Metsa Board Oyj

OMXH:METSB

Earnings Call Transcript 2021-Q1

[Mika Joukio, Chief Executive Officer]

[Audio Gap]Metsa Board's results for the first quarter of 2021. My name is Mika Joukio, I'm the CEO of Metsa Board. Here with me, I have our CFO, Jussi Noponen; and Head of Investor Relations, Katri Sundstrom.Despite the coronavirus pandemic, the year 2021 started favorably for Metsa Board. We witnessed a strong demand for both folding boxboard and for white kraftliners in all market areas, and our paperboard delivery volumes were at the record high levels. At the same time, the global pulp market strengthened and prices of long-fibre pulp rose sharply, especially in China, but also here in Europe. As a result, our operating result improved to EUR 89 million and our operating margin was as high as 18%.Production volumes for paperboard and market pulp were also at record high levels due to low maintenance and further improved production efficiency at the mills. At the beginning of the year, we sold a 30% stake of our Husum pulp mill to Norra Skog. The deal ensures long-term availability of certified Swedish pulp wood and decreases the Husum mills' cost volatility as less wood will be imported from the Baltic countries. Along with this transaction, our net debt turned slightly negative.Earlier this year, we started a development program for Kemi paperboard mill, which will increase our annual white top kraftliner capacity by 40,000 tonnes. In addition, we are planning to increase our annual folding boxboard capacity by 200,000 tonnes in Husum, but no firm decision has been made yet.So our paperboard delivery volumes were at the record high level and totaled 491,000 tonnes. Compared to the corresponding period last year, they grew by 9% and compared to the previous quarter, the growth was 11%. And the good news is that at the end of March, our order book was at an exceptionally high level, which predicts good paperboard sales for the second quarter of the year as well.Demand was strong in all regions, which can be seen in the pie graphs on the right. The impacts of the coronavirus on paperboard demand have been mixed. We have seen strong demand in food, beverage and pharma packaging, whereas segments like luxury packaging and graphical end uses have suffered. However, in the first quarter of this year, demand was strong in nearly all end uses. In Americas, the growth in retail and e-commerce boosted the demand for our coated white kraftliners.Then about the price development. In the EMEA region, the average prices of paperboards decreased slightly compared to the corresponding period last year. In the Americas region, prices in local currencies improved. We have made several price increase announcements this year in Europe and in the Americas region. We believe the average prices for both folding boxboard and white kraftliners will rise in Q2 versus Q1.Our sales increased by roughly 5% compared to the first quarter last year. The comparable operating result was EUR 89 million and the operating margin was 18%. And when we compare the operating result to the result of the corresponding period last year, we need to remember that the strike at the Finnish mills weakened the Q1 last year result by EUR 15 million. Nevertheless, the year-on-year improvement was remarkable.Here are listed the main items affecting the operating result in the first quarter. The main positives were the increased paperboard volumes together with higher market pulp prices, which in turn led to a higher result share from Metsa Fibre. On the negative side, we had the FX impact, roughly EUR 5 million, compared to the corresponding period last year. In addition, cost inflation has accelerated. Increased logistic costs and especially higher energy prices had a negative impact on first quarter results.And strong earnings performance also boosted the return on capital employed. Comparable return on capital employed for the first quarter of 2021 was 18.3% and rolling 12 months was 14.8%, both above our long-term target of at least 12%.Then to market pulp. Demand for long-fibre pulp has strengthened in Europe, but especially in China. Pulp demand has been supported by growing demand for fresh fibre-based tissue papers and the growing e-commerce market, which has increased paperboard consumption. At the same time, prolonged maintenance breaks, mainly in Q4, together with unplanned production stoppages have decreased pulp supply. The total shortage of containers has tightened the pulp market situation further. Market pulp prices have risen rapidly in both China and Europe.Then the balance sheet, which is strong at the moment. The sale of a 30% stake in the Husum pulp mill to Norra Skog decreased our net debt by EUR 260 million and made us a net debt free company. And along with that, our leverage went to 0 just before the dividend payment. As a reminder, the capital gain from the transaction is recognized only in equity. EUR 125 million was recognized as a minority interest and EUR 135 million in retained earnings. No impacts reported in the P&L.Operating cash flow in January-March was EUR 16.8 million. Cash flow in the first quarter