Metsa Board Oyj

OMXH:METSB

Earnings Call Transcript 2018-Q1

[Mika Joukio, Chief Executive Officer]

Good afternoon, ladies and gentlemen, and welcome to this presentation on Metsä Board's Interim Report for January to March 2018. My name is Mika Joukio, and I am the CEO of Metsä Board. Together here with me, I have our CFO, Mr. Jussi Noponen.So let's start by looking at the first quarter in brief. All in all, our performance was at very good level, and the quarter was the best in many years. Market prices in both folding boxboard and white kraftliners improved, which fully compensated the unfavorable foreign exchange development of the U.S. dollar. Our production and delivery volumes increased, both in paperboard and in market pulp compared to the previous quarter. I want to remind you though that our first quarter is always strong productionwise, since this quarter, unlike all the other quarters, does not include any major maintenance shutdowns. Obviously, this is evident in our results too. Also the fourth quarter, our comparison period here often has lower delivery volumes due to seasonality.Production efficiency was at a good level, and many of our production units set new records in their monthly production volumes. At the moment, the capacity utilization rate of Husum’s folding boxboard is nearly 90%. And from now on, we won't be reporting that figure separately anymore.As we have earlier stated, we believe that full utilization will be achieved by the end of this year. The pulp market continued to grow strong, and market prices kept rising. Obviously, we benefit from that with our annual 0.5 million tonnes long pulp position. And good news is that the credit market also showed strong confidence in Metsä Board. In February, we've upgraded to investment grade by Standard & Poor's. And then a closer look at top line and profitability development. Higher production and delivered volumes together with rising price levels increased our sales, which were nearly EUR 500 million. Last November, we announced an increase in folding boxboard prices in Europe of EUR 90 per tonne. On the average, we achieved roughly half of the announced increase. And in white kraftliners, we have announced 3 price increases during the past year. Our comparable operating result in the first quarter improved by 27% compared to last quarter last year and by 53% compared to the corresponding quarter last year. At EUR 69 million, it was on its highest level in many years. In mid-March, we had to raise our previously given result guidance, mainly due to stronger-than-expected pulp market development. But as earlier stated, the profitability was also boosted by the strong paperboard market and the high production efficiency rate of our mills. In addition, the tailwind in the first quarter from being a maintenance-free quarter was roughly EUR 10 million. Even though our profitability is now developing in the right direction, we still have a lot of potential to improve it, especially in Husum. We will continue our work to improve the sales mix in folding boxboard in Husum. Our total paperboard deliveries in the first quarter were roughly 470,000 tonnes. That is 9% growth compared to the previous quarter and also compared to the same quarter last year. So we are still growing faster than average market growth, which is 3% to 4%. Among all the European producers, folding boxboard deliveries in the first quarter increased by 5% compared to the previous quarter and by 8% compared to the same quarter in 2017. Correspondingly, white kraftliner deliveries grew by 3% and by 2%. The stronger European economy and discussion around the recyclability of packaging materials has driven paperboard demand growth. Moreover, demand for fresh fiber grades is supported by the concern over mineral oil migration from recycled fiber-based board into food.In white kraftliners, increasing demand in point-of-sale solutions in retail and growing e-commerce are the main factors driving demand in the near future. Also, there are no major capacity additions planned on the fresh containerboard side, and operating rates are expected to remain high.During the first quarter, the negative impact from foreign exchange rates, including hedges, was EUR 12 million compared with the previous quarter and [ EUR 15 million ] compared to the same quarter last year. U.S. dollar, which has the biggest impact on our total transaction exposure, will continue to cause headwind. The total currency impact after hedging will be quite small in the second quarter compared to the first but will further increase in the third quarter. Improved profitability was also reflected in the return of capital employment -- employed. In the first quarter, our return on capital employed was almost 16%. And even though it's not shown in here, the 12-month rolling figure was 12.7%. This was above our long-term annual target level of 12%. Our capital employed at the end of review period was EUR 1.8 billion.Our 12-month rolling cash flow from operations was EUR 241 million and free cash flow was EUR 183 million. During the first quarter, the cash flow from operations was EUR 30 million. Together with our sales, the receivables grew compared to the fourth quarter and resulted in a negative impact from working capital. The first quarter cash flow also include advanced payments of employment pension contributions in Finland, which always impairs January-March cash flows against the other quarters.Our financial position is strong, and the amount of interest-bearing net debt is approaching equal to our 12-month EBITDA. Our net debt at the end of March was EUR 335 million, which is more than EUR 100 million less than a year ago. For Metsä Board, light weighting and new barrier solutions are the key focus areas for product development. In January, we launched a bio-based, fully recyclable and biodegradable eco-barrier paperboard, especially for food service use. We will continue the development work to make our boards even lighter, but we're also focusing on new barrier solutions.And then to the near-term outlook. We believe that the good momentum in the paperboard market will continue. A big part of the announced price increase announcements have gone through, and we expect the prices to be steady or even continue to rise in certain grades. We also expect that our paperboard delivery volumes will be at the slightly higher level in the second quarter compared to the first one. And again, I want to highlight that the second quarter as well as the third and fourth quarters will include maintenance shutdowns, which will impact on our results. In April-June, we will have maintenance shutdowns at nearly all our Finnish mills. And also our associative company Metsä Fibre will have shutdowns at 2 of its pulp mills in Finland.Negative impact from the weaker dollar against the euro will continue, and production costs increased in the first quarter, especially driven by wood costs in Sweden and imported wood from the Baltics. Even though we don't see significant cost increases for the rest of the year, our full year production costs will increase from 2017.And then our result guidance. We expect that operating result in the second quarter of 2018 will weaken compared to the first quarter. We have simplified our principles with regard to result guidance. The result guidance is issued when forecast changes in comparable operating result between the current quarter and the previous quarter. And there are 3 levels, weaker, roughly at the same level and better. Previously, there were 7 levels.Then to summarize. We had an excellent start for the year 2018, and we expect the strong performance to continue. The pulp market has remained strong and the market price of long fiber pulp, which impacts on Metsä Board's result, has continued to rise. In addition, the paperboard market has good momentum, and the production efficiency of Metsä Board's mills has been high. The weaker U.S. dollar is still causing headwind. But at least, during the first quarter, the higher sales prices of paperboards offset this negative impact. We still have potential to improve the result, especially in Husum. We will continue to improve our sales mix in folding boxboard by selling bigger volumes to the Americas. And we expect the good market situation to continue. Demand for ecological paperboards is growing and price levels are expected to stay stable or even rise. Ladies and gentlemen, this was the presentation of Metsä board's first quarter results. We are now happy and ready to answer any questions you may have. Thank you.

