Metsä Board Oyj (METSB) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the presentation of Metsa Board's results for the first half year of 2021. My name is Mika Joukio, and I'm the CEO of Metsa Board. Here with me, I have also our CFO, Henri Sederholm; and Head of IR, Katri Sundstrom. Before moving on to the presentation, I would like to hand over to Henri, our new CFO since May, to give a short introduction of himself. So please, Henri.

Good afternoon, and thank you, Mika. My name is Henri Sederholm. And as Mika mentioned, I started as the CFO beginning of May. My previous position was Senior Vice President of Group Finance in Metsa Group. And I have altogether about 20 years of forest industry experience in different finance and Treasury roles, including also 6 years in Metsa Board. I'm happy and really excited to have joined Metsa Board again. Now I hand over back to you, Mika.

Thank you, Henri. And let's move on to the presentation now. As always, I will begin with the highlights from the previous quarter. The favorable development in the second quarter was a nice continuation to the already strong first quarter. Demand for our paperboards remained strong in all market areas, and quarterly delivery volumes reached new records. In addition, the average paperboard prices have improved during the first half of the year. Strong performance in paperboard and market pulp improved profitability. The operating result increased for the fifth consecutive quarter and exceeded EUR 100 million in the second quarter. In fact, this was the best quarterly result at least in 20 years. The coronavirus pandemic had no negative impacts on deliveries or production. In our mills and offices, we will continue to take precautionary safety measures, even though the pandemic situation is perhaps gradually improving. Instead, accelerating cost inflation together with the currency effect caused some headwind in profitability. At the end of June, we had a severe fire at the Husum mill's wood chip conveyor, caused by a malfunction in an electric device. Due to the fire, we suffered significant production losses: 26,000 tonnes paperboard and 55,000 tonnes pulp. Unfortunately, this will impact negatively on our Q3 sales volumes. And yesterday, after the review period, we made an investment decision to increase our annual folding boxboard capacity in Husum by 200,000 tonnes. I will come back to this in more detail at the end of the presentation. So our Q2 paperboard delivery volumes were at a record-high level for the second quarter in a row and totaled 514,000 tonnes. For the first half of the year, volumes exceeded 1 million tonnes, also a new record. Taking into account our current annual capacity, 2 million tonnes, this is pretty much the highest level we can reach. And yet, at the end of the period, our order books were at an exceptionally high level. In general, the demand for folding boxboard was good in all end-use segments, but especially in food and pharma packaging. As economies have gradually opened up and the mobility of people has increased, demand for food service packaging has also picked up. Growing retail in both EMEA and Americas and ecommerce, especially in Americas, boost the demand for white kraftliners. Volumes in the first half of the year increased in all market areas, but there was variation in the price developments. We have announced several price increases in both folding boxboard and white kraftliners during this year, and the positive effects of those have not yet been fully realized. Our April-to-June sales increased by 18% compared to the corresponding period last year. For the first half of the year, growth was 11%, and sales exceeded EUR 1 billion. The comparable operating result improved for the fifth consecutive quarter and was EUR 102 million. The operating margin for the first half of the year was record high, 18.2%. The corresponding period last year was negatively impacted by the strike at the Finnish mills by EUR 20 million. Nevertheless, the year-on-year improvement was really remarkable. And then here, I listed the main items affecting the operating result. The common positive factors for both review periods were the record-high paperboard delivery volumes, together with increased market pulp prices, which in turn led to improved results from Metsa Fibre. On the negative side, we had higher costs, together with unfavorable FX impacts. We expect the full year's cost inflation, excluding pulp, to be 3% to 4% compared to the previous year, slightly higher than our previous expectations. Especially, the cost of energy and certain raw material prices have risen faster than we earlier estimated. Also, the global problems with container availability continue to increase logistics costs. Strong earnings performance was reflected in the return on capital employed. Comparable return of capital employed for the first half of the year was as high as 19.3%, and rolling 12 months was 16.1%. Both are above our long-term target of at least 12%. Then, to market pulp. The strong demand situation for long-fiber pulp at the beginning of the year, especially in China, weakened towards the end of the review period. In Europe, the demand remained good and was supported by increased consumption of paperboard and higher operating rates of paper mills. On the supply side, the global problems with container availability and planned annual maintenance shutdowns at the market pulp mills have reduced market pulp supply. Long-fiber market pulp prices have risen significantly this year in both China and Europe. The tightened market situation is likely to keep prices high in the near future as well. Operating cash flow in April-June was also strong: EUR 134 million. Together with improved results, Q2 cash flow was improved by changes in working capital, an increase in trade payables