Metsä Board Oyj (METSB) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the presentation of Metsa Board's January-September Results. My name is Mika Joukio, and I'm the CEO of Metsa Board. Together here with me, I have our CFO, Henri Sederholm; and Head of IR, Katri Sundstrom. Henri and I will go through the presentation, and after that, we will open the lines for your questions and more discussion. So let's start with the highlights from Q3. Demand for our paperboards remained strong in all market areas, and our order books stayed at a high level throughout the quarter. Average selling prices for our paperboards improved and the rising trend is expected to continue. Some of the price increases came into force from October, and some from the beginning of next year. The average selling price for market pulp also improved and boost our profitability. Our comparable operating margin in the third quarter exceeded 20%, which I consider an excellent performance and best ever. On the negative side, cost inflation continued. The biggest item contributing to higher costs was energy, but we also saw rising logistic costs and fixed costs compared to the corresponding period last year. Our financial position remains strong, and net debt was negative. This supports our ongoing and planned investments, of which we currently have several in the pipeline. Our latest investment decision was taken in July, which will increase our folding boxboard capacity by 200,000 tonnes in Husum, Sweden. But I will return to this and our other ongoing projects in more detail later in this presentation. Despite the strong market demand and according to our earlier expectations, our Q3 paperboard delivery volumes declined from the record-high levels in Q1 and Q2. Especially in Q2, the volumes already exceeded our technical production capacity. As always, the third quarter included more annual maintenance than the first and second quarters. In addition, the fire at the Husum pulp mills chip conveyor in June cut our paperboard production by roughly 30,000 tonnes. However, taking this into account, paperboard volumes were at a good level and totaled 475,000 tonnes in the third quarter. In the review period from January to September, we delivered more than 100,000 tonnes, more paperboard than in the same period last year. In general, demand for folding boxboard and white kraftliners has been good in all market areas and in all end-use segments. COVID-19 has particularly boosted the demand for products consumed at home and especially food packaging. As economies have gradually opened up and the mobility of people has increased, demand for foodservice packaging has also picked up. During the review period, in EMEA, our biggest market area, our paperboard deliveries grew by 5% compared to the corresponding period last year. In addition to strong demand, rapidly declining import volumes, especially from Asia, have further tightened the market situation here in Europe. In the Americas, our delivery volumes grew by 12%, and in Asia Pacific by 31%. Average selling prices improved in all market areas. Now let's turn to market pulp. During the review period, market pulp volumes for both Metsa Board and our associate Metsa Fibre increased compared to last year. In Europe, demand has been good and the price level stable, thanks to increased paperboard and paper production. In China, we have witnessed more volatility in both demand and prices. The global problems with container availability have continued and caused delays in deliveries. In the second half of the year, several planned annual maintenance shutdowns will also reduce market pulp supply. In October, after the review period, the European Commission started an inspection of Metsa Fibre under European Union antitrust rules. Metsa Board is not subject to this investigation. And then, some results of our research and development work. Roughly 2 years ago, we introduced our fully recyclable alternative for plastic packaging, dispersion-coated barrier paperboard, which is mainly used for food service purposes. Our customers have shown strong interest in this product, and we have seen rapidly growing delivery volumes, which we expect to further accelerate next year. And just 1 month ago, we reported our long-term collaboration with a Finnish start-up, The Paper Lid Company, which has led to the development of a 100% recyclable paperboard lid for use with takeaway cups. The carbon footprint of this lid is more than 50% lower than the plastic lid. So we are working to provide alternatives to plastics according to consumer preferences. And initial interest in the paper lids has also been strong. But now we will move on to financials, and I will hand over to Henri. So Please go ahead.

