Metsä Board Oyj (METSB) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the presentation of Metsä Board's half year results for 2022. My name is Mika Joukio, I'm the CEO of Metsä Board. And with me here, I have CFO, Henri Sederholm; and Head of IR, Katri Sundstrom. I will first go through the presentation together with Henri, and we will then open the lines for the further questions and discussion. Let's begin by taking an overview of the second quarter. The paperboard markets strong momentum continued, and demand exceeded supply in our main market areas. Our delivery volumes were at the same level as in Q1, but were lower than the corresponding period last year. This was mainly due to our own actions as we have increased our very low inventory levels. In addition, last year's delivery volumes were exceptionally high, exceeding our production capacity. Even though Q2 included quite a lot of maintenance, especially at the Finnish mills, production volumes were at a very high level. Production volumes hit a new record during the first half of this year with paperboard production volumes almost 1 million tonnes and pulp and BCTMP volumes 730,000 tonnes. An excellent performance which is a reflection of the huge commitment and willingness of our staff to do things well in exceptional circumstances. Sales prices for our paperboards continue to rise, pushing the top line and profitability to record levels. Our sales increased by almost EUR 100 million and operating result by EUR 45 million compared to the same period last year. Return on capital employed was as high as 25%. Cost inflation continued to be rapid, especially in chemicals, logistics and energy. Rising raw material costs and the improved prices of our end products increased our working capital, also impacting cash flow and net debt, but I will let Henri explain these issues further. And last, but definitely not least, our achievements in sustainability were once again top class. We reached the Platinum level in the EcoVadis rating. And for the first time, we scored the full 100 points in the environmental section. This achievement is a reflection of our hard work on sustainability and recognizes our journey towards fossil-free production and products by the end of 2030. Now an update on Russia's attack on Ukraine. You remember that our exposure to Russia was derived from paperboard sales, wood sourcing and the use of natural gas. Thanks to the strong market situation, we have sold all the paperboard volumes released from Russia. Wood supplies have operated normally despite the discontinued wood procurement from Russia in March. Concerning energy, 3 out of our 8 mills use natural gas, which was previously supplied from Russia. Now the natural gas is supplied via the BalticConnector pipeline. In addition, we are preparing to replace some of the natural gas with LNG later this year. And the target remains that by the end of 2030, all the energy we use will be 100% fossil free. So to summarize, the war in Ukraine has had impacts on us, but we have coped well so far. Naturally, our great concern is for the people affected by the war and their survival. And now let's look at the paperboard deliveries. As you can see from the graph, the volumes for both the first and second quarters this year were lower than the corresponding periods last year. And this difference comes from folding boxboard. Last year, due to the very strong demand, our delivery volumes were at a record high and exceeded our production capacity. This year, we have increased our lower inventories and prepared for the upcoming investment shutdown in connection with Husum's new folding boxboard capacity. In addition, the allocation of Russian volumes to other markets was partly ongoing at the end of the review period. The total delivery volumes in Q2 were 472,000 tons; and for the first half of this year, 944,000 tons. And now the delivery is split by market area. The demand both folding boxboard and white kraftliners has remained strong in our main markets. In the EMEA region, the released volumes from Russia slightly eased a very tight market situation. At the same time, the bottlenecks in logistics are keeping imported volumes from Asia and Latin America lower than normal. In the Americas and especially in the U.S., demand for both folding boxboard and white kraftliners continue to be strong. Finland supply chain challenges have gradually eased, but cost levels have increased compared to corresponding period last year. Strong demand with limited supply was reflected in average selling prices, which all continue to rise. And before Henri goes into the financials, let's have an update on market pulp. During the first half, the demand for long-fiber market pulp has been good in both Europe and in China. Both Metsä Board's and Metsä Fibre's market pulp deliveries remained stable compared to the corresponding period. The global pulp supply has been reduced by several factors like bottlenecks in logistics, cost inflation in energy and chemicals and other planned and unplanned production shutdowns. This imbalance between supply and demand has kept prices high. But now I'll hand over to Henri to tell you more about the financials.

