Metsä Board Oyj (METSB) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the presentation of Metsä Board's results for the fourth quarter and full year of 2020. My name is Mika Joukio, and I'm the CEO of Metsä Board. Together here with me, I have our CFO, Jussi Noponen; and head of investor relations, Katri Sundstrom. As always, let's first take a look at the main events of the fourth quarter. Good demand in paperboard continued during the quarter, and delivery volumes decreased only slightly from Q3 levels. This development is normal due to seasonality. The pulp market was strong, especially in China, and demand was on a good level. Metsä Board's market pulp deliveries grew clearly from the levels of previous quarters. Prices of market pulp increased both in China and in Europe. Our material production efficiency was at the high level, which reduced production costs and improved profitability. The comparable operating result was EUR 65 million, roughly at the same level of Q3. The amendment of the environmental permit regarding the renewal of Husum pulp mill was finally approved, and we made the final investment decision on the renewal's first phase. One of the major events during the quarter was the sale of a 30% stake in the Husum pulp mill to Norra Skog. I will go through this in more detail in my next slide. The Board proposes a dividend of 60 -- excuse me, 26 euro cents per share, which corresponds to a 54 distribution of our net result. In December, we announced that we had agreed to sell a 30% of our Husum pulp mill to Norra Skog, a Swedish forest owners' cooperative. This deal ensures the long-term availability of certified Swedish pulp wood for Metsä Board. In the coming years, less wood will be imported from the Baltic countries, which decreases the mill's cost volatility and increases the certification level of purchased wood. With this transaction, our net debt decreased by approximately EUR 260 million, which makes us basically a net debt-free company. It will also decrease our financing share in the second phase of Husum pulp mill renewal by approximately EUR 100 million. The released capital will be used to further develop and grow our paperboard business, of which we have already made announcements. The transaction was closed on the 4th of January, meaning that its impacts will be included in our financial reporting as of the first quarter results 2021. Before going into the financials, let's have an update of the impact the coronavirus has had on Metsä Board's operations. The top priority in our operations has been to ensure the safety of our employees, prevent the virus from spreading, and secure the continuity of our business. And I think we have succeeded well in achieving these aims. We have avoided infection chance among employees, and our deliveries have continued without disruption during the pandemic. The annual maintenance shutdowns at our mills have been carried out successfully. Actually, the production efficiency at our mills has been during the year at the high level, and we have achieved several new production records. The impacts of the coronavirus on paperboard demand have been mixed. We have seen strong demand in food, beverage, and pharma packaging, whereas segments like luxury packaging and graphical end uses have suffered. Also, the decreased movement of people in public places reduced demand in fast food end uses, especially in the early stage of the pandemic. Despite a challenging year, our total deliveries grew from the previous year and exceeded 1.8 million tonnes. Also, the Q4 volumes were a bit higher compared to corresponding quarter last year. Seasonality had a small negative impact on the fourth quarter's volumes as always. And on the right-hand side, you can see the typical end uses of our paperboards. The majority of our boards go into food packaging or various retail packaging solutions. Then, the paperboard sales development by region in 2020, starting with our biggest market, EMEA. In folding boxboard, we saw good demand throughout the year, driven by the increased need for food and pharma packaging, in particular. In white kraftliners in Europe, there was some oversupply in the summer, and we adjusted our production accordingly. However, demand picked up towards the end of the year and has remained at good level in the beginning of the year. The average prices of paperboards decreased slightly year-on-year. Americas performed well last year, and our total delivery volumes in paperboards grew by 12% from 2019. The total delivery volumes were 484,000 tonnes, close to the targeted level of 0.5 million tonnes, which we set in 2016, along with the Husum folding boxboard expansion. Average selling prices of paperboards remains stable in local currencies. In Asia Pacific, the volumes mainly in folding boxboard decreased year-on-year. Sales declined slightly from last year, mainly due to lower market pulp prices. Higher delivery volumes offset the negative impact somewhat. The comparable operating result in the fourth quarter improved by 65% compared to the corresponding quarter last year and full year operating results by 20% compared to 2019. I think this is an excellent achievement, considering the exceptional circumstances last year and the strike in Finland at the beginning of the year. And here are the positives and negatives impacting profitability. First, the Q4 2020 versus Q4 2019. The Q4 result was improved by lower costs, especially in the paperboard business, higher volumes in market pulp, and positive impact from currencies. And for the full year 2020, the largest single positive effect came from lower production costs. Cheaper pulp improved the profitability of the paperboard business. However, we need to remember that taking into account Metsä Board's surplus in pulp, the overall impact of pulp on profit was neutral. In addition, wood, energy, and other raw material costs were lower year-on-year. On the negative side, we had lower market pulp prices, which obviously impacted negatively on the result share from Metsä Fibre. And the Finnish strike, which took place in January, February and lasted for over two weeks, had a negative impact of EUR 20 million on our operating result. Then to market pulp. As already mentioned, Metsä Board's market pulp deliveries grew year-on-year by a total of 13%. The main growth came from China, where increased economic activity supported paper and paperboard production, in particular. At the same time, global pulp supply decreased due to the maintenance work and extended shutdowns carried out by pulp producers. Also, the container shortage in traffic between Europe and Asia tightened the market, and the pulp prices started to rise. Prices have continued to rise in the beginning of this year. Good earnings performance boosted the return on capital employed to our long-term target level