Thank you, Mika, and good afternoon. Let's start with the sales and operating result. This year, our quarterly sales have been significantly higher than the same quarters in 2019 and 2020, thanks to the improved prices and volumes. Our third quarter sales were EUR 516 million, a little lower than Q2, which was expected due to lower delivery volumes. And looking at the review period from January to September, we are EUR 150 million ahead of the corresponding period last year. And the same favorable development contributes to profitability. Comparable operating results for January-September was EUR 295 million, almost 19% of sales. And for the third quarter, operating result was EUR 104 million, which corresponds to a record high level of 20% of sales. And listed here are the main items affecting profitability. In the third quarter, the main positives were increased paperboard and market pulp prices. And the latter, along with higher prices for sawn timber naturally improved the result share of our associate Metsa Fibre. We also sold a small stake of the surplus of our emission allowances, EUR 5 million in total. After the sale, we still have some 700,000 tonnes of emission allowances left. The main negatives in Q3 were higher energy and logistics costs and the impact from FX. Then, the whole review period from January to September. Our operating profit improved from EUR 157 million to EUR 295 million or 88%. The biggest positive contributors were, again, improved prices as well as higher volumes. And this costs for both paperboard and market pulp. In addition, profitability was boosted by higher result share from Metsa Fibre. And bear in mind that in 2020, the operating result was hit by the strike at Finnish mills. The negative impact of this was EUR 20 million. On the negative side, we had impacts from FX and cost inflation. Production costs have increased throughout the year, especially in energy, chemicals and logistics. Fixed costs were also higher compared to last year. We expect the cost inflation for the full year to be at least 4%, including variable and fixed cost, almost 2/3 of this consists of energy. Strong earnings performance has been reflected in the return on capital employed. Comparable return on capital employed for the third quarter of the year was 19.1%, and the rolling 12 months was 17.5%. Both are above our long-term target of at least 12%. Our operating cash flow remained good. In the third quarter, the cash flow was EUR 59 million and for the review period from January to September, it was EUR 210 million. CapEx for January-September was EUR 134 million, including maintenance investments. And thanks to good cash flow as well as high cash funds at the end of the period, our net debt was negative. 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 also remained at 0, supporting our investments in sustainable growth, about which Mika will tell you more. So over to you, Mike.

Thanks, Henri. So let's take a look at our investments. Our largest ongoing project at the moment is the first phase of the Husum pulp mill renewal, including a new recovery boiler and a turbine. The whole investment value is roughly EUR 360 million, of which almost 2/3 has already been invested. Project has progressed according to plan, and we expect the new recovery boiler to start at the end of H1, so at the end of Q2 next year. The investment will enhance our pulp and energy production and the anticipated positive impact on our annual cash flow will be roughly EUR 35 million, starting from 2023. The second phase of the investment will include a new fiber line. And staying in Husum, in July, we made an investment decision to expand our annual folding boxboard capacity in board machine number 1 by 200,000 tonnes. Investment value is roughly EUR 210 million from this year 2021 to 2024. 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 finally, in Kemi, we are expanding our annual kraftliner capacity by 40,000 tonnes and improving water and energy use. As part of the program, we will purchase the modernized unbleached pulp production line from Metsa Fibre. The total investment value for this is EUR 67 million. So our total CapEx for 2021 and 2022 is expected to be between EUR 450 million and EUR 550 million, including annual maintenance CapEx of EUR 50 million to EUR 60 million. Now the outlook. Strong demand for our paperboards continues, and our order books are at the high level. We expect the average selling prices for paperboards to increase from Q3, but volumes to decline. Lower volumes will be affected by maintenance work, low stock levels and a potentially seasonally slower December. Delivery volumes for market pulp are expected to increase slightly. We also expect to book insurance claims for production losses caused by the fire in Husum in the fourth quarter result. The amount of claims will be specified later. Cost inflation will continue in the fourth quarter as prices of energy, chemicals and logistics will increase. The negative impact from maintenance compared to the third quarter will be roughly EUR 10 million. And in market pulp, we expect to see solid demand in Europe, but growing uncertainty in China. The energy restrictions and carbon emission cuts initiated by the Chinese government make cost curtailments in board and paper production, and thus, reduced demand in market pulp. In addition, the demand for sawn timber is expected to decline seasonally towards the winter, which will affect our associate Metsa Fibre's results. And based on these assumptions, we expect our comparable operating result in the fourth quarter to be weaker compared to the third quarter. Then, to summarize, we are still witnessing a strong market demand for paperboards, which is reflected to our high-level order books. Our profitability in 2021 has been boosted by higher paperboard prices, and we expect this development to continue. Some of the price increases we have announced will become valid from the beginning of 2022, giving us a good start for next year. Several ongoing investments drive our sustainable growth and all are progressing as planned. Our solid financial situation provides strong support for our work. In market pulp, the outlook is mixed. There is a solid market situation in Europe, but most uncertainty and volatility in demand in China. We must be prepared for lower market pulp consumption in China if the Chinese government continues to restrict paper and paperboard production. Cost inflation has been faster than expected in 2021. Higher energy prices have been the single biggest driver of cost inflation, and we expect logistics costs for 2022, in particular, impact on profitability. But let's return to these impacts in more detail next year. And with that, we end our presentation, and now open for your questions. So thank you very much.

