Metsä Board Oyj (METSB) Earnings Call Transcript & Summary

Good afternoon, 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. With me, I have CFO, Henri Sederholm; and Head of IR, Katri Sundstrom. Let's first go through the presentation, and we will then open the lines for your questions. Let's start by looking at Q3 in brief. Once again, our comparable operating result was record high, very, very good, exceeded EUR 150 million. This was over 23% of sales. Profitability was mainly boosted by paperboard prices, supported by a strong U.S. dollar. We also did well in production, especially in folding boxboard, the production volumes were high despite the several plants maintenance shutdowns in Finnish mills. The year-to-date total volume for paperboards was at a record high level of 1.48 million tonnes. Our paperboard delivery volumes decreased slightly compared to the previous quarter, mainly in white kraftliners. Cost inflation continued to be rapid. Energy and chemical costs rose even faster than we expected. Russia's brutal war in Ukraine did not significantly affect our business. We have reallocated all Russian volumes to the new markets, and the wood and energy supply to the mills have operated without disruption. And the big news of the quarter was that we have started the pre-engineering for the new folding boxboard mill in Kaskinen and Finland. However, the investment decision on the project can be expected in 2024 at the earliest. So all in all, a very, very strong quarter in terms of performance and operational efficiency. Total delivery volumes in Q3 fell slightly compared to the previous quarter. Volumes in folding boxboard remained stable, but declined in white kraftliners. The first half of the year was strong in white kraftliner deliveries and this, combined with the slowdown in consumer spending, has elevated the inventory levels of our customers. Despite the slowdown in demand, the price level of kraftliners has remained stable or even risen slightly. Customers' concerns about availability have increased as the energy crisis in Europe has got worse. And here is the sales split by region. Overall, volumes were lower than in 2021, when they were very strong. And at the beginning of the year, we started to increase our inventories in folding boxboard to prepare for the investment shutdown in Husum next autumn. Now, market pulp. So far, demand for softwood market pulp has remained stable in Europe, even though the soaring energy costs have increased the downtime in tissue, graphic and specialty paper production. In China, demand has also been stable compared to supply, which has remained limited due bottlenecks in logistics as well as unplanned and planned production shutdowns. In January-September, Metsa Board's delivery volumes in market pulp have increased, whereas our associated company, Metsa Fibre's volume, have remained stable. The price level was higher than in the same period last year. And now I'll hand over to Henri, who will go through the financials.

Thank you, Mika, and good afternoon. Let's start from the top line. Despite the drop in delivery volumes, both in paperboards and market pulp, our Q3 sales were nearly at the same level as in Q2 and were clearly higher than in the same period last year. Our year-to-date sales were almost EUR 1.9 billion, beating last year's corresponding period by more than EUR 300 million or 20%. As already mentioned, the comparable operating result in Q3 was record high at EUR 153 million or 23.6% of sales. For January-September, the operating result was EUR 420 million, already exceeding the full year result in 2021, which totaled EUR 387 million. Now a closer look at the items that impacted our results. We'll start with the third quarter development compared to the corresponding quarter last year. The main positive item was higher sales prices for paperboards. This was supported by a positive foreign exchange impact, and especially the strengthening of the U.S. dollar. Market pulp prices also increased, resulting in a higher result share from Metsa Fibre. The main burden derived from rapid cost inflation, especially in energy, chemicals and logistics. Wood costs have also started to rise, but not to the same extent as other variable costs. And pretty much the same elements, both on positive and negative sides, impacted the January-September results compared to the corresponding period last year. All in all, higher sales prices for paperboards and market pulp offset the negative impacts from rapidly increased costs. And not surprisingly, the positive development was also reflected in the comparable return on capital employed, which reached 24.7% in the third quarter and 21.2% for the rolling 12 months. And now the cash flow. In the previous quarter, operating cash flow was already impacted by high working capital. The increase was derived from higher paperboard inventories, a rise in inventory value due to the cost inflation, and the increase in trade receivables resulting from higher prices for finished products. The same working capital elements impacted the third quarter cash flow as well, although at a slightly moderate pace. The operating cash flow in the third quarter was at EUR 66 million, and free cash flow after the investment was EUR 19 million. Operating cash flow for the last 12 months amounted to EUR 282 million. The balance sheet remained strong, with debt at EUR 91 million and leverage at 0.2. Now back to Mika, who will tell us about investments.