and decrease in inventories of finished goods caused by the strong demand, especially in paperboard. Investments during the review period were EUR 96 million. And thanks to the strong cash flow and high cash funds at the end of the period, our net debt remained close to 0. This is despite the fact that in April we paid EUR 92 million of dividends. Earlier this year, the sale of a 30% stake in the Husum pulp mill to Norra Skog decreased our net debt by EUR 260 million. Along with this, our leverage remained also at 0. We estimate that our CapEx for this year and next year in total will be in the range of EUR 450 million to EUR 550 million. Our biggest ongoing investment is the first phase of the Husum pulp mill renewal, which we expect to be ready next year. The total investment value is EUR 360 million, and it includes a new recovery boiler and turbine. So far, we have invested approximately EUR 200 million in it. During the 2020s, so later during this decade, there will be a second phase of the renewal, covering the new fiber line. The whole Husum pulp mill renewal will take us closer to our ambitious target of having all our mills fossil-free by 2030. Staying in Husum, we have yesterday decided to increase our annual folding boxboard capacity by 200,000 tonnes in there. Investment value is approximately EUR 210 million, divided in 2021 to 2024. But as said, I will go through the whole investment more thoroughly at the end of this presentation. We have also launched a development program for our Kemi paperboard mill, in which the annual production capacity of white-top kraftliner, mainly coated, will be increased by 40,000 tonnes. In addition, the mill's water and energy use will be significantly improved. As part of the program, we will purchase the modernized unbleached pulp production line from Metsa Fibre in 2023. The total investment value for this is EUR 67 million during 2021 to 2023. Our annual maintenance CapEx is around EUR 50 million to EUR 60 million. Then, the outlook. Demand for fresh fibre paperboards remains strong, which is reflected in our order books. For example, our order book for folding boxboard is at the moment all-time high. During the year, we have announced several price increases in folding boxboard and white kraftliners. The positive effects of the price increases will continue to be realized, and we expect to see improved average prices in the third quarter compared to the second. Despite the strong demand, our paperboard delivery volumes are expected to come down from the record high Q1 and Q2 levels. A big contributor here is the fire at the Husum pulp mill's wood chip conveyor in June that caused significant production losses. In total, we lost 26,000 tonnes in paperboard and 55,000 tonnes in pulp, which will have negative impact on delivery volumes in Q3. Overall price and the demand situation for market pulp remained good. Europe is performing better than China. The container shortage continues and reduces market pulp supply. Also, the strong demand and price situation in the sawn timber business is expected to improve the [ results here ] from Metsa Fibre. The planned maintenance shutdowns, together with FX impacts, will have a negative impact on Q3 results. And then, cost inflation continues. We have slightly raised our expectations for the full year and expect now cost inflation to be around 3% to 4% compared to 2020. So there are several factors affecting the result; some positives, some negatives. But putting them all together, we expect that our comparable operating result in the third quarter will stay roughly at the same level as in the second quarter. And then, before moving on to your questions, let's take a closer look at our investment decision made and published yesterday. So we have now made a decision in line with our earlier intentions to increase our annual folding boxboard capacity by 200,000 tonnes in Board Machine #1 at Husum mill. The current capacity of BM1 is 400,000 tonnes, and this investment will increase it to 600,000 tonnes per year. The ramp-up of additional folding boxboard capacity is expected to start in autumn 2023 and full production capacity to be reached by the end of 2025. The main end uses in our folding boxboards, including the additional capacity, are in food and foodservice, pharmaceutical and cosmetics packaging. Additional capacity will be directed to our main markets: Americas, mainly in the U.S., and EMEA. Within past years, we have created a solid foothold in North America, and we still see a lot of growth potential in there. Our lightweight folding boxboard is very competitive compared to local paperboard grades. And in addition, our sales is supported by an efficient supply chain and superior customer service. In Europe, we are a leading producer of premium fresh fibre paperboards, including folding boxboard, and this investment will further strengthen our position in here. The investment value, roughly EUR 210 million, is divided in 2021 to 2024 and mainly in 2022 to 2023. It will increase our annual sales by approximately EUR 200 million and have a positive impact of approximately EUR 50 million on our annual comparable EBITDA; both expected to be achieved in full in 2026. Investment will be financed with our current cash funds and future cash flows from operating activities. There will be a small impairment loss of approximately EUR 5 million related to the Board Machine #1. This will be reported in our Q3 results as an item affecting comparability. The new capacity will naturally increase the logistics volumes of the entire integrated mill area and especially in the port. We will examine the whole Husum port concept separately and decide about potential investments later. And with this, I will end my presentation, and we are now open for your questions. Thank you very, very much.

