Metsä Board Oyj (METSB) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the presentation of Metsa Board's results for January-September 2024. My name is Mika Joukio, and I'm the CEO at Metsa Board. Here with me is CFO, Henri Sederholm. So let's go through the presentation first and then take the questions. Let's start with the Q3 summary. In the paperboard business, the third quarter remained pretty similar to the previous quarter. Our paperboard volumes increased slightly and prices remained flat. Paperboard production volumes increased by over 100,000 tonnes compared to Q3 last year and by almost 60,000 tonnes compared to the previous quarter. Last year, volumes were curtailed by production adjustment measures and major investment shutdowns. And in Q2 this year, the production was impacted by political strikes in Finland and the gas explosion at Metsa Fibre's bioproduct mill in Kemi. However, the past Q3 also included many planned maintenance shutdowns impacting not only volumes but also profitability. Delivery volumes in market pulp fell sharply and the main contributor was weak demand in China. Metsa Board had no deliveries to China during Q3. The gas explosion at the Kemi bioproduct mill in March led to significant production and sales losses as well as extra costs in Q2. We have estimated that the negative impact on our operating result totaled EUR 40 million, including the impact from Metsa Fibre's result share. In the Q3 operating result, we recorded EUR 23 million in insurance compensation, including the impact from Metsa Fibre's result share. Negotiations with the insurance consortium to compensate the remaining estimated financial losses are continuing. After the review period, we renewed our dividend policy. According to the new policy, our target is to pay a dividend of at least half the result for the financial period over time, taking into account the company's future investment and development needs. There is no major change to the previous policy. Dividends will continue to be an essential element of our capital allocation. After declines in '22 and '23, the trend in paperboard delivery volumes has been upwards in '24. We have witnessed moderate growth in every quarter. In the third quarter, deliveries were 14% higher than in the same period last year and 3% compared to the previous quarter. Year-to-date, delivery volumes totaled over 1.1 million tonnes. I think this is a good achievement given the challenges we have faced earlier this year. Also visible in the graph, the demand growth was rapid in the first quarter, driven by restocking activities. After that, demand growth has slowed. As a result of the higher cost of living, consumers' purchasing behavior is still rather cautious and more consumption is directed at services than products. And here is the paperboard sales split by region and by product. Folding boxboard sales have strengthened in each market area compared to last year. EMEA especially has performed well despite the fact that Asian import volumes have continued to grow. In white kraftliners, deliveries have been stable. The explosion at Kemi fibers -- sorry, Metsa Fibre's Kemi bioproduct mill somewhat affected our kraftliner production and deliveries, even though we managed to start the production with dried pulp and by using alternative energy sources quite quickly after the accident. Now let's move on to market pulp, which has shown a lot of volatility recently. Metsa Board's year-to-date market pulp delivery volumes increased compared to the corresponding period last year. However, volumes fell sharply in Q3, largely driven by the low activity level in China. Metsa Fibre's total delivery volumes in 2024 are somewhat behind last year. In September, Metsa Fibre announced that it will adjust the production due to the market conditions. During 2024, demand for market pulp has been at a good level in Europe, but slower in China. However, buying activity in China has picked up in September. At the same time, pulp demand in Europe has softened slightly, mainly driven by lower activity in printing and writing end uses. Unlike hardwood pulp, the supply of softwood pulp has been limited for several reasons. First, there have been a lot of planned but also unplanned shutdowns as well as market-related shutdowns. Earlier this year, the political strikes in Finland limited pulp production. In addition, the global logistical bottlenecks have continued throughout the year. Softwood pulp price have risen sharply in 2024 in Europe, but has now started to decline. In China, the price changes have been more moderate. And now the key sustainability figures and the year-to-date development. Our TRIF, 3.2 has shown an improvement, but has still not reached the target, which, of course, is 0 accidents. The share of certified wood fiber was at 92%, which is above our target of over 90%. Fossil-based CO2 emissions, Scope 1 totaled 138,000 tonnes, very much in line compared to the last year's development. Energy efficiency and water usage are moving in the right direction, but lagging behind the targets. And now I will hand over to Henri to present the financials.