is typically affected by strong growth in working capital where production volumes are at the high level. As seen in the graph, this did not happen last year because the paper industry strike limited production at all Finnish mills. Investments during the period -- review period were EUR 35 million.And then a few slides about ongoing and planned investments. Our biggest ongoing investment is the first phase of the Husum pulp mill renewal, which we expect to be ready next year. After the review period, we increased the estimated investment value of this project from EUR 320 million to EUR 360 million. The design scope has been slightly expanded. And the original schedule of the final investment decision was also delayed due to the unexpected length of the environmental permit process. The delay has exposed project purchases outside the main equipment deliveries to cost inflation, which has been quite significant in recent months.The second phase of this investment consists of a new fibre line, which will be decided on and implemented during the 2020s. We have started preparations for the environmental permit process. The application will follow late this year.In February, our associated company, Metsa Fibre, made an investment decision to build a new bioproduct mill in Kemi. The new mill will have an annual pulp production capacity of 1.5 million tonnes and it will replace Metsa Fibre's old pulp mill in Kemi. The value of this investment is EUR 1.6 billion and it will be fully funded through Metsa Fibre's own cash and debt. So no equity injections from owners.Enabled by this investment, we have launched a development program for our Kemi paperboard mill in which the annual production capacity of white top kraftliners, mainly coated, will be increased by 40,000 tonnes. In addition, the mills' water and energy use will be significantly improved. As part of the program, we will purchase the modernized unbleached pulp production line from Metsa Fibre in 2023.During the review period, we also launched pre-engineering to increase the annual production capacity of the Husum folding boxboard machine by roughly 200,000 tonnes. The readiness to make the investment decision is expected to be achieved in the summer 2021. The planned increase in production would then begin in 2023.We estimate that our CapEx for this and next year in total will be in the range of EUR 450 million to EUR 550 million. The amount will be specified when a decision has been made on the investment concerning the expansion of folding boxboard capacity at Husum. The annual maintenance CapEx will be around EUR 50 million to EUR 60 million at least for the next 2 years.Then the outlook. At the end of the first quarter, our order books were at the very high level and we estimate that our paperboard delivery volumes will continue to grow. We also expect paperboard prices in local currencies to increase. As always, the second quarter will include more plant maintenance shutdowns than the first quarter. The negative impact from the maintenance shutdowns will be some EUR 5 million to EUR 7 million.Good demand for long-fibre pulp is expected to continue both in Europe and in Asia. Seasonal maintenance shutdowns and container availability issues will reduce the global pulp supply. The market situation will remain tight. Cost inflation accelerated during the first quarter and is expected to slightly increase further in Q2. We estimate that cost inflation for the full year 2021 versus 2020 will be around 3%. And FX impacts of the hedges will have a negative impact in the second quarter compared to the first. The difference will be around EUR 6 million. And based on this, we expect that our comparable operating result in the second quarter will improve compared to the first quarter.And to summarize, despite the prolonged uncertainty caused by the coronavirus pandemic, Metsa Board has had a good start to the year 2021. Our paperboard delivery volumes were at an all-time high and profitability was strong. Thanks to our thick order book, our near future also looks good. Of course, our top priorities will still be securing the health and safety of our employees, ensuring business continuity and preventing the virus from spreading.The development of the global pulp market has also been strong and rising market pulp prices have supported our results. Good market demand for premium and sustainable paperboards supported by our strong financial position enable us to continue our investments in further development and growth.And before we move into the questions part, I'd like to go through a couple of changes in our corporate management team. Our current CFO, Jussi Noponen, has been appointed Metsa Board's Senior Vice President, Sales and Supply Chain. Sari Pajari-Sederholm, now responsible for Metsa Board's Sales and Marketing, has been appointed Metsa Board's EVP in Strategy. Henri Sederholm will take Jussi's position as our new CFO of Metsa Board. Henri's current position is Metsa Group's SVP Group Finance. All changes are effective as of 1st of May 2021.And now I believe Jussi wants to say a few words before we take your questions. So Jussi, please.