[Operator Instructions] The first question comes from Robin Santavirta from Carnegie.

Now first, I would have a question related to the production problem you have had in Husum. What kind of earnings impact did that have on the Q2 earnings? And what should we expect as the earnings impact for Q3? So that's the first question.

Okay. So Henri will take this.

On the second quarter, the costs related to the fire were about EUR 5.8 million, and that was recorded in the items affecting comparability. Then when it comes to the third quarter impact it will, as Mika mentioned, inevitably have a negative impact on the sales and deliveries in the third quarter. However, we think that the higher prices of paperboard and market pulp as well will be compensating that negative impact as well as then the insurance compensation that we are expecting to get relating to the fire.

And just to check, is it sort of the EUR 5.8 million, the costs related to the fire in Q2, it was booked as a one-off, it's not in the comparable results included?

Yes, that's correct.

And then I assume that the insurance payment will also be booked as on IAC. So it's only the volume loss that is impacting the comparable EBITDA from this fire.

No, because then this is replacing the kind of operative deliveries. So that will be sort of replacing the normal sales.

Okay. I see. Then the second question I have is related to the pulp markets. I think you, Mika, said that European market is doing fine in terms of demand, whereas the demand is weaker in China. What are you seeing in these markets? Could you provide a bit more detail? You're one of the biggest suppliers of softwood pulp, I think the biggest, in China. What are the most recent developments there? And what are you seeing in Europe?

Okay. So starting from Europe. So Europe is -- so European market pulp business is doing fine. The prices are increasing and volume development has been good, and our estimation is that it also will be good. Then, back to China. So there were a bit slower period, I would say, in May, partly in June, but now the activity has picked up now during kind of July. So situation is now slightly better there than it was in May and June, and prices are stable.

Good. And finally, a question related to the CapEx guidance of EUR 450 million to EUR 550 million. Does this now include the investment decision you announced yesterday? I think you had the same guidance in the Q1 report. So is there something removed or postponed in the CapEx? Or how should we view the CapEx [ guidance ] for the next 2 years?

Yes, that includes -- this EUR 450 million to EUR 550 million, that includes the Husum investment, I mean, both investments, pulp mill as well as this new decision concerning folding boxboard. So they are included. And we haven't taken anything out.

All right. [ So that ] was already included in the last guidance.

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

Continuing on that same note with capital allocation, you have quite a lot on your plate, but it seems to me that there is room for a lot more still. So maybe could you even help us with some guidance on CapEx for 2023? That's maybe the first question. And then second to that, if you could just give us your broad thinking around what's beyond what you have already announced in terms of capital allocation. You have very strong cash flow generation, very strong balance sheet still after these investments. What's your thinking around further capital allocations? Are we talking about potential M&A, greenfields, potential further expansions on your existing platforms?