Thank you, Mika, and good afternoon. Our quarterly sales have remained fairly stable, landing at EUR 499 million in Q3. Year-to-date sales were just under EUR 1.5 billion, while in the comparison period, they were slightly above this. The positive impact from increased paperboard volumes was offset by lower prices. The operating result for January-September, EUR 73 million was well behind the corresponding period last year, EUR 121 million. The operating margin for the review period was 4.9%. And now let's take a closer look at the items that affected the result starting from July-September compared to the same quarter last year. Our paperboard deliveries increased by almost 50,000 tonnes and supported the operating result. Higher pulp prices had a positive overall impact on profitability, even though the cost of purchased pulp was higher. In other variable costs, energy and chemicals became cheaper, whereas wood costs remained stable. The result share from Metsa Fibre was higher. And as already mentioned, Metsa Board's Q3 operating result includes a total of EUR 23 million in insurance compensation. This includes the impact from Metsa Fibre's result share, which accounted for almost half of the compensation. On the negative side, the main contributor was the lower folding boxboard price. Also, FX had a negative impact. Q3 maintenance costs and employee costs were higher. And finally, depreciation has increased due to major investments completed last year. Then moving on to the whole review period, January-September. We have a lot of the same result elements as in the quarterly comparison. The main positives were increased delivery volumes, higher pulp prices and lower energy and chemical costs. On the negative side, we had lower folding boxboard prices with increased wood costs and more maintenance and higher depreciation. The sale of unused emission allowances was EUR 20 million lower than in the previous year. Metsa Fibre's profitability was weakened by lower pulp volumes and higher wood costs, among other things. And finally, both the Kemi mill explosion and political strikes in Finland have had substantial impacts on our results. The losses caused by the explosion were partly offset by insurance claims received in Q3, although negotiations with insurance consortium are ongoing. In Q3, the comparable return on capital employed jumped to 7.3%. And for January-September, it was at 4.3%. Rolling 12 months was at 3.4%. These are still low percentages and clearly below our target of over 12%. Capital employed at the end of the period totaled roughly EUR 2.5 billion. Our cash flow has been unsatisfactory and has declined. This year, working capital has been growing from a very low level at last year-end due to an increase in operational activity and the completion of major investment last year. In addition, dividend payments from Metsa Fibre dropped clearly EUR 10 million this year compared to EUR 83 million last year. Combined with low profitability, this has kept operating cash flow negative for almost the whole year. The rolling 12 months operating cash flow was EUR 112 million and free cash flow was EUR 25 million negative. Our net debt rose to roughly EUR 350 million, the highest level in the last 5 years. In 2024, liquidity has decreased due to unsatisfactory cash flow and dividend payments of roughly EUR 90 million. In addition, interest-bearing debt has increased somewhat since the end of '23. Our leverage is now at 2.0, which is still below our maximum target level of less than 2.5. And that's all from the financials. So now I'll hand over back to Mika.