[Jussi Noponen, Chief Financial Officer]

Thank you, Mika. As this is my last results call at least for time being, I want to use this opportunity to thank the investment community for the past 5 years. I will be seeing you also in the future, perhaps less frequently, but at least during the CMDs. But before saying goodbye, it is now time for your questions.

[Mika Joukio, Chief Executive Officer]

Okay. So please.

[Operator]

[Operator Instructions] Our first question is from Antti Koskivuori of Danske Bank.

[Antti Koskivuori, Analyst]

Congratulations on the strong results. And congratulations for Jussi for the new position. First question for me would be on carton board prices. Overall, it seems that there is a fairly little resistance at the moment for price increases overall in the sector. Is it fair to assume that this is also the situation for folding boxboard and the announced EUR 85 per tonne price increase? That would be the first.

[Mika Joukio, Chief Executive Officer]

Okay. So concerning the price increases we have here in Europe, we have given 2 price increases for white kraftliners and 1 price increase for folding boxboard. And concerning the folding boxboard, of course, quite remarkable share of our deals are annual deals where the prices are fixed. So this is not -- this increase is not possible for all customers, but we do our best. And then as far as the Americas market is concerned, there we have given 2 price increases for white kraftliner and also 2 price increases for volume boxboard. But how much remains, I can't estimate and give you an exact figure how much will go through because, I mean, negotiations are still ongoing.

[Antti Koskivuori, Analyst]

Yes, sure. Okay. All right. Thanks. Then second, on the kind of the annual maintenance schedule that you have, it's fairly tilted to Q4. If you could give a number for each of the quarters, how the maintenance cost will evolve now in the 3 of the remaining quarters of the year?

[Mika Joukio, Chief Executive Officer]

Okay. So rough figures. So first of all, Q2 is around EUR 5 million to EUR 7 million compared to Q1, as I said already in the presentation. And then Q3, again comparing to Q1, that's in the area of EUR 10 million to EUR 15 million. And then Q4, then EUR 15 million to EUR 20 million because this year, Husum investment shutdown will be fully in Q4. And then we also have other, for example, Metsa Fibre, Aanekoski bioproduct mill as well as then our Kyro paperboard mill investment shutdown will be then in Q4. So these are the scales.

[Operator]

Our next question is from Linus Larsson of SEB.

[Linus Larsson, Analyst]

If I may follow up on the folding boxboard to pricing. It's quite unusual that you launched price hikes this time of the year. I guess that's a reflection of an exceptional market that we're in. And nevertheless, could you please quantify what amount -- what volume is potentially up for negotiation this time around?

[Mika Joukio, Chief Executive Officer]

You mean in folding boxboard or white kraftliners? Folding boxboard, I think.

[Linus Larsson, Analyst]

Yes. No, no. In folding boxboard, I'm aware you have some full year contracts and maybe other set that's as well, but how much could be renegotiated on price terms going into, say, the second or the third quarter?

[Mika Joukio, Chief Executive Officer]

Yes. In Americas, if I start from Americas, then the -- there, our volume is between 250,000 tonnes and 300,000 tonnes, I mean, annually. And that is pretty much kind of -- there, we don't have annual deals. We have prices which are until further notice or validity is until further notice. So there, practically the whole volume can be renegotiated. But then in Europe, situation is different. And here, the -- quite a remarkable share of the volume is -- or has fixed price -- fixed annual prices. So that's pretty much.

[Linus Larsson, Analyst]

And roughly, you gave a very precise figure there on Americas. But in Europe, how many 1,000 tonnes roughly could potentially be renegotiated in -- for the second half of the year?

[Mika Joukio, Chief Executive Officer]

No. It's -- I don't have the figure for you at this point, only the figure for Americas, but not for Europe.

