Metsä Board Oyj (METSB) Earnings Call Transcript & Summary

Good afternoon, and welcome to the presentation of Metsa Board's results from the first half of 2023. My name is Mika Joukio, and I'm the CEO at Metsa Board. With me are CFO, Henri Sederholm; and Head of IR, Katri Sundström. Let's first go through the presentation, and we will then open the lines for your questions, as normally. I will start with Q2 in brief. As the figures show, we had a very challenging quarter, marked by low volumes. Weakened paperboard demand led to low delivery volumes, and we adjusted production accordingly. Paperboard production decreased by 38% compared to Q2 last year. As a result of a prolonged low order intake, we have started temporary layoffs in Finland. The first layoffs were implemented this month, and we will continue them for the rest of the year, if necessary and needed. The good news is that we managed to keep the paperboard sales prices at the Q1 level. And during H1, the price improvement was roughly 15% for folding boxboards and roughly 5% for white kraftliners compared to the corresponding period last year. The global pulp market remained weak and demand for market pulp, especially in Europe, declined significantly. In addition, pulp prices have fallen sharply this year in both China and here in Europe. In June, the European Commission closed the investigation into the wood pulp sector under European Union antitrust laws by concluding that there were no grounds to continue the investigation. Investigation started in 2021, focusing on Metsä Fibre only and did not involve Metsä Board. And once again, Metsä Board was recognized for its excellence in sustainability as we reached the highest platinum level in the EcoVadis assessment. We have a good record behind us as we have achieved the highest rating every year since 2017. And now for the paperboard sales and the overall demand situation. As the graph shows, paperboard delivery volumes have been declining for several quarters in a row. The weaker consumer purchasing power has reduced demand for consumer products, which in turn has been reflected in paperboard demand. In addition, destocking in the value chain has reduced volumes. Unfortunately, there are still no clear signs of a significant turnaround. During the first half of the year, the volumes were 22% down from the comparison period and for Q2, 25% lower than in the same quarter last year. And then here is the situation by region and by product. Overall, there were declining volumes in all market areas for both products. Imported cartonboard volumes from Asia and especially from China have significantly increased as logistical challenges have eased. Chinese cartonboard capacity has also grown strongly in recent years. So far, sales have mostly been directed to Turkey and the Middle East as well as South America. However, this has increased competition throughout Europe. Our aim is to focus on customers who benefit from our paperboards' high performance in our main market areas of Europe and North America. In addition to the high quality of our paperboards, we gain a competitive advantage in terms of security of supply and the service concept that helps our customers with various packaging challenges such as reducing the carbon footprint for packaging, reducing plastic use and improving production efficiency. Now for market pulp. There was rapidly weakened demand reflected in volumes. In the first half of this year, Metsä Board's market pulp deliveries decreased by 100,000 tonnes and Metsä Fibre's by almost 350,000 tonnes compared to the same period last year. During Q2, the market situation for pulp weakened further especially in Europe. Demand has further declined due to prolonged production shutdowns among pulpboard and especially paper producers. In China, economic recovery has not boost demand for market pulp as expected. Market prices in softwood pulp, Metsä Group's main grade, have rapidly declined during this year. Before I let Henri move on to financials, let's have a sustainability recap. In safety, we still have room for improvement if we are to achieve our target of zero accidents. The current figure is still too high. Significant lower capacity utilization affected our mills' production efficiency. This can be seen in energy efficiency, where the development was, in fact, negative as well as in the use of process water where the improvement was clearly lower compared to a year ago. The end of Russian wood imports combined with reduced wood purchases from the Baltic countries increased the share of certified wood fiber of our total wood supply. In the first half of 2023, the share was 90%. But now I will hand over to Henri to open the financials. Please.

