Metsa Board Oyj

OMXH:METSB

Earnings Call Transcript 2023-Q1

[Mika Joukio, executive]

Good afternoon, and welcome to the presentation of Metsa Board's First Quarter 2023 Results. My name is Mika Joukio, and I'm the CEO at Metsa Board. With me here, I have CFO, Henri Sederholm; and Head of IR, Katri Sundstrom. Let's first go through the presentation, and we will then open the lines for your questions. And I will start with Q1 in brief.Compared to the corresponding period in 2022, the average sales price of both folding boxboard and white kraftliners improved significantly. Compared to the previous quarter, the improvement was driven by price increases of annual contract customers in folding boxboard. We have also focused on serving our customers in Europe and North America. Total delivery volumes of paperboard decreased, being roughly 100,000 tonnes lower than in the comparison period. I will return to the reasons for this in more detail in the next slide.Demand for market pulp has weakened. The weakening has been stronger than we previously expected. And mainly for this reason, we had to revise down our previously issued result guidance for Q1 in April. And due to the market softness, we have adjusted our production in paperboard, pulp and BCTMP. Paperboard production volumes were roughly 25% lower and pulp and [ CTMP ] volumes 20% lower than in the corresponding period last year. And we will probably continue our adjustment measures going forward.The Annual General Meeting took place in the first quarter, and the dividend for last year was conformed in line with Board's proposal, EUR 0.58 per share. Earlier this year, we updated our strategic 2030 sustainability targets. The new targets highlight our commitment of safeguarding natural biodiversity, mitigating climate change, promoting the sustainable use of natural resources, healthy workplace communities and ethical operations.And now for the paperboard sales, the overall demand situation. As the graph shows, paperboard delivery volumes have been declining for 3 quarters in a row. The weakened consumer purchasing power has produced demand for consumer products, which in turn has been reflected in paperboard demand. In addition, destocking in the value chain is still reducing the delivery volumes. Right now, there are no signs of a significant turnaround.During the first quarter, the volumes were roughly 20% down from the comparison period and were roughly 10% down compared to the previous quarter. And here is the situation by region and by product. As I already mentioned, we have focused our sales on our customers in our main market areas, Europe and North America. Of these, sales to North America have been slightly stronger than in Europe. And for this reason, the sales volumes for South America, the Asia Pacific region and Middle East Africa have significantly decreased. If we compare the paperboard grades, the decline has been steeper in white kraftliners than in folding boxboard.Now for market pulp. Metsa Board's market pulp deliveries fell sharply in the first quarter, totaling 83,000 tonnes. Our associated company, Metsa Fibre's pulp deliveries also decreased, totaling roughly [ 650 million] tonnes.Market situation for pulp has clearly weakened. In Europe, the destocking has led to prolong production shutdowns in paper and pulp and has thus reduced pulp demand. In China, the economic recovery following the removal of tight COVID restrictions has not boost demand for market pulp as expected. Softwood market pulp prices fell at the beginning of the year, and the decline has deepened in the second quarter.Before I let Henri move on to financials, let's have a recap on sustainability. In safety, we are developing in the right direction, although we still have room for improvement if we are to achieve our target of 0 accidents. Low capacity utilization affected the production efficiency of our mills. Energy efficiency improvement is now somewhat flat compared to the base year 2018. The use of process water reduced but more slowly compared to the corresponding period last year.We have tightened our 2030 target to reduce water use from 30% to 35%. The end of Russian wood imports, complied with reduced wood imports from the Baltic countries, increased the share of certified wood fibre of our total wood supply. In the first quarter, we were at the level of 90%.But now I will hand over to Henri to open the financials.

[Henri Sederholm, executive]