over 12%. In Q4, the return of capital employed exceeded 14%. And for the full year, the return was 12%. Our balance sheet remains strong. Net debt at EUR 235 million and leverage at 0.7 at the end of the year. The transaction with Norra Skog in January will further decrease our net debt by roughly EUR 260 million. Operating cash flow in the fourth quarter was EUR 84 million and free cash flow, EUR 33 million. Q4 cash flow was affected by an advanced tax payment of EUR 35 million. Throughout the year, we have witnessed a good cash flow development. This, combined with a strong balance sheet, provides us with a solid starting point for the development and growth of our paperboard business in the near future. In 2020, our total investments were EUR 166 million. In addition to the ongoing investments, the investment amounts for 2021 and 2022 depend on the decision on the planned investment that I will be talking about next. But to give you some guidance, a total of EUR 400 million to EUR 500 million could be invested by the end of 2022. And now, let's have a look at what we have in the pipeline. Starting from the Husum pulp mill renewal. In Q4, we made the final investment decision on the first phase of this investment, the new recovery boiler and turbine. The erection of the steel frame is ongoing, and the construction of the recovery boiler will start next. The expected start-up of this EUR 320 million investment is estimated in the first half of 2022. The second phase of this investment consists of a new fiber line, which will be decided on and implemented during this decade. We have started preparations for the environmental permit process, and the application will follow later on this year. In order to continue profitable growth, together with our customers, we need to increase our capacity. The high utilization rate of our current production capacity is a limiting factor for future growth. So, 3 weeks ago, we started a pre-engineering project for increasing the annual production capacity of the falling boxboard machine, board machine #1 in Husum. The annual capacity expansion would be approximately 200,000 tonnes, which is roughly 50% on top of the current capacity. We expect to make the final investment decision this summer, in which case the ramp-up of the new capacity would take place in 2023. This project would strengthen our position as Europe's leading producer of folding boxboard. Just earlier today, our company, Metsä Fibre, announced that the final investment decision on a new bioproduct mill in Kemi has been made. Construction will start in the second quarter this year, and plant startup would be in 2023. The new bioproduct mill, with 1.5 million annual capacity, will replace the old pulp mill in Kemi, which annual capacity is 620,000 tonnes. The total investment value is EUR 1.6 billion and financing consists of Metsä Fibre's own cash and debt. Metsä Board does not invest equity to finance the project. The total pulp capacity, 1.5 million tonnes per annum, includes the unbleached pulp used by Metsä Board. More about that on the next slide. Enabled by Metsä Fibre's investment decision of the new bioproduct mill, we are launching a development program for our Kemi paperboard mill, which already produces premium quality, white top kraftliners. The program will include a series of bottleneck investments and renewal works of the Board production line. It also includes purchase of the unbleached pulp production line for Metsä Fibre in 2023, once it has been modernized. After these actions, Metsä Board white kraftliner capacity will increase approximately by 40,000 tonnes and pulp capacity by 180,000 tonnes annually. All in all, investments in Kemi, by Metsä Board and Metsä Fibre will increase Metsä Board's annual surplus in pulp by roughly 325,000 tonnes. The total investment value is EUR 67 million, and it will be divided between years 2022 to 2023 with the highest wave of 2023. The development program is also a significant step towards the company's ambitious 2030 sustainability targets. The water consumption per produced paperboard tonnes at Kemi paperboard mill will be reduced by roughly 40% and energy consumption by roughly 5%. Then to the outlook. In the first quarter of 2021, our paperboard delivery volumes are expected to grow compared to the fourth quarter last year. In white kraftliners, the market situation is favorable both in Europe and the U.S., and we see a possibility of some price increases. In folding boxboard, we expect prices to remain stable. As always, the first quarter is practically a maintenance-free quarter, which supports profitability. Increased economic activity in China is posting the pulp demand, and the market situation is improving in Europe, too. This has been reflected in market pulp prices, which have risen in past months. Production costs are expected to remain fairly stable, except energy prices which will be higher. The weakened U.S. dollar against EURO will have a negative impact on the first and further the second quarter results. The negative impact on first quarter versus last quarter last year is roughly EUR 8 million. And based on this, we expect that our comparable operating result for the first quarter will improve from the last quarter of 2020. And to summarize, despite the exceptional circumstances, Metsä Board performed well in 2020. We managed to ensure the safety of our employees and our production as well as deliveries to customers have run smoothly during the pandemic. Our profitability improved, we generated a strong cash flow, and our volumes increased. The sale of a 30% minority stake of Husum pulp mill to Norra Skog made us practically a net debt-free company. This, in turn, provides an excellent platform to grow our core business, sustainable and high-quality fresh fiber paperboards. And there, we have already taken actions. We have started pre-engineering for increasing the annual folding boxboard capacity in board machine #1 at the Husum mill in Sweden by roughly 200,000 tonnes. Also, along with Metsä Fibre's investment decision of the new bioproduct mill in Kemi, we launched a development program in our Kemi paperboard mill to increase annual white kraftliner capacity by roughly 40,000 tonnes. The first phase of the renewal in Husum pulp mill is progressing, supported by the final investment decision made in December. And we have already started the preparations for the second phase. This project will have a significant contribution to our target of fossil-free mills by 2030. So, many positive things are ongoing. But at the same time, the coronavirus and vaccination progression still creates uncertainty. Our top priorities will remain on securing our employees' health and safety, ensuring the business continuity, and preventing the virus spread. And by this, we are now ready for your questions. Please go ahead.