Thank you, Mika, and good afternoon. Lower volumes were reflected on top line, even though higher prices offset the negative impact somewhat. In total, sales were down by some 15% year-on-year. In the second quarter, the drop was more than 20% compared to Q2 in 2022. The comparable operating result in January-June was EUR 116 million, approximately EUR 150 million lower compared to the corresponding period last year. Next, let’s take a closer look at the items that affected the results. The positive contributors are the same in both comparisons. The average sales price of all paperboards increased in the first half compared to the first half of 2022: by 15% in folding boxboards and by 5% in white kraftliners. When comparing Q2 against Q2 last year, the sales prices of folding boxboard were higher and white kraftliner slightly higher. The impacts from foreign exchange after hedges, as well as the sale of unused emission allowances, were positive in both comparisons. Now let’s move on to the negatives. The common factor for both comparisons was significantly lower delivery volumes in both paperboard and market pulp. Due to the low demand, we have run the production clearly below capacity, which has burdened the profitability. The rapid deterioration of the pulp market also weakened results. And for Metsä Board, pulp market impacts are high through our ownership in Metsä Fibre. Metsä Fibre's’ profitability took a hit from lower sales volumes and prices, higher wood costs and weaker sawmill business. Metsä Fibre has also adjusted their pulp production to meet lower demand. And finally, cost impacts. Overall costs in the first half, without pulp, increased by 10% compared to the corresponding period last year. The main contributors there were higher wood costs and chemicals costs. In energy and logistics, the negative impacts were slightly more moderate. It’s also important to note that even though the cost inflation has slowed during '23, the benefits are not coming fully through due to low production levels and inventory turnover. The decline in profitability was naturally also reflected in the comparable return on capital employed, which was 9.3% in the first half and 4.6% in the second quarter. The rolling 12-month rate still remained above the targeted level of at least 12%. Capital employed at the end of period totaled EUR 2.6 billion. One of our key priorities now is efficient use of working capital. Production adjustment measures have kept our inventory levels moderate. The operating cash flow in the first half of the year was EUR 142 million, some EUR 50 million more than in the corresponding period last year. However, last year the rapid increase in working capital impacted cash flows. Metsä Fibre's’ dividends are paid in the first quarter, and they were some EUR 25 million higher in '23 than in '22. Metsä Board's’ own dividend of EUR 206 million was paid in the second quarter. In addition to that, EUR 23 million was paid to minority owner of Husum Pulp as dividends. And finally, the financial position, which continues to be strong, leverage at 0.6. Dividend payments impacted the net debt, which grew by roughly EUR 250 million from previous quarter. But now, I will let Mika continue with investment review.

Thanks Henri. So, regarding investments, there will be a lot of activity in the rest of the year. In Husum, we will increase our annual folding boxboard capacity by 200,000 tonnes. Investment shutdown is scheduled from late August to early October. After this investment, the total capacity of Husum's’ board machine #1 will be 600,000 tonnes per year. Due to the fast cost inflation, we have updated the investment value to EUR 230 million from the previous EUR 210 million. In Kemi, we will increase our white kraftliner capacity by 40,000 tonnes, after which the annual capacity of Kemi's kraftliner mill will be 465,000 tonnes. The start-up of the new capacity is at the end of the third quarter, and full production capacity is expected to be reached during 2024. The investment will also improve the mill's’ energy and water efficiency. Our initial investment value estimate was EUR 67 million, but it will also end up higher. And our associate company Metsä Fibre is starting up their new bioproduct mill in Kemi in the third quarter, replacing their old pulp mill. And we are proceeding with our pre-engineering for the new folding boxboard mill in Kaskinen, about which a possible investment decision can be made next year at the earliest. For the full year of 2023, we expect total investments to be in the range of EUR 250 million to EUR 300 million. Maintenance CapEx will remain roughly at the level of last year around EUR 50 million. On the right-hand side, you can see the indicative timetable for both our ongoing and planned investments. In addition to the planned new folding boxboard mill in Kaskinen, we are planning the Husum pulp mill renewal during this decade by replacing the mill's’ old fiber lines with the new one. The investment values for these 2 projects will be specified in the context of possible investment decisions. Now for the near-term outlook. Unfortunately, the operating environment remains uncertain, and the visibility of paperboard sales development remains weak. Growing import volumes of cartonboard from China are increasing competition here in Europe. Rising living costs affect consumers'’ purchasing behavior and the overall demand for consumer products. Inventory adjustment measures in the value chain are expected to follow the market situation. Paperboard sales prices are expected to remain stable in the Americas region but to decrease slightly in EMEA and Asia Pacific compared to the second quarter. The total cost level is expected to remain stable. However, additional costs can be expected from more maintenance and investment shutdowns in Husum and Kemi. Their total impact will be some EUR 10 million compared to Q2. The demand for market pulp in Europe is expected to remain muted as production curtailments in the board and paper industry continue. Seasonality may provide a slight boost to demand in China towards the end of the year. Pulp prices are expected to decline in Europe but remain stable in China compared to Q2. And FX will have a small positive impact compared to the previous quarter. And with these assumptions, we expect our operating result in the third quarter to be weaker than in second quarter. Then to summarize: the second quarter was marked by low volumes, both in deliveries and in production. Short-term uncertainty will continue, as demand for consumer products remains low, and the value chain continues to implement strict inventory adjustment measures. We focus on customers who benefit from the high performance of our products and services in our main market areas, Europe and North America. In addition, we will continue our production adjustment measures to meet the demand. Despite the short-term challenges, we continue to develop our business and invest in sustainable and profitable growth. The long-term demand drivers for sustainable packaging materials, which are increasingly replacing plastics, have not disappeared anywhere. The coming months will be busy, as 2 of our ongoing investments will be completed and the ramp-up of new capacities will start. And with that, we end our presentation and are now ready for your questions. Thank you very much.