Thank you, Mika, and good afternoon. Let's start with the top line. Low delivery volumes of both paperboard and pulp were reflected in sales, which were EUR 542 million. The operating result was EUR 89 million, down from last year's level, but also from the previous quarter. Regarding this, we had to issue a profit warning as we had previously expected the result to remain roughly at the level of Q4.Next, a closer look at the items that affected the result. First, quarter 1 versus quarter 1 last year. The operating result weakened by 27%. Higher sales prices for paperboards and market pulp more than offset the negative impact from declined volumes. On average, folding boxboard prices in euros improved by 20% and white kraftliner prices by 10%.Profitability was also supported by a positive FX impact and the sale of unused emission allowances. Total costs, excluding pulp, increased by around 15% from last year.And then Q1 against the previous quarter Q4. Average sales prices of paperboards improved driven by price increases for annual contract customers in folding boxboard. Kraftliner prices declined somewhat. And again, improved pricing offset the negative impact from reduced paperboard volumes. Profitability was also supported by positive FX impact, the sale of unused emission allowances and no maintenance.Cost was slightly lower in energy, chemicals and logistics, whereas wood costs increased. The Russian war in Ukraine has tightened the wood market in the Baltic Sea region, and this tightness is expected to continue in the coming years. However, the availability of pulpwood is currently in line with demand.The biggest negative impact was attributable to pulp lower volumes, weakened price levels and a lower result share from Metsa Fibre. And in addition, the depreciation was some EUR 10 million higher than in Q4 due to the completion of the recovery boiler and turbine in Husum.The decline in profitability was also reflected in the comparable return on capital employed, which was 13.9% in the first quarter and 20.2% on a rolling 12-months basis. Capital employed totaled EUR 2.6 billion at the end of March, an increase of EUR 300 million from a year before.The operating cash flow in the first quarter was EUR 126 million, which includes a dividend from Metsa Fibre of EUR 83 million. The cash flow after investment was EUR 69 million. Metsa Board's own dividend of EUR 206 million was paid in the second quarter in April.And finally, the financial position, which remains strong. Net debt was at EUR 9 million and leverage was at 0. So plenty of headroom to our targeted level of a maximum of 2.5. And this position creates a solid platform for our ongoing and planned growth projects, but which Mika will now tell you more about. So back to you, Mika.

[Mika Joukio, executive]

Thanks, Henri. So regarding the investments, there will be a lot of activity in the second half of this year. In Husum, we will increase our annual folding boxboard capacity by 200,000 tonnes. The investment shutdown is scheduled from late August to early October. The added capacity is expected to be full in the market by the end of 2025. After this investment, the total capacity of Husum's board machine number one will be 600,000 tonnes per year. Investment value for this project is EUR 210 million.In Kemi, we will increase our white kraftliner capacity by 40,000 tonnes, after which the annual capacity of Kemi's kraftliner mill will be 465,000 tonnes. The start-up of new capacity is at the end of the third quarter, and full production capacity is expected to be reached during next year. The investment will also improve the mill's energy and water efficiency. Our initial investment value estimate was EUR 67 million, but due to the high cost inflation, among other things, it will probably end up higher.And as a reminder, our associate company, Metsa Fibre, is starting up the new bioproduct mill in Kemi in the third quarter, replacing the old pulp mill. And we are proceeding with our pre-engineering for new folding boxboard mill in Kaskinen about which a possible investment decision can be made next year at the earliest.In 2022, our total investments were EUR 304 million. And for this year, we expect them to be in the range of EUR 250 million to EUR 300 million. Maintenance CapEx will remain roughly at the level of last year, around EUR 50 million.On the right-hand side, you can see the indicative timetable for both our ongoing and planned investments. In addition to the planned new folding boxboard mill in Kaskinen, we are planning the Husum pulp mill renewal during this decade by replacing the mill's fibre lines. Investment values for these 2 projects will be specified in the context of possible investment decision.Now for the near-term outlook. Slower-than-expected economic growth, continued inflation and weakening consumer demand are all creating uncertainty in the operating environment. The visibility of paperboard sales development continues to remain weak. For Q2, we expect the paperboard delivery volumes and average sales prices to remain roughly at the level of Q1.The outlook for pulp remains weak. Demand is expected to remain muted with declining price levels. Upcoming maintenance shutdowns will reduce pulp supply somewhat. Total costs are expected to remain stable. There may be an increase in wood costs, but the corresponding decrease in other production costs. And increased maintenance compared to Q1 will burden the profitability.FX will have a positive impact in Q2 compared to the previous quarter and the corresponding period last year. And with these assumptions, we expect our operating result in the second quarter to be weaker than in first quarter.To summarize, we have been able to defend our paperboard prices, which have compensated for the negative impact of declining volumes. Nevertheless, uncertainty continues in our operating environment and driven by destocking in the value chain and weakened demand for consumer products.In the near-term, the visibility of sales development will remain low. Quite how long is difficult to predict. It also depends on the global economic situation. We will continue to adjust our paperboard and pulp production, if necessary, to meet the current demand. Despite the short-term challenges, we are focusing on developing our business and investing in sustainable and profitable growth. The long-term demand drivers for sustainable packaging materials, which are increasingly replacing plastics have not disappeared anyway. The second half of this year will be busy as 2 of our ongoing investments will be completed and new capacity is being ramped up.And with that, we end our presentation and are now ready for your questions. Thank you very much.