Okay. Thanks, Henri. Now an update on ongoing investments. In Husum, we are expecting the new recovery boiler and turbine to start up in November. So pretty soon. Knowing the energy situation in Europe, it's good timing, because it will increase our bioenergy production and increase energy self-sufficiency. With this, our total electricity sales self-sufficiency will increase from 60% to 75%. Further, the self-sufficiency will increase to 85% when Olkiluoto 3 will start, hopefully during December. The overall investment value has increased slightly from our earlier estimate, totaling now EUR 380 million. The capacity expansions of folding boxboard in Husum and white kraftliners in Kemi are proceeding as planned, and we expect them to start up in the second half of next year. And during Q3, we announced that we have started the pre-engineering for the new folding boxboard mill in Kaskinen. The planning is based on annual capacity of 800,000 tonnes, 100% fossil-free production and world-class resource and operational efficiency. This is pretty much everything we can say about this project at this stage. More information will be provided when, and if, the investment decision will be made in 2024 at the earliest. Then the near-term outlook. Paperboard delivery volumes are expected to remain stable. However, it's good to remember that the seasonally weaker December may impact the order activity. Paperboard prices are expected to increase somewhat. The strengthening U.S. dollar will further support this. Demand for softwood market pulp is expected to be stable, with limited supply. Cost inflation shows no significant signs of slowing down, and the overall weakening of global economy, combined with the erosion of consumer purchasing power, creates, of course, uncertainty. Higher costs, especially in energy and chemicals, will burden profitability. In addition, maintenance costs will be higher in Q4 than in Q3. And with these assumptions, we expect our operating result to weaken in Q4 compared to Q3. But still, I would like to remind that Q3 was best-ever practically and Q4 will be excellent also. And then to summarize. Once again, we had a strong quarter, thanks to our successful sales and efficient production. With these, we managed to offset the negative impacts from rapid cost inflation. We expect the solid demand for premium paperboards to continue, even though there are increased uncertainties in the operating environment. The slowdown in consumer spending, together with elevated inventory levels of our customers, could have a negative impact on demand. However, at the same time, there are concerns about the availability if the energy crisis in Europe escalates. And despite the current challenges, our strategic focus is on the future growth. According to our strategy, we want to grow in fiber-based packaging materials, and for that, we have started pre-engineering to increase our folding boxboard capacity. And before we open the line for questions, I'd like to remind you of our approaching Capital Markets Day on November 10. The day's agenda includes an update on our business and operating environment as well as our strategy to grow in fiber-based packaging materials. It's possible to attend the event either virtually or on site in Helsinki. But more information of this, and the registration, you will find on our website on Investors pages. And with that, we end our presentation and are now ready for your questions.

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

Yes. This is Robin from Carnegie. I have a few questions. If I could start with the question related to paperboards. I was wondering what are you seeing when it comes to current order intake in Europe and also in North America? How would you sort of describe the current level if you compare it to the summer or the spring levels? And is there a difference between Europe and North America activity? So that's the first question, please.

Mika Joukio here. So, the order inflow now is slightly lower than it used to be in spring or summertime. And when -- if and when comparing then the Americas and Europe, the activity level in Americas, especially North America, is higher at the moment than here in Europe.

And is the lower activity level because of high inventories, or is it because the end demand of your customer has weakened? What is your analysis?

Well, our analysis clearly is that the main reason is high inventory levels throughout the whole supply chain.

Right. Right. And the second question I have, related to pulp, clearly, very strong earnings in Q3 when it comes to your pulp business. What should we expect going forward? And maybe if I phrase the question like this, have you already agreed on price declines in either Europe or China? Or should we expect prices to remain at the Q2 level in Q4?

Yes, we need to remember that the pulp price level has been very, very high, almost historical high, but anyway, very high. And in Finland -- sorry, in Europe, we have seen maybe EUR 10 to EUR 30 kind of adjustments and pretty much similar level in China, but still the level is -- price level is very good. And also then the demand is. We expect that the Q4 demand will be quite good.

All right. And then the final question I have is related to cost, particularly related to your wood raw material, pulpwood costs. What -- you call it now, as I understand, some increases for the end of the year, but I guess it was quite stable in Q3. So, you essentially seen quite limited amount of cost inflation from your key cost item, pulpwood. Now, isn't the market quite tight now in the Baltic Sea region? And how do you see sort of the winter, A, when it comes to availability, if we have a wet start to the winter, or B, when it comes to the sort of price level, and I guess that then comes to as a cost with the lag going into '23? What should we expect for the winter and the spring?

If I take first, what wood procurement situation, of course, when we discontinue to take wood from Russia, which was altogether 9% of our overall consumption or need, and then we don't, at the moment, buy from Baltic countries due to the price levels, so we -- procurement is from Finland and Sweden. And we have had -- we have increased our activities. And I'm convinced that we are able to -- Metsa Group is able to supply all wood we need at our -- to our mills. I'm confident. But as far as the price or cost inflation is concerned, Henri will tell you in more details.

Yes, sure. So I would still say that the cost inflation of wood is clearly lower than the cost inflation of our other key raw materials and cost elements. So it has clearly started picking up, as we have mentioned, on the second half, but still, we see that the overall inflation for this year will be lower than the other cost elements.

How should we look into 2023? Then I guess there's a bit of a lag before sort of the higher prices come through the P&L, is something sort of working? I can see statistics of quite significant increases in both Sweden and Finland at the moment, and the direction in both countries are actually up, in some cases, steeply up. Shouldn't this be visible in your P&L sort of -- with a lag of some time?