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

Now I have a couple of questions. First, in terms of the production curtailment that are you taking in both paperboard and in pulp. Could you share some light about the amounts that you have curtailed in paperboards now in Q2? And what do you expect for Q3 and H2? And also, if you could talk about Metsä Fibre's pulp curtailment and what we should expect down the road this year?

Yes. As far as paperboard and folding boxboard especially is concerned, so we have curtailed production pretty much based on the demand. So target has not been to increase our inventories, and that has then, of course, limited or been the limit for production. I don't have kind of exact figure for you, but maybe you can read between the lines if you compare to the deliveries. And then pretty much the same for pulp. So we have curtailed production also in -- by Metsä Fibre as well as then ourselves in Husum as well as CTMP production in Joutseno and Kaskinen.

I was looking at the Metsä Fibre's pulp deliveries they were down by more than 30% year-on-year, should we sort of think that perhaps the curtailed production is ballpark in that sort of area or do you know if they have increased the inventory of pulp?

Yes. In paperboard, the picture is pretty much as I explained. Then in pulp, the curtailments has been lower or smaller compared to demand. So you are right.

Right. So a bit less curtailments so far in pulp. I have a question related to input costs. When I look at the paperboard business of Metsä Board, excluding the associated Metsä Fibre, it seems as cost per tonne is quite significantly up year on year. And If I go back a couple of years, it seems cost per tonne is up some 50% compared to the average a few years ago. I do understand pulpwood -- cost of wood, raw material costs have increased quite significantly, but then we have energy, chemicals and logistics, I guess that is 50% of your cost base and those are essentially at historically low levels at the moment. So how should we sort of think about the input costs? And certainly, going forward, how should we model it H2? And perhaps if you have some idea or guidance for the next year as well?

Okay, Henri will take this.

Yes, you're right about your comments on the cost level. So as we stated, we had about 10% inflation compared to the first half year last year. And historically, we are still on a very high level. We have seen some cost elements starting to stabilize, even decrease. But as also said earlier, there is a time lag between -- that will hit the P&L. It's partly because of the low production volumes that hits the efficiency and then also obviously the inventory turnover, which makes the time lag. We don't really give guidance to the kind of rest of the year, it remains to be seen, but now it seems that it's gradually coming down.

I understand. And then final question I have is related to paperboard volumes. When I look at the past 5, 6, 7 years, it seems current delivery volumes are some 20%-25% lower than the average over many years and now you guide for the same amounts of deliveries to continue in Q3. I guess, it's too early to expect any kind of major improvement in Q4. Is it so that we should expect a bit of volume recovery to come in 2024 or what is the current visibility? What do you hear from your clients when it comes to demand and this inventory destocking and consumption?

Yes. As I said already in the presentation that the visibility is very uncertain, very difficult to predict what kind of volume development we will see. And for that reason then we say that the volumes will pretty much be at the same level as in Q2. Hopefully, I'm wrong, but I can't say anything else. And then of course, seasonally then Q4 normally is a bit lower than Q3 and Q2, but it remains to be seen, I mean due to Christmas time and December. But at the moment, it's very, very difficult to predict. And for that reason, the best estimate at the moment is that the volumes will be stable in Q3 comparing Q2.

The next question comes from Linus Larsson from SEB.

Mika, you mentioned increased competition in Europe. Could you please elaborate a bit on that? Where do you see that? How substantial is that? Is it a major headache? Does it impact pricing? Are you losing market share? Could you maybe expand a bit on that return competition, please?

Yes. Kind of the Asian producers have been more active now, not only here in our area, I mean, in Middle East and Turkey, but also in South America. And the reason is that there has been new capacity or start-ups of new capacity both last year as well as early this year. And that has then impacted also our deliveries, for example, to Turkey and South America and that has tightened the situation, all in all. So even though they are not here in kind of main continental Europe, they are in the areas like Turkey, like Middle East, like South and Central America and that then -- because the kind of paperboard flows, they are global, and that then tightens the situation.

Right. Right. And is it your feeling that it's still increasing or is it -- has it stabilized at a certain level? Or what's kind of the trend for the time being?

Yes, that's difficult to say. Historically, I mean, these Asian producers, they are coming and going based on the currencies and based on the local demand, especially in China and so on. So it depends on what will happen in China as well as -- as far as the GDP growth is concerned and how the local demand continue to develop. These producers, they don't have any kind of remarkable service concepts, for example, for these markets, they just simply deliver container by container, and that's the way they are operating in this business. But at the moment, the volumes are higher than they have normally been.

Great. And then just maybe jumping back to the production curtailments that we just discussed, I think this was the third quarter in a row where shipments have exceeded production in your paperboard operations, so you were cutting inventory effectively. And now in the third quarter, you have quite a bit of maintenance activity. So I understand this whole inventory situation, the main problem isn't on your side. It's in the supply chain altogether. But how do you look at your own inventory situation, and are you aiming to lower inventory situation or are you pretty happy where they're at?