[Operator Instructions] The first question is from Antti Koskivuori from Danske Bank. Please go ahead. Your line is open.

I would actually have 3 questions. I just shoot them out all in once, and we'll take it from there. The first one on kraftliner prices, we've seen some EUROP 50 per tonnes increased announcement in the market. How do you see the kind of pricing situation for kraftliner at the moment? And also, what kind of assumptions have you baked into your guidance? I think you said slight increase in kraftliner prices in Q1. Then secondly, on the kraftliner capacity increase in Kemi. So, just to confirm, maybe I missed it, but is the plan to increase the capacity by 2023? And also, if you could comment on the expected ROCE on the EUR 67 million investment? And then lastly, on input costs in 2021, there seems to be signs of inflation picking up. Now, you guide energy prices to increase in Q1 and the rest of the input cost to remain flat. Should we anticipate kind of inflationary pressures also for you in 2021 as a whole?

All right. So, starting from the white kraftliner prices. So, we have announced price increase of EUR 50 here in Europe and then $50 in America or in the U.S. market. And depending on the market, we see the increases then sometime during the first quarter, I would say, around February or latest March. And then, it doesn't necessarily go fully through that 50. So, it's a bit lower figure. But that's our, so to say, timetable with white kraftliner prices. Then, this Kemi new capacity, yes, it's coming on 2023. So, when this main investment or when the start-up of the new bioproduct mill will take place. So, this 40,000 tonnes will then be seen after that. And we don't announce the return of capital employed over projects. I mean, the company target is this 12%, and that's it. And then the costs, I would say that the -- as far as -- the first quarter is concerned, the whole year is pretty much similar, at least at this point that we don't estimate any kind of major increases preferably -- or I would say that the chemical prices. And so, they are pretty stable concerning the whole year, at least that is the situation at the moment, how we see it.

