Metsa Board Oyj

OMXH:METSB

Earnings Call Transcript 2020-Q1

[Mika Joukio, Chief Executive Officer]

Good morning or good afternoon to everyone, depending on your global location, and welcome to the presentation of Metsä Board's first quarter results. My name is Mika Joukio, and together here with me, I have our CFO, Jussi Noponen; and Head of Investor Relations, Katri Sundström. Let's start by putting the quarter in a nutshell. At the beginning of the year, Finnish paper workers went on a 2-week strike. Obviously, this had a big negative impact on our operations and profitability since the majority of our mills and all Metsä Fibre's pulp mills are allocated in Finland. However, even larger negative impact on earnings compared to the first quarter last year was caused by the decline in market pulp prices. On the other hand, the cash flow from operations was exceptionally strong for the first quarter, EUR 80 million. Mainly due to the coronavirus pandemic, total paperboard delivery volumes ended up higher than we earlier estimated. And despite these exceptional circumstances, our development projects, such as the Husum pulp mill renewal and the modernization of the finishing area at the Kyro mill are proceeding according to plan.In March, we started the foundation work for the new recovery boiler in Husum. However, the final investment decision is still pending on the renewed environmental permit. And the Board's proposal for profit distribution from last year remains unchanged.Then a few words how the coronavirus has impacted us so far. What has been positive for us is the strong demand for fresh fiber paperboards, especially in end uses like food, beverages and pharma. Of course, we have to remember that this strength is likely to be temporary and will not last forever. But so far, our order books have remained strong. In order to avoid close contacts, we have postponed some of the maintenance work planned in Q2 to the second half of the year. So far, our logistics have worked fairly well and we have not faced any shortages with containers. There have been some bottlenecks in logistic capacity in Europe due to border checks and the fact that not all drivers are willing to drive to some of the affected regions. Even though the impacts from the coronavirus on Metsä Board's operations have so far been quite minor or even positive, we have to be prepared for tougher times. A global recession is starting to look quite inevitable, and Metsä Board cannot avoid its negative effects. However, our financial position is strong and the maturity profile of our loans is healthy and our liquidity has remained strong.Before moving on to the results, let's have a look at Metsä Board's current product portfolio and the main end uses of our fresh fiber paperboards. Out of our 2 million tonnes of paperboard capacity, roughly 2/3 are folding boxboards, including the food service boards; and 1/3 are white kraftliners. Roughly 50% of our folding boxboards are used in food and food service packaging and mainly in food. Some 40% are used in more general consumer goods packaging, such as pharma and cosmetics. And the rest goes to graphical end uses. The maturity of our white kraftliners go to various retail needs, such as shelf-ready solutions, point-of-sale displays and fresh fruit and vegetable boxes. E-commerce represents quite a small share in our portfolio, some 10%, but yet it's growing fastest. All in all, the demand for our paperboards is very much consumer- and retail-driven.Then to the results, and let's start with the total delivery volumes of our paperboards. Strikes at our Finnish mills impacted negatively on our volumes, especially in February. However, demand accelerated towards the end of the quarter and our first quarter deliveries ended up on a higher level compared to the previous quarter or to the same quarter last year. Total deliveries were 450,000 tonnes, a little higher than we had estimated.Then a closer look at paperboard sales and the drivers behind the demand in the first quarter compared to the corresponding period last year. In the EMEA region, delivery volumes in folding boxboard were stable but increased in white kraftliners. The price level in folding boxboard remained stable but declined slightly in white kraftliners. In Americas, total paperboard delivery volumes grew slightly. The average selling price of folding boxboard increased mainly due to the improved sales mix and remained stable in white kraftliners. Both in Europe and the U.S., demand for food and pharma packaging has been strong as consumers have been stocking up on essentials. At the same time, demand for luxury products has suffered. In addition, booming e-commerce, especially in the U.S., has increased the demand for white kraftliners. In the Asia Pacific region, which is not a big of a market for us, total paperboard delivery volumes remained roughly at the level of the first quarter last year. Our operating result in the first quarter was EUR 34 million, which was clearly lower compared to the level a year ago, EUR 62 million. The main reason for weakened profitability was the decline in the market pulp price. Then the strikes at all our Finnish mills burdened the operating result by EUR 20 million, of which EUR 15 million hit the first quarter. All these amounts include the impacts from our associated company, Metsä Fibre. On the positive side, we had lower production costs. In particular, wood and energy prices declined compared to the last year's levels. Also FX after hedging had a positive result impact compared to Q1 last year.Our first quarter sales were EUR 472 million. The decline in sales was not as big as it was in profitability and is explained by the fact that the result contribution from Metsä Fibre doesn't show in the top line. The market pulp price decline in 2019 decelerated towards the end of the year. And this year, the prices have been quite stable, both in Europe and in China. But as said, the recent price decline has had a big negative impact on both Metsä Board's and Metsä Fiber's profitability. Globally, we are still seeing very high inventory levels, especially for short fiber pulp. The effects of the coronavirus have also been seen in the pulp market. The demand for long fiber market pulp, which is our main grade, has been supported by increased demand in tissue and hygiene products. At the same time, the consumption of printing and writing paper has declined and reduced the demand for pulp, especially here in Europe. However, this, in turn, has reduced the availability of recycled paper and has increased the demand for virgin fiber. Several market pulp producers, including Metsä Fibre, have postponed planned maintenance work in the second quarter to the second half of this year.Then our long-term financial targets and dividend. In the first quarter, our return of capital employed was 7.6%, far from our targeted level of at least 12%. And this is mainly due to the reasons I have already explained, cheaper market pulp and strikes at the Finnish mills. Our financial position is strong. At the end of March, our net debt-to-EBITDA was at the level of 1, so there is a lot of headroom to our ceiling target of 2.5. Our dividend policy is to distribute at least 50% of our net result to shareholders. The Board's proposal of the profit distribution from 2019 is EUR 0.24 per share, which corresponds to 59% of net result. The Board has confirmed this proposal, and it will be presented to the Annual General Meeting which is planned to take place on the 11th of June. Then our cash flow, which was exceptionally strong, EUR 80 million in the first quarter. There are 2 main reasons for this strength: First, the strong working capital growth, which is typical for the first quarter, did not occur due to the production losses caused by the strikes at Finnish mills; secondly, the lower pulp price has increased the share of Metsä Board's own board mills and correspondingly reduced the share of the associated company, Metsä Fiber, in generating cash flow. Q1 operating cash flow includes the dividend received from Metsä Fiber, EUR 22 million.So despite the exceptional circumstances, our investment projects are proceeding according to plan. Here is a brief summary of the Husum pulp mill renewal. In March, we obtained the building permit for the new recovery boiler and the foundational work at the site started immediately. We are still waiting for the amended environmental permit to be issued by the Swedish authorities, which we estimate to receive earliest in Q2. Once we receive that, we can make the final investment decision on the first phase of the investment. The total investment value of the first phase is EUR 320 million. In the first quarter, the investments in this project totaled EUR 24 million.Before moving on to the near-term outlook, I will let CFO, Jussi Noponen, go through our financial position. So please Jussi, go ahead.