Thank you, Mika, and good afternoon. Let's look first at the big picture of the development of sales and operating result. As already mentioned, we had a record quarter again. Our quarterly sales ended up at EUR 651 million, almost EUR 100 million higher than the same quarter last year. For the first half of the year, the sales were EUR 1.2 billion, 17% higher than in the first half of 2021. Our comparable operating result for Q2 was EUR 146 million, and the operating margin was 22.4%. These are all significantly higher levels than in the previous quarters, which can be seen from the graph. And now the explanations for our record high profitability. The main positive contributor for both quarter-on-quarter and year-on-year comparison was improved sales prices in paperboards. Year-on-year sales prices in euros have now improved by 25%. In addition to paperboards, market pulp prices improved too, leading to a higher result share from Metsä Fibre. Other positive items for both review periods were the impacts from foreign exchange rates and the sales of emission allowances, which we now sell more evenly over the year. On the negative side, the main burden came from cost inflation, which has been rapid, especially in chemicals, logistics and energy. Logistics costs have increased due to limited availability of transport equipment, higher fuel prices and the rerouting of paperboard volumes released from Russia. Higher pulp costs impacted the profitability of the stand-alone paperboard business, yet the overall impact from higher pulp prices was positive for Metsä Board, and wood prices which have remained stable for a long time have also risen. In addition, high fixed cost and decreased paperboard volumes weakened profitability. However, as shown here, we have been able to more than offset the negative impact from rapidly increasing costs. The comparable return on capital employed was as high as 25% in the second quarter and 20.6% during the last 12 months, both are significantly above our target level, a minimum of 12%. Now the cash flows, which showed quite a big change in the second quarter. Operating cash flow was negatively affected by an increase in working capital. The 3 main reasons for the increase were rising stock levels of paperboard's higher inventory value due to cost inflation and higher receivables due to increased prices for finished products. We should also bear in mind that cash flow in the first quarter of this year included a dividend of EUR 59 million received from Metsä Fibre. And despite the record high EBITDA of EUR 545 million for the last 12 months, the leverage ratio returned to positive first time after the end of 2020. At the end of June, the level was 0.2, leaving plenty of headroom for our maximum target of 2.5. Our dividend payments were roughly EUR 145 million, and in addition, the dividend paid to the minority shareholder of Husum pulp mill was roughly EUR 11 million also booked in Q2. Net debt increased by EUR 200 million and was EUR 109 million at the end of the review period. The continued strong financial position supports our investments in sustainable growth, about which Mika will tell you more. So over to you, Mika.

Thanks, Henri. So let's get an update on our ongoing investments, starting with the Husum pulp mill renewal. There, we had a small headwind as some of the installation works were delayed. Instead of September, we now estimate that the start-up of the new recovery boiler and turbine will take place in November this year. We have made no changes regarding timing or investment amounts to our other major investments, which are the capacity expansions for folding boxboard in Husum and for white kraftliners in Kemi. In May, we announced that we are exploring the alternatives to further increase our folding boxboard capacity either here in Finland or in Sweden. We haven't made any investment decisions about it yet, but the evaluation of the options is expected to be completed by the end of this year. For the full year 2022, we expect our investments to be around EUR 300 million. And that includes annual maintenance CapEx of EUR 50 million to EUR 60 million. And now the outlook. We see the solid demand for sustainable paperboards in both Europe and North America continuing. We expect our delivery volumes in the third quarter to remain stable and average sales prices for both folding boxboard and white kraftliners to increase. Foreign exchange and especially the strong U.S. dollar will improve profitability further. Demand for long-fiber market pulp is expected to remain good in Europe and in China. At the same time, the supply is restricted by various factors, including bottlenecks in logistics and production shutdowns. Cost inflation will continue, especially in chemicals and energy. Global challenges in the availability of transport equipment remain, keep logistics costs high. Rising wood prices, together with higher harvesting and logistics costs, we expect the total wood costs to increase in the second half compared to the first half. The current operating environment includes uncertainties. The stronger-than-expected slowdown in economic growth and weakening consumer purchasing power might also have a negative impact on our products. In addition, the energy situation throughout Europe is facing major challenges, and we need to prepare for shortages of energy supplies and high energy prices next winter. The good news is that after the Olkiluoto 3 is in full production and Husum's new recovery boiler has started, our electricity self-sufficiency will increase to 85%. And based on these assumptions, we expect our comparable operating result in the third quarter to remain roughly at the same level as in Q2. Then to summarize. Once again, the performance in the quarter and in the first half of the year was excellent. We achieved several new records in production, in sales and profitability. Our successful price increases in paperboards and favorable market pulp development have more than offset the rapid cost inflation. High cost inflation and rising interest rates will inevitably weaken consumer's purchasing power, which may have negative impacts on the demand for our products. This is despite the fact that most of our paperboards end use is in everyday essentials, such as food and health care products. In addition, the Russian war in Ukraine increases uncertainty globally. One of the biggest challenges in Europe is to secure energy supplies in the near future. However, in the long run, mega trends such as plastic replacement and the growth of e-commerce will continue to support demand for our products. We want to meet this growing demand and are now exploring options to increase our paperboard capacity in Finland or in Sweden. And with that, we end our presentation and are now ready for your questions. So thank you very much.