Okay. As you mentioned, we have quite a lot of stuff on the plate at the moment. So we have Husum pulp mill, and we have Husum folding boxboard. We have Kemi, and then all these operative investments, I mean, Kemi paperboard and then all these operative investments. And they will keep us quite busy during the coming 2 years, 2 or 3 years. At the moment, it's too early to say what is the CapEx allocation for 2023. Because one issue there also is the timing of the decision concerning the second phase of Husum pulp mill. So it remains to be seen. It's later during this decade, but when, that's still open. And then concerning your second part of your question is that of course we are planning also then other investments, as I have said earlier also, in order to grow our business after this or simultaneously with this folding boxboard capacity expansion at the moment in Husum. So our intention is to continue to grow also in the future, being anyway the market leader of these products.

Right. And yes, so let's leave Husum Part/Phase 2 aside for a minute, but how much of the Husum BM1 expansion CapEx would still come beyond the EUR 450 million to EUR 550 million total CapEx for 2021 and 2022? I guess that's my main question here.

Okay. Henri will take this.

As mentioned, it will -- the CapEx will be mostly in '22, '23. So you can assume sort of a roughly 50-50 split.

Okay. Great. That's helpful. That's helpful. And then just on the rather new cooperation that you have with Norra Skog on the wood supply side at Husum, I wonder if you could maybe give us an update about the changes on the ground since you started that cooperation, what kind of synergies you may be seeing already and maybe, specifically, how much imports of wood do you have at Husum for the time being.

So already during these first 6 months we have seen that the share of the imported wood has decreased. But then, of course, the full -- we can fully utilize this cooperation when the new fiber line is up and running. But at the moment, we have already seen lower share of imported wood in Husum. And also then we have seen the increased share of certified wood in Husum. So precisely what we targeted. So we have already seen this during these first 6 months.

And by when, if so, are you expecting the import to completely disappear?

Import disappear, you meant?

The wood imports.

It's very difficult to say whether it will be, I mean, totally disappeared, but significantly reduced when the new fiber line is up and running.

Our next question comes from Johannes Grunselius from Kepler Cheuvreux.

It's Johannes here. I wanted to ask you about a few things on the cost side and the pricing side. You help us giving the cost inflation, but that's for the full year. I was wondering if you could give some color on how you see the cost development for the second half, perhaps even more details on the third quarter, and if you can also help us to think about or help us with the thinking about price increases. Where do you see the strongest pricing power at the moment? Because you send a message here, obviously, that you will be able to take up underlying EBIT margins. That's my question.

So if I take first this paperboard pricing, and then Henri will take this cost side. So we have increased several price increases at all markets, I mean in Europe as well as Asia-Pacific and Americas. And our intention is to continue to increase our prices. And we'll see that during the third quarter the prices will be higher than -- paperboard prices as well as in pulp, but I'm talking about paperboard now. So they will be higher than in Q2. And then our clear target is to increase prices for next year also to the customers that we have not been able to increase this year; meaning, the customers that we have annual deal. So that has been quite openly communicated to our customers. So our intention is to continue. And of course, the main reason is very, very heavy or strong demand, both in white kraftliners as well as then in foodservice board and volume boxboard. So it's pretty much demand and supply case. But then coming to costs, Henri?

So as Mika presented, so we are estimating that the full year cost inflation will be between 3% and 4%, and that means translated into euros about EUR 40 million to EUR 60 million on an annual basis. What we can say in more detail about that is that we think that the pace will slow down slightly on the second half from the first half.

Okay. Yes, that's helpful. If we're going back a little bit on pricing, where do you see the most positive delta in the third quarter? Is that more on the pulp side? Or is it more on the board side?

It's both and. It's both and. It's difficult to say in relative terms where it will be better. But in both segments, so pulp and paperboard, our expectation is that the prices will increase.

