Metsä Board Oyj (METSB) Earnings Call Transcript & Summary

Good afternoon and welcome to the presentation of Metsa Board's Q4 and Full Year 2022 Results. My name is Mika Joukio, and I'm the CEO at Metsa Board. With me is also our CFO Henri Sederholm. Let's first go through the presentation, and we will then open the lines for your questions. I will start with Q4 in brief. Weakening demand for consumer products and destocking in the value chain were reflected in paperboard deliveries and they were lower than in the previous quarter, but also in the corresponding period last year. However, the average sales prices of paperboards increased and sales were therefore 15% higher than in Q4 2021 at EUR 600 million. To respond to the slowdown in demand, we adjusted our production in the fourth quarter with production volume was clearly lower than in Q4 last year. However, for the full year production volumes differed a little from the previous year. And in fact in pulp and BCTMP, the production volumes were at the record high in 2021 -- 2022. Costs continue to increase, especially in chemicals, energy and wood. This of course impacted the Q4 profitability, which after everything, remained very strong. Comparable operating result was 17% of sales. In December, the new recovery boiler and turbine started up in Husum, which will increase the pulp mills' electricity production and improve the energy self-sufficiency of the whole integrate. And once again, we have remarkable success in sustainability. In CDP we managed to achieve A lists in all 3 categories; climate change, forests and water. We will only -- we were one of the only 12 companies that achieved a triple A out of nearly 15,000 companies scored. Excellent work. In addition, based on our continuously strong operating results and solid credit metrics, Moody's upgraded us to Baa2 with a stable outlook. So despite an increasingly challenging operating environment, we managed to deliver a good result in the last quarter of 2022. And if we then look at the full year development through our long term financial targets, the result was excellent. Our comparable return on capital employed was almost 21%, well above our targeted level of 12%. Our balance sheet remains strong with leverage at 0.2x. And the Board's proposal to AGM for the dividend is EUR 0.58 per share, according to our dividend policy, which is to distribute at least 50% of the net result as dividends. Now the paperboard sales and the overall demand situation. The full year delivery volumes were some 6% lower than in the record year of 2021, were due to the pandemic, demand for packaging was boosted by a shift in consumption from services to products. Yet at the beginning of 2022 paperboard demand was at the high level, but declined towards the end of the year. And I'd like to highlight 2 reasons for this decline. First, rapid cost inflation with rising interest rates weakened consumer purchasing power, leading to a fall in demand for consumer goods. Second, a massive destocking in the value chain led to a decrease in order inflow and lower delivery volumes. The fourth quarter was especially impacted by this. And if you look at the situation by product and region, the biggest drop was seen in Europe and in folding boxboard. The end of sales to Russia had also an impact. However, we managed to reallocate the 130,000 tonnes of folding boxboard previously sold to Russia to our other markets in Europe and North-America. Then in H1, we increased our very low stock levels and prepared for investment shutdown in Husum later this year. And in white kraftliners, the decrease in demand was more evident in uncoated grades in Europe. So how do we see the paperboard demand developing going forward? In the short term, demand may remain a little uncertain. Quite -- how long is difficult to predict, depends largely on a global economic situation. However, the long-term demand drivers for recyclable packaging materials, which are increasingly replacing plastics, have not disappeared anywhere. The annual growth of the global packaging market is roughly 4% and within that the growth of paperboard is fastest. Now for market pulp starting with delivery volumes for the full year of 2022. Metsa Board's market pulp deliveries grew by 1% totaling 0.5 million tonnes. Our associated company Mesta Fibre's pulp deliveries decreased by 6%, totaling 2.9 million tonnes. Demand for softwood market pulp in Europe remained at a fairly low level throughout the year. In China, the demand was stable in relation to supply. Towards the end of the year, the demand declined due to the increase in production curtailments in paper and board production in both Europe and in China. Throughout the year, the supply of softwood pulp was limited due to the several production shutdowns rapidly rising costs in energy and chemicals and a shortage of wood especially in North-America. Bottlenecks in logistics, which have reduced supply for a long time, eased towards the end of the year. And pulp prices, they increased from 2021. Before I let Henri move on to financials, let's take a quick look at a couple of key figures in sustainability. In safety, we saw a clear improvement compared to previous year. TRIF was 6.7 still too high compared to our target which is 0 injuries. Energy efficiency improved by 2.7% compared to the base year of 2018. The improvement was a little lower than last year and is partly explained by the production adjustment measures at the end of the year. The use of process water has decreased by more than 12% compared to the base year of 2018. Here, Husum's pulp mill renewal will have a positive impact going forward. And the share of certified wood out of all softwood was 83% against the targeted level of over 90%. But now I will hand over to Henri to open the financials more.