[Jussi Noponen, Chief Financial Officer]

Thank you, Mika, and hello, everyone, Jussi Noponen here. Before moving on to our financing, I'd like to remind you that Metsä Board's paperboard business is quite defensive, so the downside risk is smaller than in many other industries. As Mika has already pointed out, the majority of our paperboards are used in the packaging of essentials, in segments like food, beverage and pharmaceuticals. The consumption of these products is not so strongly dependent on economic conditions. However, should the coronavirus cause a long and deep global recession and a plunge in our paperboard demand, our strong financial position would protect us for quite some time. Firstly, the maturity profile of our debt is healthy. Last September, we agreed on a new financing arrangement, consisting of a 5-year drawn loan of EUR 150 million, together with a revolving credit facility of EUR 200 million, which is currently totally undrawn. As shown on this slide, our first meaningful debt repayments take place in 2025. The financing package for the Husum pulp mill renewal has also been agreed, and we will disclose the details once the final investment decision has been made. Secondly, our liquidity is strong. In addition to the undrawn RCF, we had EUR 180 million of liquid funds at the end of March. Further, our liquidity is complemented by Metsä Group's internal credit facility of EUR 150 million and pension premium funds of EUR 190 million. So all in all, using the widest definition of liquidity, we have over EUR 700 million available. And now back to Mika.