[Linus Larsson, Analyst]

Okay. Fair enough. And then also just a complete different topic, on wood supply now with the Norra Skog partnership in place, what kind of cooperation can we expect? What synergies and what changes are you able to implement at this stage? And what might that mean in terms of the supply costs?

[Mika Joukio, Chief Executive Officer]

So the cooperation has started as we know when we closed the deal in 4th of January this year. But the operations in Husum are pretty much still -- I mean, they are pretty much similar as before. We are running the integrated -- as one integrate, even though then the ownership of the pulp mill and paperboard mill is different. But then, of course, the benefits for us will be that then there will be less imported wood from Baltic countries especially and then the cost volatility will be, of course, lower. But we see the full kind of impact only after the second investment phase of Husum pulp mill, so when we have the new fibre line. But of course, already now and before that investment, we can see positive development and especially then the security of the wood supply is better now.

[Linus Larsson, Analyst]

Okay. And then just a final question if I may on pulp. This is a [ GPA ] question relating to Metsa Fibre, but I'm sure you can answer it as well. What's the latest developments in terms of realized pricing for Metsa Fibre pulp in China? Is it, on a net realized basis, rising? Is it declining? Is it stable?

[Mika Joukio, Chief Executive Officer]

Yes. During this year, they have rosen or risen. And now the gross prices are at the level of EUR 1,000. And net price is, of course, slightly lower, but that is the situation there. And in Europe, the prices are still going up.

[Linus Larsson, Analyst]

And for net pricing for Metsa Fibre is still rising. Now we're some way into -- we're towards the end of April and should I understand you that net pricing is still on an upward trend?

[Mika Joukio, Chief Executive Officer]

Yes, that has been the case.

[Operator]

Our next question is from Robin Santavirta of Carnegie.

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

I have 2 questions related to costs. Now first of all, if I look at Q1 and the paperboard business or if I deduct Metsa Fibre, it seems as if the cost per tonne for the paperboard business has declined quite a lot year-on-year and even quarter-on-quarter. Why is that? What is the key driver driving down the cost per tonne in the paperboard business in Q1?

[Mika Joukio, Chief Executive Officer]

Maybe Jussi takes this.

[Jussi Noponen, Chief Financial Officer]

Yes. You have to remember that the comparison period was the strike quarter last year. So that comparison does not give exactly the right picture. So what we say in the outlook that we expect the 3% cost inflation year-on-year for the full year this year versus the full year last year, that gives a far more fair picture about the situation.

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

Okay. But in Q1, if you look at the key items of the paperboard business, probably pulp wood, pulp, energy, logistics, how have these developed now during the start of the year?

[Jussi Noponen, Chief Financial Officer]

There have been remarkable fluctuations in individual cost components, some going sharply up and some going slightly down. And for that reason, we want to simplify the answer and stick to that 3% cost inflation guidance.

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

All right. And that probably is a little bit more back-end loaded, that 3%? Or how should we view that number?

[Jussi Noponen, Chief Financial Officer]

Most of that was in -- already in the first quarter result and some further inflation we expect for the second quarter and the second half of the year, we expect to be slightly -- seeing a slight cost deflation.

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

You said cost deflation. What items should we expect of your cost to decline in the second half of this year?

[Jussi Noponen, Chief Financial Officer]

As I said earlier, we want to keep the communication about this matter simple and stick to the overall figure.

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

I understand. Okay. So that's clear. Then just a final question on the paperboard volumes, really strong now in Q1, as you state, and then you say record order book. What is the key driver of this? And how are you performing compared to the market development? And I'm especially curious about European market.

[Mika Joukio, Chief Executive Officer]

So yes, as I already mentioned, the order books are record high at all the mills and all the production lines. So that's why we are estimating that the volumes will increase in Q2 compared in Q1. What has happened here in Europe is that the Chinese as well as then the Latin American producers, they have withdrawn from European market to their own home markets and that has tightened the situation in the certain parts of Europe and partly also Middle East. So that has been the case.So of course, the main drivers, I mean, it's quite difficult to -- we have seen extremely good order inflow from food and pharmaceutical segment. But also during Q1, we saw improvement in other end uses. So also in graphical and cosmetics for example. So now almost practically, all segments are doing fine and the customers are busy.

