ongoing. And let's see. I don't have any figure for you at the moment concerning next year. But target is to grow from this year.

Okay. Okay. All right. Good. And then just finally, on production costs. You already commented on a bit on what's happening there now into Q4. But if you would assume the current levels remain pretty much where they are, I guess it's fair to assume that next year, you should actually have production costs overall down on a year-over-year basis. Would that be a fair assumption?

You mean for next year?

Yes.

Versus Q1? Versus this year...

No versus -- yes, average for 2020.

Maybe it's a little bit too early to say because, I mean, where the pulp prices will go that's a question mark even though some positive signs in Chinese market, but still Europe is quite uncertain. So I can't say at the moment. We have to wait another month or 2 to kind of have a clear -- more clear picture on that. But I don't expect any big changes, but whether they are up or down, it remains to be seen.

Our next question comes from Harri Taittonen from Nordea.

Yes. I mean some comments on the pulp side still remain unanswered. The -- I mean you made comment on the extended shutdowns overall in the market affecting the long private pulp supply. But do you have color on how much the sort of extra curtailments or the sort of curtailments amount roughly in tonnage terms? I'm just wondering if you had color on that on sort of general market point of view. And then related to your guidance, you guided your own pulp volumes up. But is the Metsä Fibre volumes, they will probably be down. And I was wondering if Metsä Fibre is kind of extending their downtime also compared to usual length.

Yes. So starting from the curtailments. Our estimation is based on the information we have is 370,000 tonnes long-fiber curtailments, all together, if you calculate all the mills that we know. And then the -- then as far as the Metsä Fibre deliveries are concerned, probably, they will be slightly higher in Q4 than Q3 because Q4 is typically and historically very strong or strong quarter in pulp business.

Okay. So despite these sort of premiums maintained, and that will be still the probable or likely trend now?

Anyway inventories are there. So...

Our next question comes from Linus Larsson from SEB.

I think you'd agree that cash flow has surprised positively so far this year. And at the same time, the Husum project is delayed. I wonder if those factors affect your thinking around capital allocation to any degree. Are you now increasingly looking at potential paperboard investments, for instance? And also, I mean, in this context, you are -- I think you're right that you are net long, 600,000 tonnes of pulp and that figure will clearly increase once your 25% stake in the Kemi mill becomes real. So if you could talk us through that would be very interesting.

Yes, first of all, the capital allocation. And if you think about the delay in Husum, the estimation still is EUR 320 million, of course, it will be a little bit different divided between the years than we originally estimated. But in the big picture, there are no major changes. Then if you think about the paperboard -- possible paperboard investments. I repeat my earlier message that we calculate different options. And when the time is right, then we will come out. But at this point, I don't -- I can't reveal anything more on that. And then this net loan position. So at the moment, you put it right. So it's 600,000 tonnes, what will be the case then after gaining investments, that's another question, of course, and remains to be seen. I think this is kind of also ownership in Metsä Fibre. It's not carved in stone, but let's see. Let's see when the decisions are made and what future will come. Yes.

And that's interesting what you said lastly, what is your long-term targeted out balance for Metsä Board?

We don't have a long-term target on this because that depends, of course, a lot -- what is our paperboard production capacity also. So how much we are utilizing ourselves. But it's extremely -- I mean, it's a very good situation that we have this pulp available for growth, that we don't have to buy outside the company.

No, that's for sure. That's for sure. No, I just think -- it sounds like if you might -- you and Metsä Group might reconsider the ownership stake in conjunction with the completion of the Kemi project. But I guess that's still early days, what -- how that may play out.

Yes, I didn't precisely say that. I said that the ownership is not carved in stone. I didn't say when and how much it could be. It could be changed.

That's helpful. And just finally, on this capital allocation topic, you slightly lowered CapEx for 2020 due to the Husum project. Do you have a figure or a rough indication for CapEx in 2021?

Okay, Jussi, take this.

Yes. You can expect similar levels or slightly higher than this year. And mainly this CapEx that we sort of saved from this year, it will be pushed to 2022. So no major impacts on our early estimates for next year.

Our next question comes from Johannes Grunselius from Kepler Cheuvreux.

