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 at Metsa Board. Here with me are CFO, Henri Sederholm; and Head of IR, Katri Sundstrom. As always, let's first go through the presentation and then take the questions. First, Q3 in brief. Unfortunately, the third quarter did not yet bring a turnaround in the sluggish market situation. Demand for paperboard remained muted but stable. Our total delivery volumes decreased slightly from the previous quarter, but not as sharply as in the previous quarter. Volumes are still clearly below the capacity levels, and we therefore continue the production adjustment measures. The good news is that we managed to keep the average sales prices at a good level. There was a small decrease in Europe and Asia, but the situation was stable in North America. However, a good price level was not enough to compensate losses due to low volumes, and the operating result was barely in black. Henri will go through the details later. The pulp market picked up in China. In Europe, the production curtailments among paper and paperboard producers are still slowing down demand. The positive thing is that pulp prices are on the rise in both markets. Third quarter was marked by major investment shutdowns as both the Kemi kraftliner and Husum folding boxboard capacity expansions took place at the same time. We will look at them in more detail later in this presentation. And naturally, the startup of Metsa Fibre's new bioproduct mill in Kemi was also a significant event for the entire Metsa Group. Now a few words about paperboard sales and the overall demand situation. As the graph shows, paperboard delivery volumes have declined for several quarters in a row. Good thing is that the decline has slowed down. Compared to the previous quarter, deliveries in the third quarter decreased by 4%, while the decline from the same quarter last year was much as 25%. In total, year-to-date deliveries have come down by 23% compared to 2022. Currently, consumer behavior drives the direction of paperboard demand. High-cost inflation combined with rising interest rates are eating up consumers' purchasing power, and they are more careful about their purchasing decisions. According to statistics, the value of retail sales appears to be increasing while the volume of products purchased has fallen. In addition, the consumption of cheaper private label products has increased. This slightly negative for Metsa Board's paperboards, which are widely used in branded products. And here is the situation by region and by product. Overall volumes fell in all market areas for both products. Of the single regions, North America has held up best, although even there, demand has fallen from last year's high levels. Imported cartonboard volumes from Asia, and specifically from China, have significantly increased. So far, sales have mostly been directed to Turkey and the Middle East, as well as South America. However, increasing volumes are causing a market imbalance in other regions like Europe. In addition, Chinese cartonboard capacity has grown strongly in recent years. 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 a service concept that helps our customers with various packaging challenges such as reducing the carbon footprint of packaging, reducing plastic use and improving production efficiency. Metsa Board's year-to-date delivery volumes in market pulp were a third lower than last year. Especially the deliveries of BCTMP were reduced because of production curtailments in paper, which is an important end use of BCTMP. Metsa Fibre's delivery volumes were down by 11%. The pulp market has started to show small signs of improvement, especially in China. Since the summer, demand has been at a good level there, while in Europe and North America, demand has been more sluggish. In Europe, the main reason for weaker demand has been the large-scale production curtailments by paper and paperboard producers. However, in softwood pulp, Metsa Group's main grade, the market balance has been maintained by a reduction in global supply. Softwood pulp supply has been reduced by availability issues with raw material in North America, global production curtailments and permanent capacity closures. Year-to-date market prices in softwood pulp have significantly declined compared to the corresponding period in 2022. However, during Q3, prices have been rising especially in China. Before I let Henri move on to financials, let's have a look at how the current market situation is impacting sustainability, and how we are progressing towards our targets. First, safety. Here, our target is zero accidents. Our year-to-date TRIF actual was 6.7, meaning that there is still room for improvement. 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. This year, the share has been 90%. Decreased delivery volumes and the resulting low capacity utilization affected negatively our mills' production efficiency. This was clearly seen in water use and energy efficiency. Water use per produced tonne was higher, and energy efficiency lower, than in the base year of 2018. On the other hand, less production led to a smaller amount of direct fossil-based CO2 emissions, which were almost 20% lower than in the previous year. Here, our target is that both Scope 1 and 2 emissions will be 0 by the end of 2030. But now I will hand over to Henri to open the financials.