Thanks, Henri. So let's look at investments. Before turning on -- turning to ongoing and future investments, let's recall 2 major investments we completed last year at Husum and Kemi. Both projects are still in their ramp-up phases. In Husum, we have increased the folding boxboard capacity by 200,000 tonnes, which we expect to be fully available on the market in 2026. In Kemi, we increased annual kraftliner capacity by 40,000 tonnes, which [ we ] expect to be fully available on the market in 2025. Next summer, there will be a longer shutdown at the Kemi integrated mill when the new evaporator units in Metsa Fibre's bioproduct mill will be installed. During the installation, which is expected to last 2 months, we can utilize the same special arrangements we did this year to keep production running and ensure our customer deliveries. As part of the EUR 110 million investment in Kemi, we bought an unbleached pulp production line from Metsa Fibre. This transaction was closed in September. And during January-September, our total investments were EUR 121 million. For the whole year, we estimate the total investments to be EUR 175 million to EUR 200 million. The estimate has increased from the previous estimate of around EUR 150 million due to the purchase of unbleached pulp production line from Metsa Fibre. And now our ongoing and planned investments. Earlier this year, we made an investment decision to renew the paperboard machine in Simpele. This is now ongoing with an estimated investment value of EUR 60 million. The next steps in Simpele will be the renewals of the paperboard finishing area and mechanical pulp production as well as a new power plant. At the Kyro board mill, we have started a program to improve the performance of the current barrier board and expand its end-use areas. In Husum, the second phase of pulp mill renewal will include a new pulp drying machine. The first phase included the new recovery boiler and a turbine completed in 2022. And finally, in Husum, we have started a program for new products on the current BM 2 white kraftliner production line. The aim is to find innovative solutions for the growing food and food service packaging segment. And now the near-term outlook. Overall demand for consumer products continues to be impacted by consumers' purchasing power and the general purchasing behavior. Seasonally slower December may have some impact on demand, and we, therefore, expect our paperboard delivery volumes to decrease slightly from Q3, but average sales prices to remain stable. Total costs, excluding pulp costs, are expected to increase, in particular, wood costs and fixed costs are rising. Maintenance costs will be clearly lower than in Q3, and the positive impact from this will be at least EUR 10 million. Sales prices of market pulp fell in October, so the average price in Q4 is likely to be lower than in Q3. However, demand for softwood pulp is expected to remain stable in Europe and North America. And in China, demand is normalizing after a very slow Q3. The claim settlement process regarding the explosion at Kemi bioproduct mill will continue. And we expect our Q4 operating result to be weak unfortunately from Q3. The guidance does not take into account the insurance compensation included in the July-September operating result nor possible insurance compensation for Q4. To summarize, the paperboard market has picked up from last year's very low levels. However, the strengthening of overall consumer product demand has been slower than expected as consumers' purchasing power continues to be negatively impacted by the high cost of living. Consumption has been focused more on services than on products. The trend in variable costs has been mainly downward during this year, with the exception of wood costs, which increased by 7% from the comparison period. Fixed costs have remained more stable. Our strategy is to grow in fiber-based packaging materials and to renew our industrial operations. We implement this strategy with investments, which are improving our competitiveness, accelerating our target of being fully fossil-free in production and developing future products to replace plastics. We have renewed our dividend policy to better reflect our future investment and development needs. At the same time, dividends remain an essential part of our capital allocation, and we aim to continue to distribute dividends of at least half the result for the financial year over time. And with that, we end our presentation and are now ready for your questions. Thank you very much for your attention.

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

Yes. First of all, I have a question relating to the pricing of paperboards in Q3. When I do your numbers, I end up with a setup where you would have had mid-single-digit sales price declines on average in Q3 versus Q2 in your paperboard business. First of all, is that correct? And secondly, what is the reason where have prices and why have prices declined in paperboards? And what is the outlook for Q4?

Yes. So the prices, they have not declined. The kind of difference is coming from the mix pretty much. So that is not the truth. And concerning then Q4, our estimation is that prices remain stable.

Right. So weaker mix in Q3 versus Q2.

Yes.

What should we expect going into Q4 in terms of mix? Is it similar to Q3 or is it better, worse?

Similar to Q3 pretty much.

All right. The second question I have is related to capacity utilization. You have expanded capacity in Husum. You have expanded capacity in Kemi as well in paperboards. Deliveries are still -- the market demand is quite soft. What is the current capacity utilization in paperboards? And how do you plan to manage it in Q4? And in the winter, it seems EBITDA in the paperboard business is coming quite close to breakeven. Do you plan to curtail production due to market reasons? Or what is the outlook in terms of production?