And also a question I have is, how much of the pulp in Metsa Fibre and your own excess pulp is being shipped to China in, let's say, Q2? And what do you see in Q3? Are you now shipping more volumes to Europe because of relative pricing between the continents?

I don't have the exact figure for you, but during Q3 our expectation is that the volumes to China, together with Metsa Fibre and Metsa Board, they will be higher than in Q2. But I mean then of course there is a limitation, and that is the fire at Husum pulp mill. So of course that will curtail then our volumes in market pulp side. But all in all, Q3 volumes to China from Metsa, whether it's Metsa Fibre or Metsa Board, will be higher in Q3 than Q2.

Yes. A final question. You said you saw July being better than May and June. Is that basically order activity? Or can you give us some anecdotes why you see this?

Maybe in May and June then the pulp customers, they waited for a while in order to see where the prices go. But then when the demand there was anyway quite good in paperboard and paper, so tissue paper, packaging materials as well as the so-called normal paper grades, then they started to buy again.

Our next question comes from Mikael Doepel from UBS.

Just a couple of questions here. Firstly, on the folding boxboard business, could you give some indication of the magnitude of the achieved price increases in that business and also how much of those volumes are on annual contracts? Just trying to figure out what the impact is from the pricing in that segment this year and what we can expect for next year. That would be my first question.

I can't or I don't give a clear figure for you. But anyway, the price increases so far both here in Europe as well as then Asia-Pacific and Americas, North America, especially, they have been clear and significant. So clear, some percentages. And then concerning now these annual deals, in North American market we don't have any annual deals. So they are practically until-further-notice-based deals. And then here in Europe, I would say roughly 50/50 is the share. We can check it and come back to you, if you like, but that is roughly the figure here in Europe.

That's fair enough. That's good. Then I would also ask a bit about the Metsa Fibre results which you booked as an associated income. I was wondering if you could give some indication of how much of that business is actually sawn timber. I mean we have seen quite the meaningful price increases for sawn timber into Q1 and Q2 this year and also now some of your competitors guiding for 50% increases into Q3. So I would assume that that could be quite a big driver also for the earnings uptick we are seeing there in your share of associated income. But is there any more color you could give on that? For example, how big a share of the revenues are sawn timber, how much is pulp? Anything you could help us with there to better understand the dynamics in the earnings there.

Okay. Henri will take this.

We cannot give you exact figures on that. Clearly, it is way smaller than the [ board ] business. But what we can say is that definitely the difference between last year's first half has been remarkable also in the sawn timber business. But we are still talking about some tens of millions of EBIT level difference.

Okay. All right. Good. That gives some color. And then just finally, on the Husum port concept which you mentioned. And obviously, given the higher volumes, you are going to need to make some investments there. So I was just wondering, when do you plan to take a decision on these investments? And is there any indication you can give on the magnitude of those investments once you decide upon them?

No. At the moment, it's too early to say. Of course, we are, as I said, we are the market leader here in Europe, and we need to act -- I mean responsibility is very important here. So we are calculating different options, as I have said several times, during these years. And then the best options then of course will be selected. But at the moment, it's too early to say whether it's some kind of big bang or is it just slowly increasing the current production line capacities or what is the solution. We are calculating different options.

Okay. And then just finally, on the maintenance, if you can give any indication of the maintenance impact Q3 compared to Q2 and maybe also Q4 compared to Q3. I think in the report you mentioned some additional downtime at Kyro.

Okay. Henri will clarify that.

So the maintenance negative impact is sort of roughly around EUR 5 million Q3 versus Q2, and about the same Q4 versus Q3.

The next question comes from Cole Hathorn from Jefferies.

Just on white kraftliner, I'm just wondering what has been the demand drivers there that you're seeing pulling this through, and then if we do get the brown kraftliner price increase stick in, in August, do you think there's scope for that market to edge higher if demand remains strong, is the first question. And then the second one on folding boxboard. Your U.S. peers have been raising pricing. Demand and inventory balances seem very strong there on the boxboard side. Will you be benefiting from those price increases as well? And how does that relate to Europe, going forward from here?