Thank you, Mika, and good afternoon. So, lower volumes were reflected in the top line, yet the improved price level offset the negative impacts somewhat. Total year-to-date sales were down by 19%, and in the third quarter, the decline was as much as 26% compared to the same period last year. However, the differences were even larger in profitability. The year-to-date comparable operating result decreased by almost EUR 300 million, or by 71%. And in the comparison between the quarters, Q3 was down by almost EUR 150 million, or 96%, compared to the same quarter last year. Let's take a closer look at the items that affected the result. First, the quarterly comparison. The positive contributors were higher sales prices for folding boxboards and FX impact. And then the negatives. We have already talked a lot about low volumes, and their impact on profitability was quite remarkable – not only because of a decline in deliveries, but also due to production adjustment measures. However, the most significant negative impact, in quarterly comparison, came from weakened pulp prices in addition to the decreased result share from Metsa Fibre of more than EUR 50 million. Large investment shutdowns in Kemi and Husum in the third quarter increased maintenance costs compared to last year. If we examine the whole review period from January to September, the positive contributors were clearly higher paperboard prices, the impact of FX after hedges and increased sales of unused emission allowances. The main negative impacts derived from declined delivery volumes, both in paperboard and pulp, increased fiber and chemical costs and clearly decreased the result share from Metsa Fibre. Metsa Fibre's profitability was hit by lower sales volumes and prices of market pulp, higher wood costs, and the weakened profitability of the sawn timber business. Naturally, the poor result development was also reflected in the comparable return on capital employed, which fell below the long-term targeted level of at least 12%. The rolling 12-month rate was 8.8%, and year-to-date was 6.7%. Capital employed at the end of the period totaled just below EUR 2.5 billion. The weak market situation emphasized the importance of efficient working capital management. Our operating cash flow in January-September totaled EUR 219 million, which was EUR 57 million more than in the corresponding period last year. Cash flow was supported by production adjustment measures, which kept inventory levels moderate. In addition, working capital was reduced by a decrease in the value of inventories, due to the fall in pulp prices. In the comparison period last year, working capital increased due to rapid cost inflation. Operating cash flow in the third quarter was EUR 77 million and after the investments, EUR 33 million. And finally, the financial position. Leverage has somewhat increased compared to the very low levels in 2021 and 2022, but remained at a good level, 0.7. There's still a lot of headroom to the maximum target level of 2.5. The dividend payment in 2023, already took place in the second quarter, was the highest in several years, totaling EUR 206 million. We also have sizable completed and ongoing investments this year. Now, I will let Mika continue with the investment review.

Thanks Henri. So regarding investments, there was a lot of activity during Q3. In our Kemi kraftliner mill, we completed a development program initiated in 2021. The program will increase the mill's production capacity by 40,000 tonnes per year and reduce the mill's energy and water consumption per produced paperboard tonne. Full production capacity, 465,000 tonnes, is expected to be reached during 2024. Target markets continue to be Europe and North America, where we already have a solid market position as a provider of high-quality coated white kraftliner. As part of the program, Metsa Fibre's unbleached pulp production line was transferred to Metsa Board. The modernized production line has an annual capacity of 180,000 tonnes of softwood pulp, and it is fully used in the bottom layer of the kraftliner produced in Kemi. The investment value of the whole program has been revised to EUR 110 million. At the same time, our associate company Metsa Fibre started up their new bioproduct mill in Kemi, which replaces their old pulp mill there. As for Husum, we will increase our annual folding boxboard capacity by 200,000 tonnes. The investment shutdown started in the third quarter and is expected to be finished during the fourth quarter. After the investment, the total capacity of Husum's BM 1 will be 600,000 tonnes per year, and will be fully available on the market by the end of 2025. The investment value is EUR 230 million. 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 2022 at around EUR 50 million. On the right-hand side, you can see the indicative timetable for both our ongoing and planned investments. Our planned investments include the new FBB mill in Kaskinen and the second phase of the Husum pulp mill renewal, including the new fiber line. The investment values, as well as a more detailed timetable for these two projects, will be specified in the context of possible investment decisions. Now for the near-term outlook. The operating environment remains uncertain, and the visibility of paperboard sales development is still rather weak. Rising living costs are affecting consumers' purchasing behavior and the overall demand for consumer products. In addition, growing import volumes of cartonboard from China are increasing competition in Europe. Paperboard delivery volumes in Q4 may decrease slightly compared to Q3 due to the Christmas holiday slowdown. We will therefore continue to adjust production for the rest of the year. The average sales price of folding boxboard is expected to slightly decrease from Q3. White kraftliner prices are expected to remain pretty much unchanged. The total cost level is expected to remain stable. However, Q4 will include fewer maintenance and investment shutdowns than in Q3. The demand for market pulp is expected to remain at a good level in China. In Europe, the production shutdowns in the board and paper industry are expected to continue and limit demand. However, market pulp prices are expected to improve in Q4 compared to Q3. And FX will have a small negative impact compared to the previous quarter. And with these assumptions, we expect our operating result in the fourth quarter to remain at the level of Q3. To summarize: So far, 2023 has been marked by low volumes, both in deliveries and in production. Short-term uncertainty will continue, as demand for consumer products remains low. A change in direction would require an improvement in consumer purchasing power. In this market situation, we will continue our efforts in efficient working capital and sales mix management. This will lead to production adjustment measurements and temporary layoffs. 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 demand. Despite the short-term challenges, we will continue to develop our business and invest in sustainable and profitable growth. I will end my presentation and repeat what I said earlier: the long-term demand drivers for sustainable packaging materials, which are increasingly replacing plastics, have not disappeared. And with that, we are now ready for your questions. Thank you very much.

[Operator Instructions] The next question comes from Johannes Grunselius from DNB Markets.

My first question is on how you view the inventory cycle adjustments in inventories in the value chain has been pretty painful for you and your competitors. Where do you think we are in that phase? Is it largely done or do you see more headwinds in Q4, Q1 here from further inventory adjustments? Can you elaborate on that please?

Yes. Our opinion is that these inventory levels are now pretty much down compared to where they used to be earlier this year and during the first half of the year. So we don't kind of expect that destocking would be a kind of an important factor anymore.