Thanks Mika, and good afternoon. Let's start with sales. As Mika already pointed out, despite the drop in delivery volumes our sales were clearly higher both in the quarterly comparison Q4 versus Q4 as well as in the full year comparison. This is mainly explained by higher paperboard sales prices, which on average improved by 25% compared to last year. Comparable operating results for full year was EUR 521 million corresponding to an operating margin of 21%. And although the last quarter in 2022 was weaker than the 2 previous quarters, profitability was still strong. Operating margin was 17%. Now a closer look at the items that impacted the result, starting from Q4 compared to the same period last year. Operating profit improved by 10% and the biggest positive contributor was improved sales prices, mainly in paperboards. In addition, FX impact and the result share from Metsa Fibre, also had a positive impact. The main negatives were derived from significantly higher costs, especially in energy and chemicals. In addition, logistics and wood costs were clearly higher than in the previous year. Lower delivery volumes in both paperboard and pulp also weakened profitability somewhat. Then moving on to the full year comparison. Comparable operating result, EUR 521 million, clearly exceeded the 2021 level. Also here the biggest improvement came from higher sales prices boosted by the strong U.S. dollar. In 2022, we sold unused emission allowances worth EUR 29 million, which is a little more than last year's EUR 21 million. For this year 2023, we are planning to continue the sales in every quarter. Costs increased in every category. Cost inflation was particularly fast in chemicals and energy. In chemicals, price increases were most notable for caustic soda, peroxides, starch and latexes. Energy costs were driven especially by higher electricity prices. Logistics costs increased due to limited availability of transport capacity and higher fuel prices. Wood costs increased not only due to the higher wood prices, but also higher harvesting and transport costs. In paperboard profitability was weakened by higher pulp prices, but the overall impact of pulp on Mesta Board's result was clearly positive. All-in-all, the total cost increase, excluding pulp, was some 20% year on year. Operating cash flow for 2022 was EUR 232 million, EUR 100 million lower than in 2021. The increase in working capital was EUR 150 million whereas in 2021 it decreased by EUR 50 million. Around half of the increase was derived from rise in the inventory value of paperboard due to cost inflation. Other factors behind the increase were a higher paperboard inventory level and an increase in trade receivables resulting from higher prices for finished products. Cash flow after investment was negative EUR 41 million. And just a reminder about upcoming possible dividend payments. first quarter typically includes the dividend Mesta Board receives from Metsa Fibre, whereas the company's own dividend payment is scheduled for the second quarter. And now for the financial position, which remained strong with net debt at EUR 94 million and leverage at 0.2x, plenty of headroom to our targeted level a maximum of 2.5x. And this position creates a solid platform for our ongoing and planned growth projects about which Mika will tell you more. So back to you, Mika.

Thanks, Henri. And now let's take a look at our ongoing investments. In Husum, the new recovery boiler and turbine started in December. This will increase the pulp mills' electricity production, which will reduce energy and maintenance costs and improve the production efficiency of the whole Husum integrate. It will also improve the integrated energy self-sufficiency and take us closer to our 2030 target of 100% for self-reproduction. Increased energy production will also be needed later this year when the capacity expansion of folding boxboard will ramp up. The annual production capacity will increase by 200,000 tonnes after which the total capacity of Husum's board machine number one will be 600,000 tonnes per year. The added capacity is expected to be full in the market by the end of 2025. In Kemi, we will increase our white kraftliner capacity by 40,000 tonnes after which the total capacity of Kemi's kraftliner machine will be 465 million tonnes -- 46,500 tonnes -- 465,000 tonnes, sorry, per year of coated white kraftliner. The investment will also improve the mill's energy and water efficiency. Here our initial investment estimate was EUR 67 million. But due to the high cost inflation, among other things, it will most likely end a little bit higher. In total, our capital expenditure was EUR 304 million in 2022 of which annual maintenance CapEx was roughly EUR 50 million. On the right-hand side, you can see the indicative timetable for both our ongoing and planned investments. We have started pre-engineering for the new folding boxboard mill in Kaskinen with an annual capacity of 800,000 tonnes. Pre-engineering includes technical and infrastructure design and logistics solutions, tendering for the main equipment and permit processes. The possible investment decision can be made in 2024 at the earliest. In addition, we will continue the Husum pulp mill's renewable during this decade by replacing the mill's old fibre liners with a new one. Investment values for these 2 projects will be specified in the contexts of possible investment decisions. Now let's move on to the near-term outlook, which isn't very easy to predict. Slower than expected economic growth, continued inflation and weakening consumer demand are all creating uncertainty in the operating environment. The visibility of paperboard sales development is rather weak. However, we expect the paperboard delivery volumes in Q1 to remain roughly at the level of Q4. For folding boxboards, we expect higher average sales prices in Q1, whereas for market pulp, the prices are slightly lower compared to the previous quarter. Cost pressure will continue. Especially wood costs are expected to increase. Due to the startup of Husum's new recovery boiler and turbine in December, depreciation will be some EUR 10 million higher in Q1 compared to Q4. And a positive impact from FX and no maintenance shutdowns will support profitability. And with these assumptions, we expect our operating result in the first quarter to remain roughly at the level of Q4. Then to summarize, in 2022 our profitability was at record high. Comparable operating result was EUR 521 million, or 21% of sales. With our successful price increases in paperboards, we managed to more than offset the rapidly rising costs, as well as the slowdown in paperboard demand and decline in delivery volumes. Nevertheless, uncertainty continues in the operating environment driven by global economic challenges and weakening consumer purchasing power. In the near-term, the visibility of sales as well as cost development is rather weak. Despite the challenges, we focus on developing our business, investing in sustainable and profitable growth to increase shareholder value further in the future. The Board's proposal for the 2022 dividend is EUR 0.58 per share. This is in line with our dividend policy and reflects our confidence of huge success. And with that, we end our presentation and are ready for your questions. Thank you very much.

