Metsa Board Oyj

OMXH:METSB

Earnings Call Analysis

Metsa Board Q1 2024 Results Impacted by Strikes and Gas Explosion

Metsa Board's Q1 2024 results saw a 10% decline in sales compared to the previous year, primarily due to lower paperboard prices. The company faced significant challenges, including political strikes in Finland and a gas explosion at the Kemi mill, which together caused a negative impact of EUR 25 million. Despite these setbacks, paperboard deliveries improved by 22% over the previous quarter. Investments in mill modernization and sustainability efforts continue, although with revised plans after canceling the Kaskinen project due to high costs. For Q2, paperboard demand is expected to remain strong, but additional planned maintenance will negatively impact results by approximately EUR 10 million.

A Challenging Start to 2024

Metsa Board's earnings call for Q1 2024 presented an insight into a company facing various challenges, including a significant drop in sales and political strikes impacting operations. The company reported a 10% decline in sales compared to the same quarter last year, primarily due to lower paperboard prices. The operating margin stood at 6.5%, with a total operating result of EUR 32 million. This situation was exacerbated by political strikes in Finland, which are projected to have impacted results by EUR 25 million across Q1 and Q2.

Mixed Performance Factors

Despite the decline in sales, Metsa Board benefited from slightly reduced costs which improved their operating result. The total cost deflation, excluding pulp costs, was around 4% compared to last year. Additionally, there was a positive effect from increased market pulp volumes and favorable foreign exchange rates. However, the reduction in folding boxboard prices significantly contributed to the negative outlook, alongside a general weakening in market pulp prices.

Production Impact and Capacity Optimization

The strikes in Finland resulted in closed mills for 2 to 3 weeks, causing production losses estimated at 50,000 tonnes in paperboards and 30,000 tonnes in CTMP. Nevertheless, Q1 saw a 22% increase in overall paperboard deliveries compared to the previous quarter, primarily driven by customer restocking. The company aims to fully utilize the expanded production capacity at its Husum facility, following substantial investments made in increasing folding boxboard capacity.

Gas Explosion and Financial Guidance

A gas explosion at Metsa Fiber's Kemi mill has disrupted kraftliner production, with a negative financial impact anticipated between EUR 30 million to EUR 40 million in Q2. Planned maintenance in Q2 is expected to cost an additional EUR 10 million, intensifying the pressures on the quarterly results. The company did not provide separate profitability guidance for Metsa Fiber but noted improving average pulp prices in the future.

Investment Strategy and Future Outlook

Looking ahead, Metsa Board remains committed to its investment strategy targeting sustainable production. The company has decided against proceeding with new investments in the Kaskinen mill due to unexpected high costs and instead will focus on growth and familiarity in existing mills. They anticipate maintaining strong demand for fresh fiber paperboards, supported by seasonal sales and restocking throughout the supply chain.

Sustainability Initiatives

Metsa Board is progressing well on its sustainability commitments, reporting a 92% share of certified wood fiber and lower fossil-based CO2 emissions. The ongoing investments aim to replace fossil fuels and improve production efficiency, promoting their goal of full fossil-free production by 2030. The company highlights the importance of maintaining environmental standards alongside financial performance.

Earnings Call Transcript 2024-Q1

[Mika Joukio, executive]