[Operator]

[Operator Instructions] And we will take our first question from Robin Santavirta.

[Robin Santavirta, Financial Analyst]

First of all, related to the maintenance, obviously, you will now have in Q2. Could you specify the results or the earnings impact you expect those to have Q-on-Q and also year-on-year? So do you have now more maintenance work -- maintenance stops this year in Q2 compared to last year in Q2?

[Mika Joukio, Chief Executive Officer]

Yes. So Mika Joukio here. So the tailwind in Q1 from being practically maintenance-free quarter was roughly EUR 10 million comparing to the other quarters, so second, third and fourth. As far as the annual number of the maintenance shutdowns or days, this is very normal year. Now in the second quarter, all the mills in Finland, except Kemi will have the maintenance shutdown, normal length. And then Kemi will have in quarter 3 and then Husum, quarter 4. So nothing special as such. But the tailwind in Q1 was significant due to the fact that we didn't have any maintenance shutdowns.

[Robin Santavirta, Financial Analyst]

Okay. Good, and then related to the guidance of Q-on-Q declining earnings or comparable EBIT. I -- do I get it right that you expect volumes to improve somewhat, then you expect the prices to be at the same level or improve somewhat, and then mix -- the mix from Husum, but you still expect earnings to decline? I do understand the maintenance, but is this something underlying that I'm missing? Something that burdens your earnings now going into Q2. Because from your presentation, it seems as basically all the others above the operational businesses looks set to improve, Q-on-Q in Q2. So could you comment on this?

[Mika Joukio, Chief Executive Officer]

Yes. You're right, that volumes will slightly -- our estimation is that they will slightly improve, and then prices will be at the same level or slightly higher in certain grades. But then we have this negative impact from maintenance shutdowns as well as then from U.S. dollar against euro comparing the first quarter. Not much, but somewhat anyway. So as a result, then that is our guidance. But nothing special as such as something that we didn't expect.

[Robin Santavirta, Financial Analyst]

Okay. That is clear. And then related to FX, could you comment on what is the impact, the Swedish kronor has weakened significantly now over the past few weeks. So I assume you have some positive impact from that or could you -- would you mind to -- perhaps you, obviously, could comment on what would the annual FX impact on EBIT be if spot rates would remain at the current level?

[Mika Joukio, Chief Executive Officer]

Okay. So Jussi will open a little bit over hedging policy and so on concerning different currencies, so please.

[Jussi Noponen]

Yes. This is Jussi Noponen. Our hedging duration in average is about 6 months. So the recent weakening of Swedish krona, we will start seeing the positive impacts of that only in the fourth quarter this year and especially will be getting a good start for next year. So no positive from that yet in the second quarter.