[Operator]

[Operator Instructions] The next question comes from Linus Larsson from SEB.

[Linus Larsson, analyst]

My first question is on volumes. You're guiding for roughly stable deliveries Q-on-Q in the second quarter. I wonder what your guidance might be on production as you've had 2 quarters in a row now with -- if I understand this right, lower production than shipments? So how does that look in the second quarter, please?

[Mika Joukio, executive]

So as I said, so volumes in Q2 are expected to be stable compared in Q1, I mean, delivery volumes. And our intention is not to grow, I mean, increase our inventories. So then production will be either at the level of deliveries or slightly lower.

[Linus Larsson, analyst]

So maybe some more destocking still?

[Mika Joukio, executive]

Yes, in our stocks, yes, that's true.

[Linus Larsson, analyst]

In your own?

[Mika Joukio, executive]

Yes. True.

[Linus Larsson, analyst]

And then that leads me to my second question. Looking at the value chain as a whole, do you have any observations to share as regards timing and so forth on this ongoing destocking process? How long it will go on, would be helpful.

[Mika Joukio, executive]

During the first quarter, I visited a lot of customers and we had good discussions, and kind of the common word for these discussions were uncertainty. So it's very difficult to predict whether it will end or destocking will end in Q2, Q3 or even Q4, I mean, the visibility is really, really bad at the moment.

[Linus Larsson, analyst]

And do you see any differences when you compare various subsegments, various geographies?

[Mika Joukio, executive]

Not really, no.

[Linus Larsson, analyst]

And then maybe -- so a final question. There's been a lot of focus on the weakening pulp markets. Do you provide any guidance for your -- the contribution that you're expecting from Metsa Fibre in the second compared to the first quarter?

[Mika Joukio, executive]

Yes, I don't have any precise figure for you, but the fact is that the market pulp demand and market pulp market altogether is weak in Q2 than in Q1. And of course, then the kind of impact to our results from Metsa Fibre will be lower in Q2 [ comparing ] Q1.

[Operator]

The next question comes from Robin Santavirta from Carnegie.

[Robin Santavirta, analyst]

Now the first question I have is related to the CO2 allowance sales. I guess you sold now in Q1 a similar amount in euros that you did all year '21 and almost as much as you did all year '22. So a big chunk now sold in Q1. What should we expect for Q2 and for the rest of the year when it comes to CO2 allowance sales?

[Mika Joukio, executive]

Henri will take this.

[Henri Sederholm, executive]

Yes. So what we have stated earlier on is that we will sell unused emission allowances throughout the year. So that is still valid. We are not giving a -- sort of a figure guidance on the quarterly sales, but it's a fair assumption to assume that we will continue to sell throughout the year. Our position or balance at the moment is about 0.5 million tonnes. So that's why we have a fairly large balance at the moment.

[Robin Santavirta, analyst]

But could it be as much as in Q1 -- in Q2? Is that what your plan?

[Henri Sederholm, executive]

No comments on any numbers.

[Robin Santavirta, analyst]

Related to the maintenance shut now in Q2, can you provide some details about the financial impact that you expect versus Q1? And how does Q3 and Q4 look like?

[Henri Sederholm, executive]

Yes, comparing Q1, then the negative impact is roughly EUR 10 million.

[Robin Santavirta, analyst]

EUR 10 million?

[Henri Sederholm, executive]

Yes.

[Robin Santavirta, analyst]

And do you have a figure in mind sort of a ballpark Q3 and then Q4 as well?

[Henri Sederholm, executive]

Yes. Yes, Q3 is the biggest, roughly EUR 20 million and then Q4, again, another EUR 10 million, comparing to Q1.

[Robin Santavirta, analyst]

Just a detail maybe for Henri on the depreciation level. How was it -- was it so that there is a further increase now in -- as of Q2 or Q3? how should we model depreciation going forward?

[Henri Sederholm, executive]

Yes. The full year depreciation for this year will be about EUR 20 million higher than last year. So a little bit above EUR 100 million this year. EUR 105 million is a good number to use.

[Robin Santavirta, analyst]

And the final question I have is related to the start-up of your growth investments, so in Kemi and in Husum in Q3. How should we expect that kind of shot for example? Does that mean that the deliveries -- the paperboard deliveries sort of should remain sort of subpar in Q3? And any cost related -- or start-up costs related to those sort of ramp-ups in Q3? How should we think about those?