Good afternoon, everyone, and welcome to the presentation of Metsa Board's results for January March 2024. My name is Mika Joukio, and I'm the CEO of Metsa Board. Here with me, our CFO, Henri Sederholm and the Head of IR, Katri SundströmSo, let's go through the presentation first and then take the questions. As always, let's first take a summary of Q1. The year started positively with a significant pickup in the demand for paperboards. As expected, the average price of falling boxboard fell slightly compared to last year's average price.The white craft price level remained fairly stable. The pulp market also improved, especially in Europe. Pulp demand was boosted by increased activity among paper and paperboard producers, which had a positive impact on European market pulp prices.There were no planned maintenance shutdowns during the first quarter as normally and production volumes increased by 6% compared to the same period last year and by 28% compared to the previous quarter.In March, the positive development was interrupted by political strikes in Finland, which shut down all our Finnish mills for 2 to 3 weeks. The total result impact due to the strikes is estimated at EUR 25 million divided between Q1 and Q2.In gaming bioproduct mill, there was a serious gas explosion in March. This also has an impact on our kraftliner mill as it is part of Kemi Integrate. However, we aim to continue white kraftliner production in Kemi at the lower-than-normal production level during the repair works. The accident will have a significant impact on our results, and I will return to that in the near-term outlook.Finally, we decided not to invest in the folding boxboard mill in Kaskinen. The result of the reengineering showed the total costs were significantly higher than initially estimated, and the project's financial targets would not have been met. Instead, we are planning investments in our existing mills, about which I will say more later.And now for paperboard sales and the overall demand situation. After several consecutive quarters of decline, our paperboard deliveries finally took an upward turn. Total deliveries in the first quarter were 364,000 tonnes, not far from the corresponding period last year.Compared to the previous quarter, they were up by 22%. The demand has mainly been boosted by customer restocking activities. I think it's still too early to speculate on a clear improvement in consumer demand or strengthening of purchasing power. But hopefully, we'll see more evidence of both later this year.The good order inflow at the beginning of the year was interrupted in mid-March when thread unions launched massive political strikes in Finland. The strikes stopped the raw material shipments to the mills and closed all the ports in Finland, preventing deliveries to our customers.We had to close all our Finnish mills, resulting in an estimated loss of production of 50,000 tonnes in paperboards and 30,000 tonnes in CTMP. And here are the paperboard sales split by region and by product. There were no major changes compared to the corresponding period last year. If the comparison were against the previous quarter, each region would show a clear increase, except EMEA linerboards, which remained stable.In the U.S., we have rerouted our deliveries following the collapse of the bridge in Baltimore, where one of Metsa Board's North American warehouses is located. Our customer deliveries have not been affected, but there will be small additional costs.Market pulp delivery volumes increased compared to the corresponding period last year. In total, the demand for market pulp has clearly increased due to the higher operating rates of paper and paperboard producers. The improved market situation has also been reflected in European market pulp prices, which have recently experienced a sharp upward trend.In China, demand was seasonally affected by the Chinese New Year, during which paper and paperboard production is partly shut down. Going forward, the market will remain tight, especially in long fiber pulp. Supply is limited due to several overlaps, extended impacts from finished political strikes, global logistical bottlenecks, several planned maintenance works among pulp producers and the long shutdown in Metsa Fiber's gaming mill.And now, for sustainability. First, I'd like to take the opportunity to highlight our actions in terms of sustainability reporting. According to one of our strategic programs, leader in sustainability, we have already conducted our 2023 reporting in accordance with the CSRD, and the full report is included in the Board of Directors' report. There, you will find an extensive description of sustainability at Metsa Board, including several indicators related to it.Here are a few of them, the most relevant for us. First, of course, safety. Our TRIF 2.2 showed a clear improvement from last year, yet not at its target, which is, of course, 0 accidents. The share of a certified wood fiber was at 92%, which is over our target. Good.Fossil-based CO2 emissions decreased compared to the corresponding period last year. The steady production rate reduced emissions even though production volumes increased. Energy efficiency and water use are still lagging a little behind the targets, reflecting the impacts from last year where we had to adjust our production to meet the demand.But now, I will hand over to Henry to present the financials.

[Henri Sederholm, executive]

