Metsa Board Oyj

OMXH:METSB

Earnings Call Transcript 2022-Q1

[Mika Joukio, executive]

Good afternoon, everyone, and welcome to the presentation of Metsa Board's 2022 First Quarter Results. My name is Mika Joukio, and I'm the CEO of Metsa Board. With me here our CFO, Henri Sederholm; and Head of IR, Katri Sundstrom. Henri and I will go through this presentation, and we will then open the lines for your questions and further discussion.

Let's begin by taking an overview of the first quarter. The strong momentum on the paperboard market continued, and our deliveries increased from the previous quarter ending at 473,000 tonnes. Average sales prices for our paperboards have increased for 4 consecutive quarters, and they were up by 20% year-on-year. This was reflected in both the top line and profitability.

Our quarterly sales were EUR 582 million and comparable operating result, EUR 122 million (sic) [ EUR 121 million ]. Furthermore, comparable return on capital employed was above 21%, all record high figures again. As always, the first quarter did not include any major maintenance shutdowns, and production volumes were at a high level.

In pulp and BCTMP, we achieved new record highs, an excellent achievement given the weakened coronavirus situation and the large number of infections among employees. Thanks to several precautionary measures, there have been no production interruptions.

Henri will cover cost inflation in more detail, but I'd like to underline the rapidly increased logistic costs we have seen this year. This is a result of higher fuel prices and several bottlenecks in logistics around the world.

And finally, I would like to highlight our strong financial position with interest-bearing net debt a negative EUR 100 million. This supports our ongoing investments, which I will return to later.

Russia's attack on Ukraine is creating uncertainty in the global economy and is also reflected in Metsa Board's business operations. Our exposure to Russia is derived from paperboard sales, wood sourcing and the use of natural gas. In March, we discontinued all paperboard sales to Russia and we are now reallocating those volumes to other markets.

Reallocation opportunities are not limited by demand, but rather by bottlenecks in the supply chain. In 2021, 5.6% of our total sales came from Russia, consisting mainly of folding boxboard sales to multinational brand owners. Metsa Group, responsible for our wood sourcing, has discontinued wood procurement from Russia. Wood sourcing now focuses on the other existing regions: Finland, Sweden, and the Baltic countries. In 2021, roughly 9% of our total wood sourcing came from Russia and it was mainly birch. And in production, 3 out of our 8 mills used natural gas imported from Russia.

In the short term, we have explored alternatives to replace this with LPG and LNG, also gas or oil. In the long term, and according to our sustainably targets, all the energy we are using will be fossil-free by 2030. Here, the alternative energy sources could be electricity or fire gas.

So to sum up, the war in Ukraine does have impacts on us, but our opportunities to cope with it through alternative operations are relatively good. So far, the financial impacts have been quite small. The risks of inputs and raw material availability have certainly increased. And at least some extra costs can be expected going forward. Naturally, our great concern is for the people affected by the war and their survival.

And now, we move on to quarterly deliveries. Typically, first quarter delivery volumes increased from the fourth quarter levels. This time, they were almost 7% higher than in Q4. If we compare this to the level a year ago, deliveries decreased by 4%, and this was not due to a fall in demand, but our own capacity constraints. Our stock levels were low at the start of the year and we have also gradually started to build up stocks for the ramp-up of Husum's new folding boxboard capacity in 2023.

Another split -- delivery split by market area. There were no major changes here except for the decline in folding boxboard deliveries due to the capacity limitations. The market situation in our main market, EMEA, remains tight. Demand exceeds supply, and the bottlenecks in logistics are also keeping imported volumes from Asia and Latin America lower than normal.

In the Americas, and especially in the U.S., demand for both folding boxboard and white kraftliners has been strong. Finland supply chain problems have gradually eased, but cost levels have increased. Average selling prices have improved in all market areas.