[Robin Santavirta, Financial Analyst]

Okay. Jussi, you -- could you comment on the full year FX impact on EBIT if we would have the current spot price for the full year?

[Jussi Noponen]

We have not hedged the full year yet, and we are not giving a full year guidance for anything. So the answer is no.

[Robin Santavirta, Financial Analyst]

Okay. And then finally on the wood raw material cost. If I recall correctly, you provided us of -- an estimate of the cost inflation for the full year in the call of the Q4. Is that what you expect now still? Or has that assumption changed?

[Jussi Noponen]

Yes. If we compare year-on-year, so 2017 and -- this year to 2017, so the only wood costs, there is remarkable increase. And okay, even though, we don't give any annual estimates but still, at this point, I can say that it's -- now it seems to be more than EUR 20 million of the impact year-on-year. And then we need to remember that there is other cost inflation elements like salaries, for example, in Finland. So there is slight increase also there. So inflation is clear this year, cost inflation, I mean.

[Robin Santavirta, Financial Analyst]

Okay. But in terms of wood cost, do you expect them to increase Q2 year-on-year -- Q-on-Q?

[Mika Joukio, Chief Executive Officer]

The slight increase in Q2 compared in Q1 but shouldn't be any remarkable -- be anything remarkable.

[Jussi Noponen]

But year-on-year [indiscernible].

[Operator]

And our next question is from the line of Larsson from SEB.

[Linus Larsson, Analyst]

I'd like to ask about this Husum ramp-up and the profitability improvement potential that you previously outlined comparing 2019 versus '16. You've said EUR 100 million result improvement could be achieved, provided that you reach 95% operating rate. Now I wonder how far we are in that ramp-up. And I wonder if you could help us also understand, maybe what expect in 2018 versus '17 on a full year basis in terms of earnings or volumes or something else that you can help us with?

[Mika Joukio, Chief Executive Officer]

Yes. So as you remember, there are 3 elements in this Husum profit improvement. First of all, the lost pulp production or the pulp production that we lost back 2016, when we had this investment shutdowns and startup issues, so that's roughly EUR 25 million. Then we launched then efficiency program concerning fixed costs, that was another EUR 5 million. And then full capacity utilization at normal sales prices was the remaining EUR 70 million. So last year, we already reached the positive impacts from pulp. And so pulp volumes and efficiency program. But only slight improvement in sales. And now we estimate that we reach the rest of the EUR 70 million. So remembering that last year, we reached the EUR 30 million. So reach the rest of the EUR 70 million then during next year and this year quite evenly. So still this profit improvement year-on-year, '16 versus '19 is valid.

[Linus Larsson, Analyst]

That's great. And then I guess, the pulp and the efficiency improvements came gradually during last year. And so my question is, the above rough figure for the full year '18 versus the full year '17 as an improvement figure?

[Mika Joukio, Chief Executive Officer]

So as I said last year, roughly we achieved 1/3 of that profit improvement. And then rough estimation for this year is another 1/3. And then rest of the improvement next year. So this is just, at this point, very rough estimates. But that's the case at the moment.

[Linus Larsson, Analyst]

Okay. That's very helpful. And if I then ask about the [indiscernible] cost ramp-up. You previously said it's been ahead of schedule. I think I read today that it was more like according to plan. How far has that ramp-up come? How much improvement potential is there from the Q1 2018 level still?

[Mika Joukio, Chief Executive Officer]

That's too early to say. The ramp-up -- so ramp-up this year has proceeded according to plans. As you said, last year, we were slightly ahead of the ramp-up curve and this year, more or less precisely on the ramp-up curve. But then what will be the final impact on our result, that remains to be seen because we are not there yet. So remains to be seen. But so far, everything goes as planned.

[Linus Larsson, Analyst]

And then just one final question, if I may, regarding folding boxboard pricing. We put quite a bit of attention on that in our last quarterly call. Now in hindsight, could you maybe summarize for us how the folding boxboard price negotiations ended up in the beginning of 2018, please?

[Mika Joukio, Chief Executive Officer]

Yes. So as I said, the announcement was EUR 90 per tonne, and we roughly -- on the average, we achieved 50% of that. So let's say, between EUR 45 and EUR 50 per tonne, depending on the customer, of course. But on the average, that was the result for European business.

[Operator]

[Operator Instructions] We will take our next question then from Harri Taittonen from Nordea.

[Harri Taittonen, Senior Director & Sector Coordinator]

The -- okay, where to start. There was a news about Metsä Fibre examining potential investment in Kemi. I mean, just wondering if the financing structure could be something similar to what you sort of did Äänekoski, just theoretically, if these plans go ahead.