Thank you, Mika, and good afternoon. The first quarter sales were 10% lower than in the corresponding period last year. The main contributor was lower paperboard prices.The operating result in the first quarter landed at EUR 32 million, and the operating margin was 6.5%. As Mika already mentioned, the total negative impact from the political strikes is estimated to be EUR 25 million, of which EUR 10 million to EUR 15 million was in the first quarter and the rest in the second quarter.And now, let's take a closer look at the items that affected the result. 1st January, March compared to the same quarter last year and starting with the positives, the slightly reduced cost level improved operating result. Total cost deflation, excluding pulp costs, was around 4% compared to Q1 last year. All other costs, except wood costs, reduced or remained stable.Increased market pulp volumes and FX had also positive impacts on results. Then on the negative side, the main contributor was lower folding boxboard price. In addition, market pulp prices weakened, which also impacted Metsa Fiber's result.As already mentioned, the estimated impact from political strikes was EUR 10 million to EUR 15 million and roughly the same effect was seen in the reduced sale of emission allowances.And now, the comparison with the previous quarter. The main positive element was increased paperboard volumes. As Mika mentioned earlier, deliveries increased by 22%. The first quarter did not include any planned maintenance, creating a positive impact of roughly EUR 10 million compared to Q4.The operating efficiency of all the mills improved as there were no maintenance market or investment-related shutdowns. However, the main positive impact came from Husum's folding boxboard as the start-up of new capacity took place in Q4. And the main negative differences were due to the lower falling boxboard price and the impact of political strikes.Comparable return on capital employed quarterly level, 5.7% and rolling 12 months at 3.1% are clearly below our target of over 12%. Capital employed at the end of period totaled EUR 2.3 billion.Q1 cash flow from operations was EUR 8 million negative. It was weakened by the rapid growth in working capital due to a pickup in sales and production volumes. In the corresponding period last year, cash flow was supported by production adjustment measures to prevent an increase in inventory levels. In addition, cash flow this year included only EUR 10 million dividend from Metsa Fiber, whereas the dividend last year included in Q1 cash flow was as high as EUR 83 million.Next, the financial position. Our net debt increased a bit and was EUR 176 million at the end of the period. Leverage also increased mainly because of lower rolling 12 months EBITDA landing at 1.1%. This is still a good level with sufficient headroom to our maximum target level of 2.5. And a reminder that our own dividend payment, roughly EUR 90 million took place in April and is therefore visible in the Q2 figures.But now, I'll hand the floor back to Mika.

[Mika Joukio, executive]

Thanks, Henry. So, let's move on to the investments, starting with the completed ones from last year. The folding boxboard capacity increase in Husum and the Gemmill development program. We are currently focusing on making full use of Husum's expanded capacity of folding boxboard. This will further strengthen our leader position in our main markets in Europe and North America.We are continuing investments in the Husum port, which should be completed this year. In Kemi, kraftliner production has been interrupted due to the gas explosion at the Metsa Fiber's bioproduct mill elaboration plant.The renovation of the old operation plant is expected to last until the end of June, and the installation of the new evaporator units is expected to take place in Q4. During the renovation and installation works, our aim is to continue the production of white kraftliner with dried unbleached pulp at lower-than-normal production level. Some coated grades will also be produced in Husum.However, this may delay our target of having Kemi's expanded kraftliner capacity fully available on the market in 2025. And finally, a reminder that at the end of 2022, a new recovery boiler and the turbine at the Husum pulp mill started up. This was a EUR 380 million investment, which strengthened Husum integrated role as an efficient and sustainable platform for the long-term development of paperboard production.Part of the costs from the investments completed last year will also be carried over to this year. As a result, our total investments in 2024 are expected to be slightly lower than in 2023. Depreciation will naturally increase year-on-year due to the completions of the investments.During the review period, we also made a decision not to investment in the new Kaskinen folding boxboard mill. As a result of engineering, the total cost of the project was significantly higher than originally estimated and the project would not have met our financial objectives. Instead, we are planning growth and development investments at our current mills, which will support our strategy to grow in fibrous packaging materials and renew our industrial operations.They also support our goal of fossil free production by the end of 2030. In Husum, we are still planning the second phase of pulp mill renewable, which means replacing existing fiber lines with new ones. Also in Husum, we have started a program for new products on the current white kraftliner production line, PM2. The aim is to find innovative solutions for the growing food and food service packaging segment.Simpele board mill will be modernized in phases over the next 10 years. This program includes renewals in the paperboard machine and the finishing area, renewals in the mechanical pulp production and a new power plant. Yesterday, we made the first investment decision regarding Simpele modernization, which I will open up further in my next slide.And finally, at the Gura board mill, a broker will be launched to improve the performance of the current barrier board and expand its end-use areas. Yesterday, we announced an investment decision to modernize simple as paperboard machine. This is the first part of the broader investment program planned for Simple mill over the next 10 years.This investment includes the renewal of the paperboard machines pre-drying and cold injections. With new technology, we can replace the use of fossil fuels in paperboard reduction, which in turn takes us closer to our 2034 cell-free target.The investment will improve the quality and performance of Simpele folding boxboard, which is mainly used in food and pharma packaging. These are end users where the quality and safety criteria of the paperboard are extremely strict. Further, our cost competitiveness will increase as production efficiency increases. The estimated completion of the project is during the second half of 2025 and the value of the investment is estimated at EUR 60 million.And now, the near-term outlook. The solid demand situation for fresh fiber paperboards is expected to continue in the second quarter. Demand is supported by restocking in the value chain. In addition, Q2 is a seasonally stronger quarter in paperboard sales. We expect our paperboard delivery volumes to increase slightly from Q1 and average sales prices to remain stable.There will be more planned maintenance in the second quarter than in the first with an estimated negative result impact of around EUR 10 million. The average market pulp price is expected to improve, driven by European pig prices. The global market situation for long fiber pulp remains tight as supply is limited by the gaming accident, pulp producers' annual maintenance shutdowns and global logistics bottlenecks.The negative result impact of the political strikes in Finland in Q2 is expected to be roughly at the same level as in Q1 at EUR 10 million to EUR 15 million. The negative result impact of the gas explosion in Kemi is estimated at EUR 30 million to EUR 40 million in Q2. Depending on the schedule for the repay work and restart of kraftliner production.Metsa Board and Metsa Fiber have standard property and business interruption insurance policies on which claims will be made later and whose financial impacts are not included in the estimate. And based on this, we expect our operating results to weaken from the previous quarter.Then, the summary. As we already stated in connection with our full year results in February, the order activity improved at the beginning of the year, which we expect to continue at least in the coming months. The first quarter was hit by political strikes, the effects extended into the second quarter.The explosion at the Kemi Bioproduct mill will impact Metsa Board's kraftliner production. It will have a significant impact on the Q2 results, which are not expected to include any insurance compensations yet. We have recently announced plans for new investments at our current mills to be implemented over the next 10 years.With these investments, we are improving our competitiveness, accelerating our target to be fully fossil-free in production and developing future products to replace plastics. Yesterday, we made an investment decision to renew the Simpele paperboard machine. Investment will significantly improve the quality of Simpele-folding boxboard and increase the mill's cost competitiveness. We will keep you updated with both our ongoing and upcoming investments as soon as plans are finalized.And with that, we end our presentation Henri and I are ready for your questions. Thank you very much.