[Henri Sederholm, executive]

Yes. In both cases, I mean, Husum and Kemi, we have by purpose then increased our customer stocks, customer inventories. So we don't expect any kind of hiccups concerning the deliveries during the shutdown period or then after the shutdown period, of course, depending on how successful the start-ups are, but that is the case.

[Robin Santavirta, analyst]

And any cost sort of related to the start-ups?

[Henri Sederholm, executive]

What do you mean cost?

[Robin Santavirta, analyst]

So also this abnormal production or start-up cost, perhaps more employees or other sort of fixed cost increasing related to the start?

[Henri Sederholm, executive]

No. Of course, then -- in the beginning, then the production volumes are not necessarily at the targeted level. I mean, it takes time. It's ramp-up period. But concerning the fixed costs, no, we don't expect any additional costs.

[Robin Santavirta, analyst]

And maybe if I can, 1 final one on pulp. Now it looks like pulp prices in China are going steeply down and looking at the wood cost, what are they, 50% higher in Finland and Sweden versus back a couple of years ago? Any plans to sort of curtail for Metsa Fibre production or for you guys to curtail pulp production as well now during the summer or early autumn, if the prices head into the direction it now seems?

[Henri Sederholm, executive]

Yes, it's one possibility to curtail production both in Metsa Board as well as then in Metsa Fibre, depending on the delivery situation, of course. But our intention is not to -- our purpose to increase our inventories too much.

[Operator]

The next question comes Antti Koskivuori from Danske Bank.

[Antti Koskivuori, analyst]

1 question from my side. You talked about paper prices in Q2 being flat, while if you look at the statistics, the white kraftliner prices have come down through Q1. I was just wondering if you could elaborate a bit the kind of assumptions behind that statement? Do you see folding boxboard prices going up, compensating on lower kraftliner price? Or how do you see that developing?

[Mika Joukio, executive]

Yes. On the average, that is the case that the prices are expected to remain stable. But then depending on the region, depending on the product, there might be kind of pluses and minuses. It's not fair to say that linerboard goes down and folding boxboard goes up. That is not the case in general. So based on our understanding and estimates, average prices will remain quite flat.

[Antti Koskivuori, analyst]

Is there -- if we look the spot prices of white kraftliners, should we expect -- I mean, something that we see today happening in spot prices, should we expect that to have a kind of impact on your sales prices later on? i.e., is there a meaningful lag between the prices that we see in the market and your delivery prices?

[Mika Joukio, executive]

Yes, our intention --

[Antti Koskivuori, analyst]

I guess my question -- yes.

[Mika Joukio, executive]

Our intention in paperboard is not to kind of sell spot. We prefer then production curtailments and keep the price levels as we have guided.

[Operator]

[Operator Instructions]. The next question comes from Harri Taittonen from Nordea.

[Harri Taittonen, analyst]

Yes, my colleagues have exhausted pretty much my list of questions, but maybe one on the -- some news on the U.S. box shipments seem to be picking up a little bit in April. I mean, is it -- you have exposure, of course, to that market in your segment. But is there anything that you recognize on that side of any -- or is it sort of some seasonal pick up or have you sort of recorded anything on that?And then on the cartonboard side, also, like, how are the trade flows developing? Is a new feature that you get more import pressure from the Asian markets to Europe or to the common export markets? Is that something which is affecting the restoration of supply-demand balance? So those 2 questions, please.

[Mika Joukio, executive]

So concerning your first question, of course, there is seasonality. Q2 is normally better than Q1. I mean, if we then compare North America to Europe, North America, both in linerboard as well as in folding boxboard is slightly better. The market situation is slightly better there or demand. So that is the case. And then as far as the Chinese producers -- you said Asian producers, but I say Chinese producers, so they are more active this -- I mean, at the moment then, for example, 1 year ago, of course, driven by lower logistic costs. And they are active in South America, for example, or some areas, some countries in Middle East, Africa and so on, but not that much in the Mainland or main markets of ours like North America and Continental Europe. But they are more active now than they used to be.

[Operator]

The next question comes from Harri Taittonen from Nordea [Operator Instructions].

[Mika Joukio, executive]

Okay. So no further questions. Then I thank you all participants for your attendance to this event and wish you good and nice continuation of the day and week. And of course, we wish excellent Vappu, so 1st of May. Thank you.