Okay. Starting for folding boxboard and the North Americas market. So of course, in that market we follow the global, because we are anyway, relatively speaking, quite small player comparing to the SBS players. So we follow the SBS prices. So when they increase, of course we increase and then follow the kind of development there. But the North American market is quite separate. I mean there are not that much connection between European market and North American market. The dynamics are different. Then coming back to white kraftliners. So demand boosters. Of course, very strong retail business at the moment, especially in Americas, but also here. And then of course ecommerce plays important role. So they are the main key drivers: a strong retail business at the moment in both continents, and then of course growing and strong ecommerce.

[Operator Instructions] And there's a question from Harri Taittonen from Nordea.

Two questions. One is about the Husum, the first phase on the sort of recovery boiler and turbine. Now that the startup is getting nearer, can you sort of remind and maybe give some additional clarity to the financial impact just from this first phase? And also the timing-wise, you indicate the first half of next year, but what would be the factors kind of driving it towards the end of the first half or towards the early part of next year? So that's about that. And then the second question is about the EU [ 55 ] and the forest strategy documents and just kind of if you can -- it's a big question, but if you can give your first take of your impression what the impact looks like on your product portfolio and the use of alternative barrier materials on consumer board.

Okay. If I take this second question first. So this European forest strategy. Of course, it's still a bit unclear what will be really the kind of impacts on, for example, in paperboard business. That's more on the forest side. I mean how we -- what will happen in the forests, kind of harvesting and so. So it's too early to speculate what will happen, what will be the kind of effects and impacts on paperboard business. Hopefully, we -- of course, we have discussed internally a lot about that topic, but I think there will be more clarification during the second half of this year. And then coming back to your second topic, I mean, the barrier development. So we are developing barrier materials. Of course, today our biggest barrier material is PE from Husum; so PE-coated products. But as we know, that lands under this single-use plastics kind of directive, and then of course that will impact also our product development. And we are working actively there. Then the Husum pulp mill, Phase 1. So it proceeds as planned. Now the project resources, they had the holidays in July. Project still -- so it was not standing still. There were work at the site. And then now after summer break, then the activity will be even higher and more and more. I mean the headcount at the project will be higher and higher. And at the moment, we haven't seen any kind of drawbacks or problems, whether they are timetable or schedule kind of related or then cost related. So next year, this time, hopefully, everything is up and running. But then coming back to these other impacts, maybe Henri, you can open up that?

Harri, can you repeat your question on those?

I mean when the project was first communicated, then there was some kind of fairly broad indication on the potential kind of financial impact, and I can't remember if it was for the 2 phases together or not. So if you could remind how the first phase, about the financial impact of the return targets for that first phase looks like now that the startup is getting nearer.

Unfortunately, I don't have that figure with me. So we can revert to you with that one.

We have a follow-up question from Johannes Grunselius from Kepler Cheuvreux.

So I just want to come back with one question. I'm trying a bit to reconcile the Q2 numbers, and I was wondering if you can help a little bit with rough figures. How much did you hike the folding boxboard price on realized terms quarter-over-quarter? And the same question on the kraftliner side.

So as I said earlier, so I don't have a kind of clear or exact figure for you. But we have seen that the price increases, they have gone through not fully, which is a normal situation, but a significant share of our intention. And our estimation is that also in Q3 that will be the case. So prices are increasing.

Because when I see the delta in the sales and try to compare it with the volume change, I mean, it just appears to me that you have pretty big increases in realized price per tonne. But it might be so that you had a change in mix or it might be a big step-up in maybe the pulp sales as well, of course. But you are indicating to me that there is nothing like -- it's not significant price rises, quarter-over-quarter anyway.

You're right.

And as there appear to be no further questions, I return the conference to the speakers for any closing remarks.

Okay. Thank you, everybody, for the questions and participation to this webcast. And I wish you a nice continuation of the day and also a nice continuation of the summer. Sunlight is still ongoing. All right. See you next time. Bye.