[Mika Joukio, Chief Executive Officer]

Okay. Okay. Thanks, Jussi. And then how do we see the near term? First of all, the negative impacts of the pandemic on Metsä Board's business operations are very difficult to estimate on the long run. We don't know for how long the situation will last and what are the final impacts on global economy and thus, Metsä Board's profitability. However, at the moment, we are seeing a good demand on our products and our current order books are strong. Based on this development, we estimate that our paperboard delivery volumes in the second quarter will remain at the level of the first quarter. Also, we expect paperboard prices in all our main market areas to be stable. The supply and demand of long fiber pulp is expected to remain balanced, and prices are not expected to decline further. Several producers have already started to announce small price increases both in China and here in Europe, including Metsä Fiber. Due to this coronavirus, some maintenance works planned for April, June have been partially postponed to the second half of this year. However, we don't expect any major changes to production costs. So based on these assumptions and current visibility, we estimate that our operating result in the second quarter will be better than the first quarter. Then to summarize. In the short term, the demand for Metsä Board's pure and safe fresh fiber paperboards has increased as consumers have been stocking up on essentials: food, beverages, pharmaceuticals. We believe that at some stage, this accelerated demand will slow down and possibly even start to decline, but when and by how much that is still unclear. However, it's quite fair to assume that the negative impacts of the pandemic on the global economy will also have an impact on Metsä Board's profitability. However, I'm pleased to say that Metsä Board's financial position is strong, which will support the continuity of our business in the coming months. Also, our development projects such as Husum pulp mill renewal are progressing according to plan. Right now, our main tasks are, in addition to securing business continuity, to make sure that our personnel stay safe and healthy and that we do everything we can to prevent further spread of the virus. Now that was the presentation part of our first quarter results, and we are ready for your questions. So please go ahead.

[Operator]

[Operator Instructions] Our first question comes from the line of Harri Taittonen from Nordea.

[Harri Taittonen, Senior Director & Sector Coordinator]

You talked about the order book being on a good level. Can you remind on that -- on the folding boxboard and linerboard side, what is sort of the more or less normal variation between the highs and lows during the cycle? And where you are in terms of length of order books at the moment against that sort of cyclical range?

[Mika Joukio, Chief Executive Officer]

The variation during the year is not very high or big because the products are not that cyclical. The normal level practically is, let's say, 20 days, and now we are clearly above that.

[Harri Taittonen, Senior Director & Sector Coordinator]

Okay. Okay. Then just looking at them, I mean, it shows in your associate line, but the Metsä Fibre margins, they seem to have declined by some 7 percentage points in Q1 compared to Q4. Is it sort of -- can you just comment anything about if it was because of the strike? Or was the sort of average price still down? Or what -- just to understand how this associate line could develop in Q2 and Q3?

[Mika Joukio, Chief Executive Officer]

Yes. So average prices did not decline anymore during Q1, but they were quite stable. But of course, the biggest thing was the strike at the Finnish mills because all the Metsä Fiber's pulp mills are allocated here in Finland.

[Harri Taittonen, Senior Director & Sector Coordinator]

Yes. Yes. I understand. And maybe the final question, just on the -- your fairly conservative wording about the pulp price outlook because not knowing that, as you said, you mentioned that several companies and including Metsä Fibre have announced price increases in both in China and Europe, and you are saying that they are probably going to go down. So just kind of could you give a flavor of -- I mean, is there any sort of customer response from the ongoing price increase attempts? Or any sort of color on that?

[Mika Joukio, Chief Executive Officer]

So Metsä Fibre and other suppliers, they have given price increase announcements, both in China and here in Europe. But of course, it's maybe a little bit too early to speculate whether they go through and how much they go through. But what is -- I mean, what is clear is that -- or it seems to be clear that the prices are not declining anymore, but how much they would increase during Q2 is still, of course, unknown.