Okay. The capacity utilization rate at the mills that you mentioned, I mean, Husum board machine #1 and then, I mean, the folding boxboard line and then the Kemi mill, they are running full because they are in the ramp-up phase. Of course, they are not having the full capacity yet. But as far as the operating rate as such is concerned, they are running pretty full. But then the other mills, the situation is worse. During the first quarter, we were very close to kind of full capacity utilization, as you may remember. But then Q2 and Q3, then the order inflow got weaker. And for that reason -- for that reason, we have taken already downtime, so curtailed production, and we will do so also during Q4 if the order inflow remains weak. So we take downtime and possible also is that, that we have temporary layoffs. So we have negotiated this. So it's possible to have these layoffs still during Q4. But that is pretty much the situation. So...

Yeah, I understand.

So, yeah, Husum and Kemi, they are speeding up and then the other mills, other production lines, they are taking downtime.

Yes. Yes. And if I may, a last question. It's related to pricing, again, related to paperboards. I read that one of your Continental European competitor, the largest one, said last quarter that there's essentially a price war when it comes to consumer board in Europe at the moment and essentially somebody needs to shut production in order with the current demand situation to get prices up. Would you subscribe to that kind of sort of comment that it's a bit of a price war setup in virgin fiber consumer boards? Or is that sort of something you don't see or believe -- you believe simply it's a soft market?

Yes, I wouldn't say so. At least we are not in war with anybody. We said that the prices will be -- our prices will be stable during Q3 and also then same statement for Q4. So I don't kind of underline that statement.

I understand.

The next question comes from Andrew Jones from UBS.

A bit of a follow-up to the last question about what's needed to actually stabilize the market. I mean this situation clearly isn't sustainable. We thought we were on a bit of a recovery track earlier in the year. Now we're sort of seeing that go the other way. Clearly, capacity needs to come out in this market given how low operating rates are. And looking at the [ VC ] cost curve, it appears that you're generally -- you have a number of assets close to the top end of that mill, including like Tako and Aanekoski and I think Kyro as well, they're all above the 80th percentile according to that. Now, first of all, do you think that's accurate? And secondly, I mean if it's not a large player like yourselves taking out capacity, like how can you rely on anyone else to do so? I mean, clearly, something has to change. I mean, are you cognizant of that? And do you think that you would have to be the player to take that action?

Yes, you're right that we are -- we have curtailed production capacity. And if situation continues to be as today or during Q3, we will continue to do so at the mills that I -- not necessarily in Husum or Kemi, but other mills in Finland. And at the moment, of course, we don't have any plans to kind of to close down any production lines. We take these temporary layoffs knowing that the situation at the market is not normal. I mean, the purchasing power of the consumers is still weak or it's uncertain. People are not using the kind of money for products as much as earlier. They are using it for services and so on. That probably will change when the purchasing power is getting better remains to be seen. Then of course, the Chinese are still -- they are quite strongly in, for example, in Turkey, in Middle East and that kind of markets. And when the situation in China is getting better, I mean, the purchasing power of the Chinese people is getting better and the economy is getting better in China, that probably will change the situation. But at the moment, we don't have any plans to kind of close any capacity.

Okay. I mean just observing those trends you've talked about. I mean, clearly, we could do with improvement in consumer demand, but the structural issues of higher wood costs, I don't think are going away. I think also in looking for an improvement in China might be optimistic given we might have a Trump presidency coming down the road to work tariffs on the country. I mean those large Chinese mills are still ramping, and we should be seeing more capacity going into next year. I mean it doesn't feel like any of this is changing. So I mean, someone's going to close something. And again, you've got a number of mills there, and taking out some fixed costs, I would imagine that probably improves your margins and I guess, would also help the shape of the industry. But I don't know, I think -- yes, I guess there's no question, but I think it's food for thought at least. Just one follow-up on the financials. Just for 4Q, any strong -- can you just talk us through the moving parts in terms of the delta for the FX move, for the additional maintenance, for any sort of -- I mean, you said there's no real mix effect, but can you just put some numbers around some of those factors you called out?