Now, for the pulp market. For the time being, demand for long-fiber market pulp is good in both Europe and China. At the same time, the global pulp supply has been reduced by several factors like bottlenecks in logistics, cost inflation in energy and chemicals and other unplanned production shutdowns. This imbalance between supply and demand has kept prices high.

But now, I'll let Henri tell you more about the profitability and financial position.

[Henri Sederholm, executive]

Thank you, Mika, and good afternoon. Let's first look at the big picture of the development of sales and the operating result. Our quarterly sales ended up at EUR 582 million, almost EUR 90 million higher than the same quarter last year. Our comparable operating result also improved significantly compared to any previous quarter at EUR 121 million. And operating margin during the first quarter was as high as 20.9%. These are our record figures.

And here is the comparison with the same quarter last year. The most significant factor improving profitability was higher paperboard prices. Year-on-year, average sales prices in euros improved by 20%. Market pulp prices also improved. And during the first quarter, we sold emission allowances worth EUR 7 million. And as we stated in the previous earnings call, we are planning to carry out the sale of unused emission allowances more evenly throughout the year.

Then on the negative side, the main burden came from cost inflation. The price level of chemicals and energy especially increased significantly from last year. The same development was seen in logistics. Higher pulp costs impacted the profitability of the standalone paperboard business, yet the overall impact from higher pulp prices was positive for Metsa Board. A small negative impact also resulted from lower delivery volumes of paperboard and FX after hedges.

At the end of the review period, we completed the sale of our fully owned subsidiary, Hangö Stevedoring to Euroports Finland. The gain on the sale of EUR 19 million was booked as an item affecting comparability. Hangö Stevedoring is a port operator in the port of Hanko, and its business is not part of Metsa Board's core business. In 2021, its sales were EUR 22 million, and it had 187 employees.

Now, cash flow then, which also continued at a strong level. In January, March, operating cash flow was EUR 93 million. The difference from the corresponding period last year is mainly explained by the dividend received from Metsä Fibre, EUR 59 million. Last year, the dividend was 0.

And the comparable return on capital employed, which in the first quarter was as high as 21.1%, significantly above our target level of 12%. The 12-month rolling return on capital employed was 19.3%. And thanks to the strong cash flow, our net debt has remained 0 or negative since the beginning of last year. As a reminder, our dividend payment of EUR 146 million was paid at the beginning of April. The strong financial position supports our investment in sustainable growth, about which Mika will tell you more. So over to you, Mika.

[Mika Joukio, executive]

Thanks, Henri. So let's give you an update on our ongoing investments. Compared to what we stated in our previous call in February, there are no major changes regarding the time schedules or costs of our ongoing investment projects. The first phase of the Husum pulp mill renewal is close to completion, and the new recovery boiler and turbine are expected to start in September. Investment will increase the mill's generation of renewable energy, and with the new Olkiluoto 3 nuclear power plant, Metsä Board's overall self-sufficiency in electricity will rise to 85%.

During the first quarter, our total investments were EUR 107 million, including EUR 31 million of acquired businesses. For the full year of 2022, we expect them to be around EUR 300 million, which includes annual maintenance CapEx of EUR 50 million to EUR 60 million.

Now, let's move on to the outlook. Strong demand for our sustainable paperboards continues. In the second quarter, we expect delivery volumes to remain stable. We expect average sales prices for both folding boxboard and white kraftliners to increase from the Q1 level. Demand for long-fibre market pulp is expected to remain good in Europe and China. At the same time, the supply is restricted by various factors, including bottlenecks in logistics and unplanned production shutdowns.

The second quarter will include more maintenance than the first quarter, with an estimated negative impact of EUR 10 million to EUR 15 million. Cost inflation continues, especially in energy and chemicals. Global challenges in the availability of transport equipments remain, increasing logistics costs. And based on these assumptions, we expect our comparable operating result in the second quarter to improve compared to the first quarter.