[Operator Instructions] Next question comes from Linus Larsson from SEB.

My first question is relating to your first quarter guidance and the building blocks and assumptions that are baked into that guidance statement. You do quantify the depreciation increase of 10 million. What else would you be able to quantify? And in that context, for instance, how much do you expect would cost increase in the first compared to the fourth quarter? And also how much of a success have you had with regards to your folding boxboard price renegotiation? So a few questions relating to your first quarter guidance please.

Okay. Before Henri will open up these pluses and minuses, I would like to say that the annual volume of price negotiations, they have been successful and we have been able to then also have price increases for these annual deals 2023 compared to 2022. And that is the basis why we say that the prices are expected to increase in Q1 compared to Q4, especially in folding boxboard. But Henri will open more about this plusses and minuses.

Yes, okay. So, well, if we start with the positives so what we can sort of quantify a little bit is the maintenance impact, which is going to be around EUR 10 million positive against Q4. And what comes to the FX impact also, let's say EUR 5 million to EUR 10 million positive against Q4. What we will not be able to quantify at this stage is the impact of the price increases. But that's something to mention also on the positive side here. And then on the negative, so as you mentioned the depreciation minus EUR 10 million. And then the kind of cost inflation impact is also something that we aren't able to specify at this stage. Obviously, wood prices we haven’t mentioned separately, but the cost pressures will continue. Also, otherwise, as we know energy prices are very volatile, even though they have decreased now somewhat so those are the elements.

But is it fair to assume that you're expecting increasing variable costs for non-wood input as well?

That's a fair assumption.

Okay. And then if I may, just on CapEx, do you provide a CapEx guidance for the full year?

Okay, Henri will...

Yes. The guidance is EUR 250 million to EUR 300 million so slightly lower than last year.

Great. And where are we when it comes to the phase 2 in Husum? You've concluded the recovery boiler investment, but when it comes to fibre line, what's the timing of that part?

Yes, the recovery boiler and turbine started up in December and now the fine-tuning kind of period is ongoing at the moment. And then concerning the second phase, as you said, the new fibre line, we do not have the exact date or a year here, but it will be then during -- now we see it so that it will flip in the -- during the second half of this decade. of course, depending on a lot what we will do concerning the Kaskinen investment. So Kaskinen, anyway, this decision will be made. Our target is to make that decision first. So later, during this decade.

Okay. So that's some time away, then I understand.

Thanks.

Next question comes from Johannes Grunselius from DNB Markets.

I have a question on your volumes or shipments for the fourth quarter, and you indicate to us I think that they will be largely flat. I mean, you have obviously free capacity, but are you deliberately avoiding volumes and sort of prioritizing price in this market situation? Or how should we think about that? Could you potentially sell more volumes and have a positive P&L effect, but your reasoning is that it's more important to keep prices. Can you elaborate on that please?

Yes, it's in a way mixture, but of course, the prices are in good level and our intention is not to go down with prices. And of course, then they shut downs or standstills are a kind of natural result of that. That is our approach.

All right. And then you talk about, obviously, quite low visibility in the volumes, but you're still guiding for flat volumes. Is that based on sort of your current or the backlog what you have now and can you elaborate a bit on that please?

Yes, that is based on our backlog but also then our kind of estimate concerning the February and March deliveries. So that's pretty much based on our understanding.

And then final question for me, at least here. I mean, if you separate the U.S. market and European market on the folding boxboard and maybe also white kraftliner, how do you see these 2 geographical markets developing? I suppose U.S. is stronger. It would be interesting to hear your thoughts there.

Yes, the situation in the U.S. comparing to Europe, it's quite similar, actually. The U.S. is slightly stronger, as you said, but the differences are not very big one, big ones.

[Operator Instructions]