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

On the variable costs on a sequential basis in the fourth compared to the third quarter, that is, are you expecting an overall increase? And could you say, on a sequential basis, again, which costs you're seeing increasing compared to the third quarter, please?

Okay. Henri will take this.

Okay. Yes. So compare the fourth quarter to our third quarter, so we are seeing some single millions of inflation or sort of seasonality of costs in both variable and fixed costs. On the variable side, it's mostly energy, some chemicals and logistic costs, as we have also mentioned for the year-to-date commentary.

All right. That's helpful. Yes. Actually, that was my second question on the seasonality, at least on the fixed costs, you tend to have not only higher maintenance costs in the fourth quarter, I think you said, EUR 10 million, correct me if I'm wrong. But also, for other reasons, seasonally higher costs, fixed costs compared to the third quarter. Could you also say something about that, please?

Yes. Henri, will continue.

Yes, sure. So some single millions also in the fixed cost side.

Okay, plus the EUR 10 million, is that right, of increased maintenance costs?

Yes.

Great. That's clear. And then, just one more, if I may. You have a net cash position, even assuming the CapEx project that you have outlined so far, it looks as if you will continue to have a very strong balance sheet for the foreseeable future, what you're thinking around that? Are you looking into more potential expansion projects, or extra dividends, or M&A or something completely different?

Yes, you're right. As you mentioned, that we have several ongoing investments ongoing and in the pipeline. And of course, they will need then funding, no doubt. But then, as far as the dividend is concerned, our dividend policy is unchanged, so 50%. And, of course, we then play the game according to that. But of course, management always have something on the kind of planning board in order to be competitive and strong also in the future, but too early to say anything more about those.

And just specifically on M&A, maybe, is that something -- is it on your agenda? Or is that pretty -- or is that not really something that you spend much effort on?

Yes, it's not actively on our agenda at the moment. But of course, we do not close any possibilities if there will be good ones.

The next question comes from Robin Santavirta from Carnegie.

I would have a question related to your paperboard business and the order book development during the quarter. Could you describe what kind of order books do you have in paperboards, Europe and in North America? And how have those developed now since the summer?

Yes. So the kind of optimal situation for us is that the order books are around, let's say, 3, 4 weeks. But now the order books at all the mills are, let's say, 2 to 4x higher than normally, and that situation has been pretty much slow during the third quarter.

Okay. So order intake is still very high during the third quarter, I understand.

You're right.

Now related to that, you have announced a quite big price increase in folding boxboard in Europe for -- mainly for next year. Could you shed some light, how has those discussions gone? I assume that normally sort of half of the intended price increases, but what one can expect if you're successful? Is this now the same rule of thumb we should use into '22 or is it better or worse? Any kind of comments or light on that would be helpful.

Yes, I don't specify any number for you, but you are right, we have had several price increases already during this year. And as you said, we have announced price increase also for next year. And the tighter the market situation, of course, the issue are these discussions. So maybe you can read between the line, what has been the success rate comparing to the, let's say, more normal market situation, but that is pretty much the case.

All right. And finally, just on Metsa Fibre volumes, am I right assuming that some 60% of all of Metsa Fibre pulp volumes -- also if you include the ones that are used internally are sold in Europe and 40% in China? Is that roughly right for Metsa Fibre?

I would say 50-50 pretty much.

The next question comes from Mikael Doepel from UBS.

Just a question on the cost side of things. I mean, if you would assume the current spot rates for energy and chemicals and so on, what would be the magnitude of the cost inflation you would see into 2022? I mean, you have helpfully guided for this year, it's going to be at least 4%. But given what you see today, if you don't assume any major change, what would that mean for 2022?

Okay. Henri will answer.

Yes. It's a bit too early to speculate on next year. So what we have stated in the report as well is that we expect the cost level to stay quite high, but remains to be seen what the impact will be, and we don't want to speculate on any number at this stage.