[Operator Instructions] Our first question comes from the line of Robin Santavirta from Carnegie.

Now my first question is related to the current demand situation. You have had a really strong first half of the year. I was wondering if you could share some thoughts on the current order intake versus, for example, in the winter or in the spring, is it still across the board for you guys, the Metsä Board part, as strong as it was? Or is it a bit weaker? I guess, it cannot become stronger than it was in the winter? So that's my first question.

Okay. So Mika here. So demand -- or the order inflow has been good. But to be honest, I mean, the kind of panic behavior that we saw among customers late last year and then also winter time, that we don't see at the moment. But what is kind of interesting and true is that customers very eagerly would like to discuss 2023 already now even before summer holidays, and that is not normal. So order inflow as well as the demand has continued to be good and our expectation is that, that will be the case also in Q3.

All right. That is clear. Then related to energy, if I understand it correctly, some 13% of your costs in 2021 was related to energy. Now energy prices, power prices have increased quite significantly in Finland as well and in Sweden. How is that energy consumption hedged? And how will sort of the current exceptional high prices be visible in your P&L when it comes to next year. So a bit more sort of color on that would be appreciated. And another question related to energy. What happens if there's a gas allocation situation in Europe to the 3 mills that use gas and perhaps to your suppliers and to your customers as well? So those on energy.

Okay. If I can first, your later question. So what if there is no natural gas for everybody. Of course, it's very difficult to estimate at this point. And as I said, we are preparing ourselves to use the LNG as well as, then oil is another option. But as I said, of course, the crystal ball is not very clear as far as that kind of situation is concerned, naturally. But then concerning this energy prices and hedging, then Henri will take that.

Okay. Yes. So if you look at the total energy cost, we have to remember that we have this shareholdings in PVO, so the nuclear power plants as well as then we have, of course, the integration to our ownership in Metsä Fibre. So if you look at the total energy cost, about 1/3 of the costs are sort of market exposed. So that's kind of giving the magnitude that we need to hedge. And out of that, then we are talking about electricity, where we have a high self-efficiency after the Olkiluoto 3 starts and then the Husum boiler and turbine will start. So we have about 85% of self-sufficiency. We are hedging natural gas and other fuels. So that's the kind of part that we are hedging.

I understand. And then a final question related to pulp wood. You have managed very well now despite of the border shut between Finland and Russia. What is the outlook when you just say higher pulp wood cost an [ issue ], I guess that is quite natural. But could you share any view of magnitude or sort of momentum. We have increased quite clearly now into the summer as normal. Should we expect continued increases from the current prices of pulp wood in Finland and Sweden. And is there any sort of fear of availability when it comes to Finland or Sweden when it comes to your production now in H2?