Next, we have a question from Robin Santavirta from Carnegie. Please go ahead. Your line is open.

Just maybe a follow-up on the cost side. If you look at 2020 and the paperboard business, the profitability improved quite significantly, especially after the strike in Q1. What are the main reasons it seems as the core sort of side is down quite significantly? So, what are the mains -- the reasons for that? And then in terms of the paperboard business [indiscernible] for '21, you say, I guess, roughly flat input cost outlook at this stage for the full year. What is the lag if you see prices of pulp would start to increase, for example, in the summer in Sweden and Finland? So, when is that seen in your P&L?

Okay. So, starting -- I mean, the main contributors concerning our profit improvement, of course, is the higher volumes in paperboard as we have estimated. And then also this positive price development in pulp, of course, that will clearly have a remarkable positive impact on our results. And that's simply the kind of how we see it at the moment. Of course, then we need to remember that from currencies from FX, that there will be a clear negative impact as far as this year is concerned. But I'm very optimistic and positive concerning the whole year. And I do not see any major threats in cost side, whether they're chemicals or other raw materials or wood at this point. At least, we do not have any signs of that.

All right. And then the lack, if you see increasing output prices, for example, in Sweden in the summer or after the summer, when is that -- what kind of idea do you have it is one quarter, 2 quarters before it was to the P&L?

So what do you mean by lack?

If the list prices of pulp would increase. I guess, first of all, you have some kind of inventory. And secondly, you have some agreements on your wood purchase in these markets. So, what kind of sort of dynamics do you have in the wood purchases and the pricing?

So of course, now when we have this Norra deal, that, of course, helps our wood procurement, clearly. And I repeat by saying that we do not see any kind of major negative impact coming from wood side, whether it's Finland or Sweden.

All right. And then another question related to paperboard. You said during the Capital Markets Day that there is a possibility that this pandemic could have some structural positives in terms of demand dynamics for you guys in paperboard. What are you seeing now where 4 months data now? Is it sort of a cyclical recovery? Or do you see some structural positives as well with, for example, fiber-based packaging, replacing other materials at the moment or this year?

Yes. I would say that the situation is pretty much similar as kind of 3, 4 months ago. So, we haven't -- of course, there are differences between the segments. So, food and beverage and pharma sector is doing fine. And then, of course, geographical end uses and then luxury packaging, it's a bit kind of worse. But in general terms, our order inflows are good. And last year, we run full except the strike and no reason to believe that that wouldn't be the case this year either. Of course, you never know what happens to the global economy. If this kind of pandemic goes on and goes on, that's another story. But at the moment, the demand is good, and the order books are healthy.

All right. And finally to --

And the situation in white kraftliners is now better than, for example, last summer.

For sure. That's probably more cyclical construction. But finally, two technical questions. What was the CO2 allowance why sales gain you got in Q4 last year? And what is the amount of CO2 allowance wise that you received for this year? The price is up quite significantly. So, that probably has an impact on earnings this year as well. And then secondly, related to maintenance, what was the earnings impact in Q4 from [indiscernible] and Metsä Fibre had?

Okay. Jussi Noponen will take this.

Yes. I can take the emission allowance question at least. So, in the fourth quarter, we sold worth about EUR 6 million. And the new surplus for this year is still unknown, but at the yearend, we had about 800,000 tonnes of surplus from earlier years without any new surplus from this year. But there will be a surplus also from 2021.

All right. Related to the maintenance, can you give some climate?

So the question was Q4 versus Q1.

Yes. Yes.

Of course, in Q1, this is practically maintenance free. But comparing last year Q4.

We don't have the figure exactly here, but it is a substantial positive compared to the fourth quarter as we don't have much maintenance in the first quarter.