[Operator]

And our next question comes from the line of Robin Santavirta from Carnegie.

[Robin Santavirta, Head of Materials Research & Financial Analyst]

I was wondering about the paperboard guidance you have of flat quarter-on-quarter deliveries. In spite of that, you state that you have clearly stronger order books than you normally have. And historically, Q2 has been a strong quarter in deliveries of paperboard quarter-on-quarter. So is that -- do you bake in some kind of slowdown for the end of the quarter? Or is that just sort of a cautious guidance?

[Mika Joukio, Chief Executive Officer]

So during Q1, of course, we need to remember that we also had a strike, which boosted -- I mean after strike, of course, then customers really ordered well. And then this pandemic game, and that was another boost. So I think maybe it's a little bit careful estimation, but I would say that realistic level is at the same level as -- I mean, Q2 deliveries to be at the same level as Q1.

[Robin Santavirta, Head of Materials Research & Financial Analyst]

All right. All right. And then in terms of this strike impact of EUR 15 million and EUR 5 million, first of all, could you just share some light on what the EUR 5 million now in Q2 is? The strike is -- it was already quite some time ago, so what does that EUR 5 million consist of? And secondly, this EUR 15 million impact in Q1, is that only the negative part of this strike or do you also include some positive, as you said, quite some orders at the end of or after the strike?

[Mika Joukio, Chief Executive Officer]

Okay. Jussi will take this.

[Jussi Noponen, Chief Financial Officer]

Yes. So if we start from the EUR 5 million, now with the good demand and high order books, without the strike, we would have better availability of the product. And now in early Q2, our delivery volumes would have been higher, so that's causing the sales loss in the second quarter and lost profit of about EUR 5 million. And yes, the EUR 15 million, it was the genuine impact of the strike, including the lost production in the first quarter as well as the lost sales in the first quarter.

[Robin Santavirta, Head of Materials Research & Financial Analyst]

And that also includes then if you had some kind of catch-up impact on orders? So is it also probably the positives and the negatives of the lost production you had in Q1 at EUR 15 million?

[Jussi Noponen, Chief Financial Officer]

Well, now, of course, it's -- going forward, it's quite hard to isolate the impacts of the strike and the bounce back after the strike and now the strength of the order book caused by the coronavirus situation. But this EUR 15 million plus EUR 5 million is our best estimate on this.

[Robin Santavirta, Head of Materials Research & Financial Analyst]

I understand. That is clear. And then final question for me on maintenance cost. Should we now expect basically no financial or earnings impact from maintenance in Q2? And what should we expect for Q3 and Q4? I guess, normally you have had EUR 10 million more maintenance cost in Q2 quarter-on-quarter and then basically at the same level until the end of the year, every quarter. So could you shed some light on the potential or the maintenance costs as it looks at the moment?

[Mika Joukio, Chief Executive Officer]

Yes. So in Q2, the maintenance costs will be some millions higher than in Q1, not EUR 10 million, but anyway, some because we didn't practically have anything in Q1. But then Q3 and Q4, of course, there will be more maintenance than during the normal years because we have moved maintenance from first half of the year to the second half of the year. So it's not EUR 10 million, EUR 10 million, EUR 10 million this year, so it will be something a bit different.

[Operator]

Our next question comes from the line of Mikael Doepel from UBS.

[Mikael Doepel, Executive Director & Analyst]

It's Mikael Doepel with UBS. I missed your first comment on the visibility that you have right now. Do you have -- how long does your order book stretch right now? What is your visibility? Do you already see the full month of May, maybe into June as well?

[Mika Joukio, Chief Executive Officer]

Yes. So I mentioned that the normal -- I mean, good order book, as far as the availability for customers is concerned, is roughly 3 weeks or 20 days. And now we are clearly above that. So that's clear. But of course, if then something happens in the European or global economy, of course, that will affect then also our deliveries, whether they are postponing orders or whether they are canceling orders or so, but at the moment, we don't have that. At the moment, situation is good, but you never know what will happen, for example, in June under these circumstances as we are living in.