So first of all, concerning availability, of course, we have had some challenges concerning the birch, but they have been solved, and we don't see any major problem concerning availability. As far as the prices are concerned, of course, the stump prices, they have slightly increased comparing, let's say, first half of last year to first half of this year, but then we need to calculate also then the -- all these logistic costs into this and because they play important role in wood cost at the mill. But the magnitude of the inflation in wood prices is not the same level as in energy or logistics or chemicals.

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

Maybe if I may continue on the wood supply topic, what I'm curious about is how much is already reflected in terms of additional cost for rerouting and new sourcing an additional list price increases? How much of that is reflected in the second quarter? I noticed that it doesn't seem to be much of -- it's not the key element of cost inflation that you highlight for the third quarter, it seems to me. Is that because there is a delay that we will see wood sourcing costs come through more clearly later on? Or what you know at this stage is largely reflected in the second quarter already?

If I start and then maybe Henri can continue. But the delay in wood cost or wood price is typically 3 to 6 months. So when you are able to see the new prices. And concerning then Q3 or second half of this year, we estimate that the wood prices or wood costs will be slightly higher than the first half of this year, but not as much as we can see, for example, in energy, logistics or chemicals. But do you want to, Henri, add something?

No. I think perhaps on the availability of wood, that we can confirm that there hasn't been problems in the availability so far.

And this 9% that you sourced in Russia last year, what's the current situation? Is that coming? Is that, if you were to roughly describe which countries those volumes are coming from currently, what would you say?

That's easy. It's coming from Finland or Sweden. So we have not increased our wood supply dramatically, for example, from Baltic countries. So the increase is coming from Finland and Sweden.

Perfect. That's clear. And then I don't know how -- and if you want to answer this, but you say that paperboard prices will be higher in the -- as compared to the second quarter. You also say that variable costs will be higher, Q3 on Q2. Is the one factor higher than the other? And if so, which?

I mean, I can only say that we are able to quite nicely offset the coming inflation in chemicals or other elements with our price increases or new prices. We have had price increase announcements, and our estimation is that we are able to see those increased prices in Q3.

That sounds reassuring. Then just 1 final question, if I may, on your dividend policy. It says that you are supposed to pay out at least 50% of EPS. Is there any way we could misunderstand that? I mean, is that valid any given year, you have a strong balance sheet, markets seem strong as it appears. Should one view it over a business cycle or anything like that? Or is there any way of misunderstanding that message?

No. No. I think message is very, very clear. That is precisely our dividend policy, and that is not kind of connected to any kind of years or whatever other topics or issues. So that's a quite clear statement or very clear statement.

It's valid for, in this case, the reporting year 2022.

I mean, no reason to believe something else at this point.

And the next question comes from the line of Johannes Grunselius from DNB Markets.

Johannes Grunselius here. My first question is on the higher production versus shipments and you obviously built some quite a big -- took up the net working capital, quarter -- yes, in the second quarter. I was wondering if you could help us in providing some insights how this was impacting the P&L? And also the net working capital, do you expect that to be released extra value on the net working capital side in the third quarter.

Yes. Okay. This inventory increase, especially in folding boxboard, not that much in white kraftliners, but in folding boxboard. That is coming from the fact that our inventory levels were very, very low in the beginning of this year also after Q1, and we needed to increase that. And also then the other reason is that we are preparing ourselves to this Husum investment next year. So in order to serve the customers during that shutdown period, we need to have higher cost -- higher stocks and that is the other reason. But as far as the operating network and other things you asked, then Henri can comment.

Yes. So the inventory levels are back to the kind of normal level, and we don't have any plans to increase them any further. It's also good to note maybe 2 things about the net working capital increase. Firstly, the cost inflation is obviously reflected in the value of the inventory. So the increase in the inventories based on not only the amount, but also the value of the end products, and then the receivables obviously reflecting the much higher price levels.

Okay. That was clear. But if we then look at the third and the fourth quarter, should we expect any increase in the folding boxboard shipments compared to Q2? Was it sort of a bit lower than what it's representative going forward.

So typically, then Q4 volumes are lower than Q3 volumes due to seasonality. But it's too early to kind of comment in more detail, but that is very often the case.