[Mika Joukio, Chief Executive Officer]

Yes. Mika here. So at this point, it's far too early to say anything. This is just a kind of preplanning or prefeasibility study depending on different options, 2 different options. A totally new pulp mill or then modernized current pulp mill. And so that's far too early to say anything concerning financing.

[Harri Taittonen, Senior Director & Sector Coordinator]

Yes. I understand. Well, maybe on -- the other one on the volume side on the sort of folding boxboard in America. Just wondering why did the America sort of deliveries or sales or even in volume terms, did not grow more than the EBIT given that it's been kind of a core of the Husum expansion. And I'm looking at the EMEA growth, that was more, at least in absolute terms, big year-on-year compared to what you achieved in the U.S. So just sort of wondering if you could put some color on the development on that front?

[Mika Joukio, Chief Executive Officer]

Yes. I mean, in the U.S., of course, growth continued but there -- in America's market. But also there, we put a lot of emphasis on sales mix, that need to be remembered. And as far as the sales from Husum is concerned, production was really good. We had a production record in March, we had a production record in January. And the whole production has been sold and prices are increasing. So I have no worries concerning the American market and our story there.

[Harri Taittonen, Senior Director & Sector Coordinator]

Okay. Great. And the final question on the sort of the market bump statistics of -- and the deliveries. Just wondering what the sort of potential for you with sort of current capacities, first of all, for the -- for your own sort of deliveries of market pulp, they were 124,000, a bit less than last year. And then also looking at the Metsä Fibre pulp deliveries at 177,000, obviously they were up. But just wondering what the sort of volume potential with currently existing capacity would roughly be for your deliveries of market pulp? And also the production of Metsä Fibre pulp, of your proportion of that?

[Mika Joukio, Chief Executive Officer]

So it's higher level mathematics, so to say, that in Husum, when the pulp mill already is running practically full, so we are not able to very much increase that capacity, of course. But then the growth is coming from Äänekoski, so from Metsä Fibre side. And then how quickly that ramp-up will then be finalized to the target capacity, then of course, we will get our share. But the -- all the other mills, both in Metsä Fibre as well as in Husum, they were running full.

[Harri Taittonen, Senior Director & Sector Coordinator]

Okay. Well, just one more, if I may. Just quickly on the possibility to lengthen the maintenance intervals at various mills. It sounds like is it sort of most of the maintenance is still based on kind of an annual cycle, whereas it sems that sort of a -- there are examples so more and more of a longer periods between the maintenance stoppages.

[Mika Joukio, Chief Executive Officer]

Yes. During the course of the years, of course, the maintenance shutdowns are shorter and shorter. But as far as then the interval is concerned, then there are also some legislations that we need to check different issues at the mills and that puts certain limits on that. But what has clearly happened during last, let's say 5, 10 years, so you start the length of the -- of 1 single maintenance shutdown is shorter today than back 5 years ago or 10 years ago. And that is something our action management is working every day to get them as short as possible, but still keep the machinery in good shape and efficiencies as targeted.

[Operator]

Our next questions come from Mikael Jafs from Kepler Cheuvreux.

[Mikael Jafs, Analyst]

I have a question regarding the balance sheet. You have a very strong net debt to EBITDA level currently, 1.1, clearly below your target of being below 2.5. So my question is really, how should we think around this currently very strong balance sheet? That's first part of the question. And then second part of the question, if you could perhaps give some color and flavor regarding potential new and additional investments?

[Mika Joukio, Chief Executive Officer]

So I think these 2 questions are a bit combined. So as you said, our balance sheet is strong. Our net debt to EBITDA is 1.1, as you said. And that, of course, gives opportunities to think different dividend growth and investment options. Here, I also would like to highlight that this 2.5, maximum 2.5 should be the case also when we have heavy investments, if we would have. So that -- we need to be below 2.5 in all times. As I said previously, and I repeated here, that in management, we are planning different options, we are calculating different scenarios. And our intention is to continue to grow over the market growth year-on-year. So we are working on that, but no results yet. I mean, as far as the new investment is concerned, probably you asked our investment plans and not competitors because competitors, I don't comment. But as far as our investment plans are concerned, I already mentioned that they are in the drawing board or planning board at the moment. And then if and when we have decisions, then we, of course, tell about them.

[Operator]

It appears that we've got no further questions at this time. I would like to turn the conference back to the presenter for any closing or additional remarks.

[Mika Joukio, Chief Executive Officer]

Okay. Thank you, everybody, for your attention. And I wish you excellent early summer and nice continuation of the day. Thank you.