[Mikael Doepel, Executive Director & Analyst]

Okay. And then in terms of the packaging demand and the strength that you are seeing. If you look across the regions in the U.S., the Europe and Asia, is there anything that stands out in any of the regions, either positively or negatively when it comes to packaging demand, either for folding boxboard or kraftliners?

[Mika Joukio, Chief Executive Officer]

So our main markets are Europe and North America. And in both those markets, demand is good for both in folding boxboard as well as white kraftliners. In Asia Pacific region, we are small, we are selling at all white kraftliners there and the volumes in folding boxboard are only 5% of our total deliveries. So it's Europe and then North America, and in both markets, situation at this very moment is good.

[Mikael Doepel, Executive Director & Analyst]

Okay. Okay. And then just a final question on the overall cost development. I hear you saying that the production costs will be stable in Q2. I would assume that there could be some cost deflation going forward. Maybe you do some cost takeouts as well. For the full year, would you expect your total cost to be up or down or flat?

[Jussi Noponen, Chief Financial Officer]

Yes, Jussi here. So yes, you are right that there is potential for some cost deflation. And now for the second quarter, we are guiding flat costs quarter-on-quarter. But for the full year, at least, we are not expecting cost inflation, how much deflation there will be that we don't know yet, but more likely deflation than inflation.

[Operator]

Our next question comes from the line of Antti Koskivuori from Danske Bank.

[Antti Koskivuori, Analyst]

Yes. First of all, on Husum environmental permit, I think earlier, the wording was that you expect to make the final decision during Q2. Now you say, earliest at during Q2. Maybe it's a bit of nitty-gritty, I can understand it, but is this just a timing effect? Or is there kind of more complexity or something in the process that makes you a bit more cautious on the time line?

[Mika Joukio, Chief Executive Officer]

No, we didn't change our wording. It was also -- earlier, it was earliest Q2, so no changes. So we still expect that earliest, by end of June, we will get that. So no change.

[Antti Koskivuori, Analyst]

All right. Okay. Okay. Cool. Then secondly, on FX. I guess with the current -- if we look at the spot rate, it implies fairly nice support to the earnings in 2020 and 2021. Would you share a number what you would expect to see on a support from FX in 2020, assuming that the current spot prices would prevail throughout the year?

[Mika Joukio, Chief Executive Officer]

Okay. Jussi.

[Jussi Noponen, Chief Financial Officer]

No, sorry, I don't have the calculation for the full year with me now. But for the second quarter, we can say that a low single-digit millions profit improvement is coming from FX.

[Operator]

Our next question comes from the line of Linus Larsson from SEB.

[Linus Larsson, Analyst]

A follow-up on the Husum project. You say, second quarter of this year at the earliest for the final go ahead. I wonder if you could also say what your base case is. And how much of Husum CapEx that is baked into the EUR 210 million that you are guiding for as CapEx for the full year for the group?

[Mika Joukio, Chief Executive Officer]

So I didn't quite -- so we are proceeding according to original plan. So there is no change. And also this -- how much we are using this year, at the moment, we don't see any major change.

[Jussi Noponen, Chief Financial Officer]

The amount included in the estimate is between EUR 140 million and EUR 150 million for this year.

[Linus Larsson, Analyst]

Okay. Great. And that's pretty much independent on whether there is go ahead as per the 30th of June or a quarter or so later than that because you already started the project up at Husum?

[Mika Joukio, Chief Executive Officer]

It's not totally independent, so the timing of the permit and the final investment decision, and that may influence the CapEx estimate.

[Linus Larsson, Analyst]

Okay. And is it your base case that by the 30th of June, you will have a decision? Or what's your assumption on your plan right now?

[Jussi Noponen, Chief Financial Officer]

So we will have the decision ASAP we get the acceptance of this amended environmental permit. So decision will be made after that. But we go on full speed at the moment in Husum. So we believe that it will come.

[Linus Larsson, Analyst]

Good. And as for CapEx in 2021 you see, what could you say at this stage?

[Jussi Noponen, Chief Financial Officer]

Again, dependent on the timing of the permit. But for -- if you mean for the Husum project, you can estimate roughly the same magnitude as for this year.