It's Johannes here. Grunselius, Kepler Cheuvreux. I have a question on how one should think about mix dynamics, because in Q3 as well in Q2, you had a lot of increased volumes to food and pharma and less so to luxury segments. Is it the same sort of EBITDA per tonne for all these segments? Or do you earn a higher EBITDA per tonne in luxury segments? That's my first question.

I mean in rough figures, it's pretty -- they are pretty much similar. Of course, the products vary a little bit. But in big picture, no big changes or differences.

Okay. Because what I'm after is, how one should view mix for the coming quarter, let's say, 2021 do you think you can take opportunities in terms of geographies, niche segments and so forth. And thereby increased profits with a better mix? Or how should one view on that one, on that aspect?

Yes. Of course, we produce what customers order. And as I said, the profitability of different products, they are not that much different. So of course, it has impacts on the production cycles at the mills, that's clear. And what grades we are producing, but that is not significant.

Okay. Okay. That's useful to know. And could you just remind us about on kraftliner. How much is coated and how much is uncoated? And -- because I know there is obviously a price premium on the coated materials. Do you foresee that you can improve this ratio for next year?

Yes. So the Husum white kraftliners, they are all uncoated. So -- and then in -- as far as Kemi is concerned, it's about, let's say, 350,000 tonnes is coated and then remaining 70,000 tonnes roughly is uncoated.

Okay. Are you running at full speed on the coated materials?

Yes, we do.

Okay. Okay. That's good to know.

[Operator Instructions] Our next question comes from Markku Järvinen from Handelsbanken.

We still had a few more questions. Perhaps could you discuss a bit more about Metsä Fibre and their volume development this year? They've reported that the volumes are down 14% this year. And capacity utilization, if you look at deliveries, the capacity seems to be sort of around 80%. Could you talk about that dynamic and how much inventory have they built. And what is the thinking behind this sort of situation?

Yes. Of course, the biggest contributor is the strike. That really impacted the volumes, that need to be remembered. All the pulp mills of Metsä Fibre are all located in Finland. And of course, that strike had a significant impact on the volumes.

And now in Q3, was Metsä Fibre still building up inventory? Is it sort of -- and is that meant to be taken down now in Q4 when there is all this maintenance?

Of course, target is to get down the inventories now when they -- and they have 3 mills, they have shut down now, a maintenance shutdown. And as I said, fourth quarter is historically strong in pulp, so intention is to go down as far as inventory levels are concerned.

Okay. Very good. And then you said you've seen softness in -- on place white liners which have some [indiscernible]

Uncoated. Uncoated.

Sorry, sorry uncoated white liners in terms of supply/demand but that has improved. I wonder if you could sort of discuss the sort of market dynamics there. I mean we've seen [indiscernible] coarseness with a lot of capacity for the uncoated market this year, they plan to shift to more coated markets, more to folding boxboard eventually is the liquid packaging board. But have you seen them in the market? And how do you see that dynamic developing? Or are they headed to coated to white liners? Or following boxboards, where do you see them now in the market? How does that impact the market balance in the various segments?

Yes, I don't want to comment on single -- one single competitor in this case. But as I said already in the presentation, the reason for the softness in uncoated white kraftliners is this oversupply situation that we have. And now the situation or the balance is better. But during the first quarter -- first quarter and second quarter in the summertime, it was worse. But now it's better and order inflows are -- our figure and order books are better for us.

Our next question comes from Robin Santavirta from Carnegie.

Two follow-up questions. First of all, could you just remind us about the financial impact, but the earnings impact for you guys as a group from the strike we had in Finland? And whether that burdened Metsä Fibre part more of the paperboard part of Metsä Board more? And then secondly, a question with the potential future growth, could you also consider M&A as a post platform for growth? So those are the 2 ones.

Okay. So the strike impact from Metsä Board negative impact was EUR 20 million. And then for the whole group, Metsä Group, it was EUR 50 million. So that was the impact. And then as far as the M&A issues are concerned, of course, we are looking around all the time. But our kind of preliminary target is not to grow by that. But as I said, of course, we are looking around as we always do.

There appears to be no further questions, so I'll hand back to the speakers for any other remarks.

Okay. Ladies and gentlemen, thank you very much for your good questions, for your interest. And I wish you nice continuation of the day. And most importantly, I wish that everybody could stay safe. Thank you very much. Bye now.