That's right. There is some time lag, but we are not yet giving any guidance on sort of next year's cost level, as there are so many uncertainties at the moment.

The next question comes from Johannes Grunselius from DNB.

This is Johannes Grunselius, DNB. I have 2 questions. The first one is on FX. You obviously have exposure to the dollar, Swedish krona and that provides you a very nice tailwind, which we saw in the third quarter. Could you help us a little bit in -- give some color on the magnitude on the tailwind, let's say, for 2023? If currency rate stays where they are, what kind of magnitude should we expect for that -- for next year, please?

Yes. So we are hedging the currencies for 6 to 8 months. So that's about the time lag that it takes before the kind of current spot rates hit our P&L in full scale. So we are gradually going to the levels that we are seeing today. So the first half of next year will already be clearly better rates than the second half of this year, and then improve for the second half of next year, considering that the spot rate would stay as it is today. So, of course, things can change. But as we see now, there will be definitely a gradual improvement when we start next year.

Sure. I understand you are exposed both to the spot and then you have your hedging level, but the hedging levels are turning gradually better, right? So that's why I'm asking you on some kind of color or possible range on the tailwind, but maybe you don't want to disclose that one?

We are not going into the details at this stage, so we'd rather sort of comment closer to the time, but we can say only generally that it will be improving.

Yes. Yes. Fair enough. And then my other question is on the expansion when it comes to new folding boxboards volumes in Husum. So you provide some indication of the annual effect, and that's highly appreciated. Should we anticipate some sort of significant effect second half of next year already or that's more coming 2024? That's my question.

Yes, concerning this Husum investment, folding boxboard investment, the start-up will be some time, I mean, in September, October next year. And the stand still will be, at the moment, we estimate like 45 days. And then after that, the start-up period. So of course, the volumes won't increase next year, and then it's understandable that we are building the stocks, inventories at the moment. And then, as far as 2024 is concerned, of course, it depends on the start-up curve. But our estimation is that the rebuild line will reach the target capacity by end of 2025, so that the full capacity, the 600,000 tonnes, could be reached then latest 2026 totally.

Okay. That's helpful. But since you have built inventories now, you will take down operations in Husum to prepare for the expansion. Will it actually mean a sort of a technical short-term effect, which is negative on the P&L? How should we think about that in the third quarter?

Okay. Henri will evaluate that.

Yes, there will be an investment shutdown, which will be sort of more than a month next year. So that will have an impact, but we will give more guidance on that later next year, but that will definitely have an impact.

Okay.

Yes.

But maybe that could be booked technically as a CapEx or is it more of a P&L effect as you see it now?

Well, we don't have the details for you at this stage, but, of course, we are trying to cover also the kind of sales volumes from the inventories for that period. But surely, there will be also some cost elements involved.

The next question comes from participant from UBS.

A couple of questions for me. First of all, just for a bit more precise guidance on 4Q, you've talked about flat paperboard volumes. Can you give us some indication as to what the market pulp volume is likely to be like in Metsa Board and in Metsa Fibre? That's the first one. Secondly, just -- I don't know if you can guide that precisely, but your costs were pretty stable in Metsa Fibre in this quarter, obviously, the wood cost is coming through on a lag. But could you kind of maybe give us some form of sort of range of "cost inflation" you might be expecting in the fourth quarter for both the board business and Metsa Fibre? And just finally on the FBB mill that you're planning, the 800,000 tonnes. I'm just curious about where you expect to place those volumes in the long term. Because it seems [ as though ] the market probably isn't growing enough to accommodate both that and the project from Stora Enso, in addition to quite a lot of new capacity coming out of Asia in the near term. Where do you see that material going? And what gives you confidence that the market will be large enough to take it?

Okay. Okay. First of all, the Q4 volumes. So, as we said, paperboard volumes, our estimation is that they will be flat or stable compared in Q3. Of course, there is always the kind of slowdown in December, but still our estimation is that, comparing Q3, the volumes will be flat. Then, as far as pulp is concerned, the last quarter normally is quite strong in pulp business, and especially December, and remains to be seen. Of course, there are certain uncertainties, but we are positive as far as pulp volume development, both here in Europe as well as in China are concerned. Then if I jump to this, before Henri will tell you more about this cost inflation. But then Kaskinen volumes, of course, the sales plan is part of the planning. Of course, we have had already some plans before this announcement, but our main market is Europe and North America, and our intention is to continue to grow there also then based on the Kaskinen volumes. But then we need to remember that Kaskinen volume, if and when everything -- I mean, if everything goes cause very, very positive, then the earliest possible start-up actually would be 2026, which would mean, if and when we could be able to make a decision then next year. So then the project period is at least 2 years. And then we have the start-up period. So when the kind of remarkable and significant volumes are at the marketplace, it can be easily 2027. So it remains too busy. So -- but our target is to -- our strategic goal is to grow in fiber-based -- fiber packaging materials in long term also. And this is quite a long-term play, so to say. But then the inflation, Henri?

Yes, the cost inflate... sorry.