[Linus Larsson, Analyst]

Okay. And for the maintenance part of the group as well?

[Jussi Noponen, Chief Financial Officer]

Also fairly unchanged, yes.

[Linus Larsson, Analyst]

Great. Very good. Then also on your volume guidance, just a follow-up on what you're saying regarding the second quarter. Could you just touch upon that and comment it, split by folding boxboard and kraftliner or various end users, if you like? I'm sure the picture varies a bit depending on the different parts of your paperboard business.

[Mika Joukio, Chief Executive Officer]

Yes, it's pretty much same split as in Q1. Let's say, 300,000 and 150,000, all together 450,000.

[Linus Larsson, Analyst]

Okay. Okay. Okay. And when it comes to end users, do you see some segments where you see a weakening now and elsewhere continued strength?

[Mika Joukio, Chief Executive Officer]

As I said in the presentation that the food segment and then pharmaceutical segment, they are probably strong, but then this kind of luxury packaging, like cosmetics, for example, they are suffering a little bit. So that's quite typical in this kind of situation.

[Operator]

Next question comes from the line of Markku Järvinen from Handelsbanken.

[Markku Järvinen, Analyst]

Yes. It's Markku Jarvinen from Handelsbanken. I just still wanted to ask about the maintenance. Did you say that in Q2, you will have no maintenance that is sort of 0 for Q2?

[Mika Joukio, Chief Executive Officer]

No, no, no. We will have maintenance in Q2 comparing Q1, but we have also moved a lot of maintenance from Q2 to Q3 and even in Q4, but we don't have as much maintenance during Q2 as, for example, last year. But more than Q1...

[Markku Järvinen, Analyst]

Could you give a number for that impact?

[Mika Joukio, Chief Executive Officer]

A few million, so below EUR 5 million compared to a normal Q2, some millions lower this year.

[Markku Järvinen, Analyst]

Less than EUR 5 million. Okay. Very good. And sorry, compared to a normal year, it's...

[Mika Joukio, Chief Executive Officer]

Yes, normal -- so comparing normal Q2, so of course, it's lower. But comparing Q1, it's higher.

[Markku Järvinen, Analyst]

Okay. But you're saying it's going to be a few million less than EUR 5 million, the maintenance impact in Q2?

[Mika Joukio, Chief Executive Officer]

Yes, yes. So between 0 and EUR 5 million.

[Markku Järvinen, Analyst]

Okay. Good. Very good. And is that including the maintenance by Metsä Fiber or when are they doing the maintenance at their pulp mills?

[Mika Joukio, Chief Executive Officer]

They have also moved their maintenance annual shutdowns to H1 -- second half of the year.

[Markku Järvinen, Analyst]

So all of Metsä Fiber maintenance will be in H2?

[Mika Joukio, Chief Executive Officer]

Not totally all, but practically, the big ones are all there.

[Operator]

[Operator Instructions] And as we have no more questions, I now hand back to our speakers for any closing comments.

[Mika Joukio, Chief Executive Officer]

Okay. Thank you, everybody, for active participation. And at this point, of course, I wish you, first of all, nice Vappu try to stay at home and not on the streets. Go as far as possible from the big cities. There is one more question.

[Operator]

Yes, if you would like to take that question, it comes from the line of Cole Hathorn from Jefferies.

[Cole Hathorn, Vice President]

Just one on logistical challenges. Could you just talk a little bit about how you're managing the logistical challenges shipping to your customers and managing your supply chain at the moment?

[Mika Joukio, Chief Executive Officer]

Yes. So as we said in the presentation, we don't have a major hiccups in logistics. Of course, in some areas, I mean, between the borders, between the countries, for example, there might be some challenges, but they are quite minor. So we are pretty close to normal situation. We don't have any shortage of the containers, for example, and so no major problems there. Okay. Then I continue. So I started by saying thank you very much for active participation. And then I would like to wish you a nice Vappu, 1st of May. It's not the normal. So we need to stay home and try to be just with the family members. And so have a nice continuation of the day and please stay -- I wish you that everybody is staying safe and healthy. Thank you.