Would you say that this should be a logically a tailwind for you with moving into next year for 1 or 2 quarters, or is it difficult to call?

It's very difficult because, of course, I mean, the consumer behavior is the main driver here and that's very difficult to estimate, of course.

Then my second question is where you think your -- well, it's difficult question. I understand that, but if you can elaborate a bit on how you view the cost curve in your industries in your paperboard niches? Do you see any signs that competitors are closing down production temporarily or even on a permanent basis because they simply cannot cover cash costs at these levels?

I don't want to comment on what competitors are doing. I just simply say that we have taken downtime, we have had temporary layoffs, and most probably other players do the same. But I said I don't have a precise information that.

My final question is, I mean, on the positive side, your prices on your core product seems to be holding up very, very good given market circumstances. Could you just give us a sort of a feeling for how one should think about earnings contribution from incremental tonnes here is fixed, is maybe the margins on incremental tonnes on your core products, like 50% in that ballpark region would be interesting to hear your thoughts there.

I don't want to too much talk about prices. Our intention is to keep healthy price levels. That has been our target during this year, and that will be our target also during Q4 as well as then for next year. So prices, of course play a very, very important role as far as to profit and loss calculations.

The next question comes from Linus Larsson from SEB.

On CapEx and 2024, I'd like to hear your thoughts or maybe even an estimate on the total number for the full year 2024 and your general thinking around a potential project at Kaskinen and Husum partner Phase 2, are those projects, I mean, is it at all possible that they will start burdening cash flow already in 2024, or is that only potentially later on?

So concerning CapEx this year, it's somewhere in between EUR 250 million and EUR 300 million as presented already in the presentation. And the next year CapEx will be lower, how much lower remains to be seen. But at this point, I would say clearly lower. And then concerning these big investment plans that we have for Kaskinen and Husum fiber line, at this point, I would say that no major CapEx will be seen next year concerning those investments. Of course, first we need to make decision and only after that then we will use money for those.

And then maybe getting back to pricing, and I understand there are limits as to what you can and would like to say around folding boxboard price negotiations. But maybe you could at least remind us about the amount of sales that is affected by full year contracts and what's really up for renegotiation at the end of the year? And also maybe if you could in any way comment around the price dynamics. I mean, costs are still high, demand is for the time being weak, profitability is low. How is that going to play out in negotiations? If you could just in any way comment around that would be interesting of course.

Yes. The annual deal and negotiations here in Europe. They are ongoing as we speak, and it's too early to say what will be the result. And then I have earlier said that the prices are pretty much based on demand and supply, but of course the costs also play a certain role. Intention is not only to make paperboard, but the intention is to make money, as I have said several times and that need to be remembered when we have these price negotiations, whether they are here in Europe or they are in North America.

And the sales affected of these negotiations?

Sorry, sales, could you repeat?

Yes. How much of the business are we talking about that is subject to full year folding boxboard price negotiations?

Yes. In in the North America, they are only partly, quite small part is like annual deals, and then here in Europe maybe 50% roughly is the figure.

[Operator Instructions] The next question comes from Andrew Jones from UBS.

I just wanted to ask about this volume trend because volumes in paperboard down 25% year-on-year. From what you said earlier, it sounded like you are not seeing destocking be an issue in that. So are you saying that destocking had no effect on that year-on-year decline in the third quarter? And could you disaggregate, like how we should think about that decline? Is it -- how much is destocking, if any of it, how much is underlying demand and how much is just losses to imports that you've called out in the release? I think if we listen to Huhtamaki or others where -- well, they might say that coffee cups and things like that are down a few percent, we're not talking that scale of demand erosion, like where is that coming from in the underlying market? And if there's no destocking having effect on that anymore, that sounds like really bad news for the underlying market. I mean, what are your expectations for an improvement in the coming months? I've got a follow-up after that, if you could kick off there.

Yes. As, as I said, we don't see that destocking at this moment wouldn't any more take place maybe earlier in Q3 and late Q2, that that was still the case, but at the moment we don't see that anymore. And of course this tough competition, which is then coming also pretty much from China. So Chinese producers, they are very active now here, and that can be seen on the volumes of the European players, where typically like Turkey, Middle East, Latin America, there have been the areas where the European producers have exported volumes and now the competition due to the Chinese and Asian players, it's much tougher than it used to be. So that's very important. And then the Russian volumes, we are not selling anything, not a singleton to Russia anymore, of course. And we used to sell more than more than a 100,000 tonnes annually there. So all these together plus then the consumer purchasing behavior then that leads to situation where we are at the moment.

But I mean, just to push back on that a little bit, I mean, in terms of those import volumes, can you try and quantify how much of an effect that's actually had on volumes, sales volumes, like for yourselves and other European producers? I mean, how significant an issue is this in your addressable market?

Yes, I don't have the clear figure for that, but they are remarkable volumes. We are talking about hundreds of thousands of tonnes.

Yes, you're talking about the delta year-on-year.

Yes, you may remember that these Asian players, they were not very active for example, during COVID when container prices were sky-high from China to Europe, for example. And now the container prices are lower and they have a lot of extra capacity there. So then that has led to the situation where we are.