[Operator]

[Operator instructions] The next question comes from Andrew Jones from UBS.

[Andrew Jones, analyst]

Just a question on the market, I guess. I mean, we're talking a lot about Asian imports at the back end of last year. And clearly, your volumes picked up a lot in the first quarter. But I'm just curious, is that all demand driven restocking? Or have you seen less Asian imports in some of your markets? And how do you see that trend evolving as we go through the rest of the year? Because obviously, some of those large machines and in Asia clearly, they're still ramping up.Do you see imports becoming a threat again later on in the year? Is that something that concerns you greatly?

[Mika Joukio, executive]

Yes. The activity of the Asian producers in Q1 was a bit, I mean slightly lower than in 2023 on the average. But, of course, they still are in the areas where we operate also like Turkey, like Far East like Latin America. But maybe the Red Sea situation has also then kind of being a challenge for them and we have seen slightly lower volumes.As far as the year-end or later this year is concerned, it's difficult to speculate what will happen when the new machines will start up and probably then we might see new volumes, but I think it's too early to say, and I don't want to speculate with that.

[Andrew Jones, analyst]

And just on the upturn in volumes that you've seen, I mean, are any particular sectors that have been driving that upturn? And how do you compare maybe to some online market demand trend versus where maybe a bit of restocking? I mean, how do you assess about uptick between the fourth quarter and the third quarter in terms of demand?

[Mika Joukio, executive]

Yes. So far, we have seen restocking here. No doubt, that's clear. And then the activity in the North American market is a little bit better than here in the European market. But I think it's still too early, remembering also that the impact from the political strikes and shutdowns of the mill. So, it's a bit too early to say, has there really been a pickup in the real demand.Hopefully, that has taken place and will take place. But at the moment, it's a bit too early to say.

[Andrew Jones, analyst]

And just on the second quarter, just to remind us of some of the moving parts. I mean obviously, you're talking about higher volumes on the folding boxboard side. Clearly, white kraftliner volumes will be down because of the Kemi effect that you've said it's a $30 million or $40 million impact. Do you have any estimate actually around the volume of white kraftliner in the quarter?And then just on sort of moving parts, you've flied higher maintenance. For memory, I think that was about $10 million headwind. But can you just clarify that and also nets of 5 or I mean it was a negative contribution this quarter. But I guess with the Kenny explosion, despite the higher pulp price, I'm guessing that probably gets more. So, can you just talk at through some of those moving parts as to how we should think about the second quarter?