That's true.

The next question comes from the line of [indiscernible] from SEB. Please go ahead. Your line is open.

Just want to have a couple of confirmative answers around the financing of the Kemi bioproduct mill. So, do I understand it correct that there will be no equity injections from Metsä Board side? If you could please confirm that.

That's correct.

And also --

Yes, confirmed.

Confirmed. Excellent. And also, in that context, over the past couple of years that the Board has received dividends from Metsä Fibre, what's the proposal for 2020.

Jussi here. I can take this one. So, as Metsä Fibre's net result from last year was slightly negative, so they are not proposing a dividend from last year.

That makes sense. And then on your own CapEx, maybe I missed that, but what's your CapEx guidance for 2021 full year? And if you could please break that down, how much is maintenance, how much is expansion? And also, Mika, you did give some rough guidance on CapEx for the next couple of years, specifically on the planned paperboard project. What CapEx are you expecting for the 200,000 tonnes of additional folding boxboard capacity?

Yes. So, concerning then the CapEx this year, it's too early to say anything because that really -- I mean, the impact then coming from the possible board machine #1 rebuild or new capacity is still open. So, it's very difficult at this point to estimate. So, we will come back to that when we have the figure. We don't have that figure yet. And I think maybe this is a disappointment as far as the answer is concerned, but we can't say much more at this point.

No, that's fair enough. I'm just a bit curious on the Husum investment. Is it so that you are looking at quite a broad range of potential projects? Or is it so that you know already now that if you go ahead, this is the amount of money fairly precisely that you're expecting to be spending?

That's precisely what we are doing at the moment. So, of course, we have a rough figure in our mind, but we want to get a kind of a more exact figure, and that's what our development people, technical people are doing at the moment. So, do you want to add?

That's fine. And then also on the -- on your net balance in terms of pulp exposure, could you please give an update on what you expect for the full year 2021 in terms of net pulp balance? And also, you said today that assuming a successful start-up in 2023, you will get an additional 325,000 tonnes of indirect pulp exposure. Could you share some of your thoughts around that? I mean, what's your targeted net pulp position? Should we expect some changes in terms of that one, the Kemi partner is up and running?

Yes. So, now, the situation of the Norra deal is that our pulp position is 400,000 tonnes long. And then after this, Kemi -- I mean, Metsä Fibre investment, as well as our ownership of the unbleached pulp line, then the additional capacity will be 325,000 roughly. ,So then after this Kemi implementation, whether it's Metsä Fibre, Metsä Board, then we are ballpark around 700,000.

And a positive investment decision on the BM 1 expansion would then take it back down a little bit.

Right. Fair point. But, is it your thinking that this is something that you want to keep to keep options open? Or should we expect you to make, I don't know, reduce your ownership in Metsä Fibre beyond the start up? Or what's your general thinking around that?

The general thinking is still the same as last time we discussed about this. So, I mean, all the options are, of course, open and possible. So, nothing is carved in stone as far as the ownership of Metsä Fibre is concerned. But at the moment, we don't have any plans to change. But of course, it can be an option in the future.

The next question comes from Harri Taittonen from Nordea. Please go ahead. Your line is open.

Yes. And congratulations on getting the investment on going on the Board front. Just sort of a lot of questions have been asked already, but on the sort of [indiscernible] or on the pricing, I understood the pricing picture might be a bit sort of stronger in the U.S. I'm just wondering if you have any kind of insight to that -- the potential to sort of see your prices linked to the potential strength over there.

Okay. So, I already mentioned the white kraftliner prices in the U.S. So, we have announced price increase, and then remains to be seen how much goes through. But the expectation is that sometime in February, latest March, we will see increase there. And then, as far as folding boxboard in the U.S. is concerned, we have announced price increase already in the beginning of this year, and it should be valid sometime in -- also in February, latest March. So, both folding boxboard and white kraftliner prices in the U.S. market are -- so we have announced price increases.

Yes. No, I guess, the folding boxboard will be sort of linked to the success of the solid sulfate price.

Yes, that's true.

Performance in the U.S. So, that would be the driver.

That's true.