[Operator]

Our next question comes from the line of Johannes Grunselius from Kepler Cheuvreux.

[Johannes Grunselius, Head of Forestry, Paper & Packaging]

It's Johannes here. My first question is on the inventory situation in Europe. Do you feel that clients are buying ahead of price hikes and are ordering materials and so forth? Or could you give some thoughts or your intelligence on that, how you see inventories? And are you a bit worried that sort of this very strong situation can reverse because of the average change in the inventory cycle? That's my first question.

[Mika Joukio, Chief Executive Officer]

Yes, based on our understanding and based on the discussions I had also with our customers, that is not the -- I mean, people are not building inventories at the moment. So there is a real consumption behind this demand. So of course, there is always a risk, but I don't see that very remarkable at this point.

[Johannes Grunselius, Head of Forestry, Paper & Packaging]

Yes. And then you had the discussion on the earlier question there about, let's say, non-European players withdrawing volumes from the European market. Is it possible to put any numbers on that just to get a sense for the positive magnitude in the market balance from this?

[Mika Joukio, Chief Executive Officer]

I don't have the numbers for you, but you can find them, I think, from some public sources event. But they are remarkable. They are high.

[Johannes Grunselius, Head of Forestry, Paper & Packaging]

Yes. Maybe then on your Q2 outlook. I mean there are a couple of positive things here. One is obviously higher pulp price. You're guiding for better volumes, also price hikes for paperboard. Would it be possible for you to give some color, which of these 3 elements or if there's any other elements are most important for the uplift in the earnings for the quarter-over-quarter?

[Mika Joukio, Chief Executive Officer]

No, no. Those are the most important positive things, of course, and there is some negative, for example, currencies. They will have negative impacts in Q2 comparing Q1. But this -- that you mentioned, they are the key drivers in positive side.

[Johannes Grunselius, Head of Forestry, Paper & Packaging]

Yes. Okay. Because I was wondering also a bit on the volume side because you showed stellar volumes in Q1. How much more can you sort of lift volumes from here because there must be some kind of limit, right, before you hit the full capacity utilization? Is it possible to give any indication where the absolutely maximum is and where you think it will be in Q2?

[Mika Joukio, Chief Executive Officer]

I think the maximum is coming from the production, of course. And in Q1, we produced more than we delivered to customers. So we have still potential, let's say, some 10s of 1,000s of tonnes during Q2, depending on where the inventories go.

[Johannes Grunselius, Head of Forestry, Paper & Packaging]

Yes, yes. But I mean, if I look at the last 2 quarters, it's not the new level of production in your system. You still have the same volumes constraints. Or could you tweak out more volumes from here? That's what I'm wondering.

[Mika Joukio, Chief Executive Officer]

No, during the first quarter, the production volumes were record high. Of course, it's possible to make a new record. But of course, the improvement is not that big. But luckily enough, the production really has been good the whole year last year as well as in the first quarter of this year.

[Operator]

Our next question is from Mikael Doepel of UBS.

[Mikael Doepel, Executive Director & Analyst]

Firstly, I have basically 2 questions. Firstly, on the Husum debottlenecking. So you gave the CapEx estimate for '21 and '22 of between EUR 450 million and EUR 550 million. And based on your commentary, I would assume that there is some of that debottlenecking baked into that. But I was wondering if you could clarify a bit what the size of that particular investment could be in total?

[Mika Joukio, Chief Executive Officer]

Yes. It's a little bit too early to say precisely. We have said earlier that it's somewhere probably between EUR 100 million and EUR 200 million, but where that finally will land, the calculation and planning is ongoing and then we know better, remains to be seen. But that is the magnitude. So not as much as the kind of new production line.

[Mikael Doepel, Executive Director & Analyst]

No. No. And the full kind of effect of that is baked into the CapEx indication for '21 or '22?

[Jussi Noponen, Chief Financial Officer]

There is some carryover expected for '23.