Okay. But still related to that, I mean, given the price hikes you have already announced, and as Mika alluded to, the markets are tight. So those are likely to go through in a good way. Do you think that's going to be enough to cover the cost inflation that you might see next year? Or would you say that you still need to increase your pricing further to be on the safe side from that point of view?

Yes. So our prices are based on market demand. So we don't kind of play the prices or adjust the prices based on the raw material prices also. So that is our philosophy. So demand plays very important role in our pricing and I don't want to say whether that will cover our cost inflation or not, we will see, and you will see next year.

Okay. And then, just finally on the -- in terms of the building blocks, Q4 compared to Q3. Now you already mentioned the maintenance impact of EUR 10 million. You mentioned the cost impact that you're going to see. So my question would be, what are the other moving parts there? I mean, you do guide for higher pricing, for example, Q4 versus Q3, what's the impact going to be of that? Then, there is an FX effect as well, if you could talk a bit more about the impacts of those. And also, if you could clarify the maintenance impacts of EUR 10 million, does that include Metsa Fibre and Aanekoski mills, that's just Metsa Board board mills?

Okay. Henri will answer.

Okay. The last one first. So that's on the Metsa Board impact. So we have several elements impacting positively and negatively as you listed. So the paperboard prices have a positive impact. The volumes are lower, so that has a negative impact. Clearly -- then, also this pulp will have somewhat of a negative impact. So that's, I guess, the main things that you listed there. So the FX has a very minor negative impact.

Right. Right. Okay. And then, just finally on the sawn timber side of things. I mean, I know that that's part of Metsa Fibre's operation, but it's still probably a meaningful impact on your earnings as well. So I was wondering if you could shed some light on what kind of a market dynamics you currently see in that particular market when it comes to demand and pricing?

Yes. We see that the prices in that segment, they are going down slightly. And then, seasonally also, the demand will be lower. So both volumes and prices have negative impact if you compare quarters to quarters.

The next question comes from Johannes Grunselius from Kepler Cheuvreux.

It's Johannes here. Two questions. These have -- you might have discussed this, but I was actually missing a few minutes of the presentation. But anyway, my question is then on the pulpwood and how you see these costs for 2022? If you can give us some light on that, please.

Okay. Henri will take it.

Yes, sure. Our current view is pretty stable, so no dramatic changes expected.

Yes. And in terms of availability and so on, I mean, and input cost for wood fiber, is it the same in Finland and Sweden, would you say at this point?

Pretty much.

Yes. Okay. Got you. And also, more on the cost inflation theme on energy. And did you say how much of the energy cost here for the coming quarters or maybe 2022 that is hedged in your books?

Okay. Henri, again.

Yes. Well, we didn't say that it is not easy question to answer very simply as we have different commodities in the energy sector that we are hedging. So we have a certain share of the next 12 months' net position hedged, but it's impossible to give a very simple answer to that.

Okay. But how should we think about it that you are sort of a bit hedged, or quite reasonable hedge, or more naked or just to simplify things?

Well, a bit hedged would be probably the closest.

Yes, yes. Okay, okay. Perhaps, a third question from my side because you mentioned in the report that China has curbed production, it impact inflows of paperboard products into Europe. Could you mention what product that is? And if you perhaps could indicate what kind of magnitude we are talking about here in the market?

Yes. I mean, the Asian producers, and particularly, the Chinese producers, they are selling so-called ivory board here, which is close to folding boxboard, but they are selling that here in Europe, Middle East, Turkey, these markets. And traditionally, it has been in the rough figures, 100,000 to 200,000 tonnes depending on the year and depending on the situation. The Chinese, they are coming and going. Or historically, they have been coming and going, depending on the local demand in China. And then, of course, then the strength of euro.

Yes. Okay, okay. But you have seen this effect and maybe it will become a bit greater in Q4, maybe next quarter. I mean, given that the old signals is that China is taking off production at the moment? Would you -- do you see like a new stable level when it comes to imports of ivory board?

Yes. At the moment. Okay. There are 2 reasons. Of course, is restrictions by Chinese government, but then, I think even more important reason is that the container prices from China to Europe or these markets are very, very high at the moment. And of course, that restrict also then deliveries of them. So my rough estimation is that the situation will remain pretty stable during the coming months.

[Operator Instructions] We have no further questions, so I will pass it back to the speakers.

Okay. I would like to thank all the participants and wish you good continuation of the day. Thank you, and see you and hear you next time. Bye now.