And to summarize, the strong performance continued and we again set several quarterly records in sales, production and profitability. The result was improved in particular by higher sales prices. Demand for sustainably-produced fresh fibre paperboards was strong, and we expect this to continue. We are seeing no major changes in the demand supply balance which also supports the favorable outlook. We expect cost levels to remain high. Logistics costs, especially, are expected to increase due to higher fuel prices and bottlenecks in global transport.

Russia's attack on Ukraine has had and will have impacts on Metsä Board's operations. We have taken steps to replace our Russian-related businesses in the sale of paperboards as well as in the procurement of wood and natural gas.

And with that, we end now our presentation and are ready for your questions. Thank you very much.

[Operator]

[Operator Instructions] Our first question comes from the line of Mikael Doepel of UBS.

[Mikael Doepel, analyst]

A couple of questions, first of all, on folding boxboard volume. If I read your slide correctly, those were still down on a year-over-year basis despite correcting for the incremental sales. So my question there is, is that correct? And why, given the strong demand? I could also see that the folding boxboard volumes to the Americas were down on a year-on-year basis. And I guess the same question there. Why is that?

[Mika Joukio, executive]

Okay, so it's actually a very clear reason. This year and the beginning of this year, our stock levels, so inventories were clearly lower than a year ago due to the fact that we have maintenance shutdowns in Q4 and also some investment shutdowns like Olkiluoto, and for that reason, the stocks were lower, inventories were lower, and that we were able to deliver more even though there were a good demand for that.

Pretty much same reasons for folding boxboard in general and then the U.S. So you are right by saying that the volumes were lower, especially in folding boxboard.

[Mikael Doepel, analyst]

Right. And going into the rest of the -- in the Q2 and to the rest of the year, would you expect that trend to change or not?

[Mika Joukio, executive]

Yes. In Q2, our estimation is that the volumes will remain pretty much similar as in Q1. Now, we are producing -- our production is -- the production has been full in Q1 and then in Q2, we have more maintenance shutdowns. But the estimation is that volumes will be pretty much similar on the same level as in Q1. And also, we need to remember that we are already now building stocks concerning the Husum investment next year, so we need to also now prepare for that.

[Mikael Doepel, analyst]

Yes, of course. That makes sense. And then continuing on folding boxboard then. On pricing, you say that pricing is moving up into Q2. We know that there are shorter price contracts in the U.S. We've seen price increases in gains there. In Europe, you -- previously had a lot of annual contracts. I'm just wondering if there is any change to the European contract structure now given the -- what I guess you could call, a volatile market? Have you gone to shorter contract, and perhaps also apply some energy surcharges to the pricing in Europe?

[Mika Joukio, executive]

Not remarkably. It's pretty much similar situation this year in Europe as comparing last year if you think about the -- how long agreements we have. They normally are annual deals with brand owners.

But wherever it has been possible, we have been able to increase the prices and of course, we have also the incentive price increase letters to these brand owner customers even though we have fixed prices for this year in order to them to kind of understand what to expect there at the end of the year.

[Mikael Doepel, analyst]

Right. Right. Okay. Well, that makes sense. And then just a final one on wood supply. Just wondering how you see that developing going forward? You're not sourcing from Russia anymore. Where can you find more wood? Can you source more in Finland or somewhere else? And also, how do you expect this to impact pulpwood cost?

[Mika Joukio, executive]

Yes. So we will replace those volumes by sourcing them from Finland, Sweden and the Baltic countries. We have possibilities to increase volumes in Finland and Sweden and then sourcing more from Baltics. So I don't see this as a major problem for us.

[Mikael Doepel, analyst]

Is it putting upward pressure on pricing?

[Mika Joukio, executive]

At least not yet here in Finland and Sweden, no. Maybe you can see something in Baltics, but not here.

[Mikael Doepel, analyst]

Okay, that's very clear.

[Operator]

[Operator Instructions] And it seems we have no questions on the line at this time. Please go ahead, speakers.

[Mika Joukio, executive]

Okay. If there are no further questions, then, of course, I thank you all for your participation and wish you a good continuation of the day. Thank you.