[Mika Joukio, Chief Executive Officer]

Yes, of course, depending on when we are finally able to make decision.

[Mikael Doepel, Executive Director & Analyst]

Right. Right. Okay. And then just finally on the Husum minority stake booking on your balance sheet. Could you just briefly explain how that's going to be booked now? I heard Mika mentioning something on that in the commentary here in the beginning, but if maybe you could just clarify a bit more how it's going to be booked and why it's not really showing up as a minority on your P&L?

[Mika Joukio, Chief Executive Officer]

Okay. Jussi will clarify.

[Jussi Noponen, Chief Financial Officer]

Yes. I think the balance sheet impacts, as were stated by Mika, they are as they are. So there is not much more to say. So there is a minority interest and a positive impact on retained earnings on the balance sheet. And in terms of P&L, you are right that in the P&L itself, the minority is not deducted. But then after the P&L statement, if you flip to Page 15 of our Q1 release, there is a table at the bottom of the page, how the noncontrolling share has been deducted when calculating EPS.

[Mikael Doepel, Executive Director & Analyst]

All right. But I mean -- and when you book that into equity, I guess, it has to come off in some way there as well on your balance sheet in minority share, right?

[Jussi Noponen, Chief Financial Officer]

Sorry, I did not understand the question.

[Mikael Doepel, Executive Director & Analyst]

No, I mean because you reduced the minority impact for your EPS, but I guess that reduction should also be reduced from your net profit, which should reduce what you flow into your equity and balance sheet. Or is that not the case?

[Jussi Noponen, Chief Financial Officer]

Perhaps, Mikael, we can take this offline to clarify.

[Mika Joukio, Chief Executive Officer]

So we will revert.

[Operator]

Our next question is from Harri Taittonen from Nordea.

[Harri Taittonen, Senior Director & Sector Coordinator]

Right. Just a couple of questions already partly passed upon. But related to this volume and just so curious from the technical point of view that with your guidance for the second quarter also, that means that production for the 6-month period will be -- I mean, was roughly sort of million tonnes and record high end. Just if we assume that demand holds on like it is for the second half, I mean, what would be the second half technical potential? How much lower would it be compared to the first half given the maintenance and things like that? Just to get a feel of that, the potential there for the second half.

[Mika Joukio, Chief Executive Officer]

Yes, I don't have the exact figure for you, but we know that these big maintenance shutdowns will take place, as you said, in the second half like Kemi and Husum for example. And of course, there will be then losses or curtailment so to say, I would say, somewhere around 15,000 tonnes to 20,000 tonnes maybe all in all, depending on how the startup will go after shutdowns, et cetera, and so. But then we remember that Q1 production was really, really good. I mean several production records and so.

[Harri Taittonen, Senior Director & Sector Coordinator]

So we should not use the traditional ruler method to extrapolate from here?

[Mika Joukio, Chief Executive Officer]

Yes. Of course, you can, but that won't -- that's probably then the answer is not right.

[Harri Taittonen, Senior Director & Sector Coordinator]

No. Okay. The other sort of small -- just to notice that in the other operating expenses, the number was EUR 27 million Q1 and it looks like it has been more like mid-30s last year per quarter and just minus 37 a year ago. Was that because of the strike and the maintenance, and this was just kind of a -- so that this other line will be kind of moving up to that mid-30s again or is there something else?

[Mika Joukio, Chief Executive Officer]

Maybe Jussi can.

[Jussi Noponen, Chief Financial Officer]

No. Sorry, again, such a detailed question that let's, Harri, take that offline as well.

[Operator]

[Operator Instructions] We have another question from Johannes Grunselius from Kepler Cheuvreux. There are no further questions at this time. So I hand back over to our speakers.

[Mika Joukio, Chief Executive Officer]

So no questions anymore? Okay. All right. Thank you very much for your attention and I would like to use the opportunity to thank Jussi also for this CFO time, and wish him good luck and success for new position and new, new challenges. So thank you very much. And thank you all for your attention also and have a nice day and see you next time.

[Jussi Noponen, Chief Financial Officer]

Thank you also from me.