Okay. And a bit back on the pricing, there was a few questions on that already. But could you just indicate what kind of overall price increases we are talking about in the third versus the second quarter? Is it sort of a small percentage or is it more meaningful?

No, it's smaller. If you compare then first half of this year to last year, our prices are 25% higher. Of course, we don't -- we can't -- we are not able to see that kind of increase in Q3 comparing Q2, but some minor increases, yes.

Okay. Okay. Then final question for me. I mean, if you compare the U.S. market now compared to the European market, are you seeing similar strengths in the market or any other market being developing better than the other one in relative growth, can you sort of elaborate a little bit on that?

Yes. Both markets have been strong for us. Of course, the kind of extra challenge has been then the Russian case that we have reallocated the volumes from Russia elsewhere, mainly here in Europe, and that has been able to able to do without any major problems. So that shows that demand has been good.

Yes, absolutely.

So I would say that the U.S. market as well as the European market, both have been strong, and estimation is that, that will be the case also in Q3.

Okay. All right. I also want to take the opportunity just to ask you what -- how you read the new behavior that clients want to talk 2023 shipments already at this stage? I mean, is it more to position themselves? Or are we talking about that you are securing business already now in the summer period? Or how should we look at that? If that's more an indication of a sort of healthy market next year? Or is it impacting your business in a more tangible way?

I think -- so we have not been active here. The customers have been active to start discussion concerning next year. But I think there is -- there are 2 elements. First of all, then last year, maybe the customers have learned that the earlier you start discussions, then more secure are your volumes then in next year. And then also -- then customers see that this good situation will continue. It's good to remember that kind of a lion's share of our products are used in end users like food or pharmaceuticals and the consumption of those are quite stable.

And the next question comes from the line of Harri Taittonen from Nordea.

Yes. Just reading in the report that you're saying about this reactivation of some substitution projects, and that could give some sort of boost or demand, which has not been the case earlier. But well, is it sort of any particular end user or type of products that you could specify or kind of give some color on where this kind of substitution could pick up pace?

Yes, it's very easy to answer. It's mainly food segment only, but mainly.

Yes, yes. Okay. Okay. Good. And then while this has partly been talked about already in sort of several ways. But if you think of the cost base and sort of sequential development Q2 versus Q1, and if we then look at Q3 versus Q2, is it sort of similar sort of pace of cost increase? Or is it sort of when you put all these individual items together, what's the kind of overall picture of the shape of the cost inflation.

Henri will answer.

Yes. This is very difficult to predict as we have seen over the last quarters due to very rapid changes in the energy prices, for instance. Some of the cost elements are more stable, like the logistics costs, where we have longer agreements where we can see that. But otherwise, it's really difficult to say. We are, I guess, fair to say that we are not expecting an increase in the pace, but it is there, clearly some stabilization. It's too early to really confirm that either. So we'll have -- just have to see.

And we have 1 more question from the line of James Twyman from Prescient.

Yes. So I was just wanting to know how much of the European market would you say for white top kraftliners and boxboard coming from Russia? And have you noticed a significant benefit from that as well as the negative impact on your exports there?

Yes. So our sales to Russia last year was roughly 130,000 tonnes, and that was only folding boxboard. We don't sell -- we didn't sell white kraftliners that much. If you think about the production in Russia, there is practically only 1 folding boxboard mill having capacity of 200,000 tonnes. So that is quite minor player in this field.

And in white top kraftliners, I think there's quite a bit of production in -- from Russia as well. Isn't that?

I don't have the exact figures in my mind. We can revert to that later, if you like.

Okay. But you have noticed a significant impact on the European market from Russia, effectively?

Okay. But then -- I mean, we are playing -- we are selling mainly coated degrades. I think they don't have those and also then virgin fiber or fresh fiber linerboards kraftliners.

And in terms of white top kraftliners, do you expect those prices to be going up in Q3 as well as boxboard?

More on the folding boxboard side.

And as there are no further questions, I'll hand it back to the speakers.

Okay. Thank you all participants for active participation and good questions. And at this point, I just wish you a good and nice continuation of the summer, and see you and hear you next time. Thank you.