[Mika Joukio, executive]

Yes. If I start and say concerning the maintenance. So, typically, in Q1, it's quite maintenance-free quarter. And then Q2, the maintenance activities will increase. And that is the case also this year. Of course, during the strikes and shutdowns, we were able to do some maintenance. But I mean, anyway, there are more planned maintenance shutdowns in Q2 than in Q1, and those will have a negative impact of EUR 10 million in Q2 comparing Q1.But then concerning Metsa Fiber --

[Henri Sederholm, executive]

Yes. So, as you know, we are not giving sort of profit guidance on Metsa Fiber's results. We are just commenting on the elements impacting. So, average pulp prices are expected to improve clearly from the first quarter, as we have said, obviously, the Kemi explosion impact heavily Metsa Fiber result on the second quarter and our guidance on the impact of the Kemi situation includes also our share of Metsa Fiber's impact, which then totals EUR 30 million to EUR 40 million, but we are not giving sort of separate guidance on Metsa Fiber's profitability.

[Operator]

The next question comes from Cole Hathorn from Jefferies.

[Cole Hathorn, analyst]

Just on the white kraftliner market, I mean with your volumes out of the market and we're seeing price increases in the brown grades as well as brown-grade export prices into Europe going up. I'm just wondering what you're doing on the price developments in White kraftliner because I imagine if it's a tighter market, you've got to be pushing the pricing lever, particularly given the Nordic wood costs?And then I just like your thoughts on will the Kemi mill issues as well as the strike impacts on pulpwood? Could you give any color on the short-term impact of the strike on pulp wood as I know there were logistics, rail as well as a lot of downtime on those kind of short-term pulp wood dynamics that cycle thoughts there.

[Mika Joukio, executive]

Okay. What Kraftliner prices, we also announced a price increase here in Europe, and it quite nicely went through, but that was pretty much only for one coating rates. So, having this kind of situation as we have at the moment with Kemi. So, we don't see that those prices will pick up at least during the Q2.Let's see what will happen then in H2. And then as far as the pulp wood prices are concerned, yes, there is a clear tendency that wood prices are going up. I can't say how much, but anyway, the tendency is upwards, not towards.

[Cole Hathorn, analyst]

Maybe just following up on the pulp wood. Were there any short, like shorter-term dynamics where I mean, just availability, logistics issues that may have impacted that further, and there might be a little bit of short-term relief coming in the market? I'm just wondering if there's more than the tight supply-demand situation of the wood fiber boss, I'm wondering if there's kind of a logistic and operational impacts with the strikes that may have made it slightly worse.

[Mika Joukio, executive]

Yes, concerning Metsa Board Metsa Fiber, we are sure that we get wood enough, no doubt. So, there won't be any sort of cheese. But, of course, I don't speculate what other competitors are doing.

[Operator]

[Operator instructions]The next question comes from Andrew Jones from UBS.

[Andrew Jones, analyst]

Just on the CapEx profile. Now that Kaskinen is not happening and you've got these additional investments phasing. Can we talk about how the overall the CapEx envelope looks over the next couple of years, this year into 2025, '26? Just so we can reframe those expectations.

[Mika Joukio, executive]

Yes. Thank you for the question. Henri will take this.

[Henri Sederholm, executive]

Okay. So, if we think about the elements, our sort of maintenance CapEx level continues at around EUR 50 million to EUR 60 million per annum and then we have also stated the renewal of the ERP system, which is expected to be at least EUR 80 million, which is divided between 24% and 25%, mainly as we currently know, which would be around sort of EUR 40 million per year.And then, as Mika mentioned in the presentation, we have a significant amount of sort of CapEx, which are still related to the projects that ended last year for this year and some new investments also announced as, for instance, in Peleso. Putting that all together amounts to around EUR 200 million for this year.We are not giving guidance still on next year, but that probably will follow then later on this year when we know exactly which projects are starting. We announced a number of different things that we are looking into. And that will clarify then a bit later on.

[Andrew Jones, analyst]

But presumably, the trend will be down from 2024, I would guess.

[Henri Sederholm, executive]

Well, we cannot really speculate at this point. It depends on the projects that are decided.

[Operator]

There are no more questions at this time. So, I hand the conference back to the speakers for any closing comments.

[Mika Joukio, executive]

Okay. Thank you, all participants, and I wish you a nice continuation for the day. See you next time. Bye-bye.