Metsa Board Oyj

OMXH:METSB

Earnings Call Transcript 2021-Q4

[Mika Joukio, Chief Executive Officer]

Good afternoon, everyone, and welcome to the presentation of Metsa Board's Fourth Quarter and Full Year 2021 Results.My name is Mika Joukio, and I'm the CEO of Metsa Board. Together with me here, I have our CFO, Henri Sederholm and Head of IR, Kati Sundstrom. Henri and I will go through this presentation, and we will open then the lines for your questions and more discussion.So we have a very strong year behind us. Indeed, it was the Metsa Board's best ever performance. Our paperboard business developed particularly well and delivery volumes were at an all-time high of more than 1.9 million tonnes. The same applies to production volumes where there were also record highs. Increased volumes and higher prices pushed our sales above EUR 2 billion. And despite fast cost inflation, we managed to improve our margins remarkably.Our comparable return on capital employed was almost 19%, which is clearly above the targeted level of 12%. And our financial situation is strong with a negative leverage. All in all, a strong performance, and I want to thank all our staff for their great work in these exceptional circumstances and all our partners for the cooperation.Our aim is to be a leader in sustainability, and this needs actions and investments. In 2021, we continued our efforts to reduce fossil CO2 emissions in our mills. For example, in the Kyro and Simpele mills, we replaced peat with renewable energy. The first phase of the Husum pulp mill renewal will increase the mills bioenergy production and self-sufficiency in electricity.At the end of the year, 85% of our total energy used was fossil-free. At the beginning of the year, we sold 30% of our Husum pulp mill to Norra Skog and made a long-term wood supply contract with them, which will increase the share of certified wood fiber in Sweden. Our target is that more than 90% of all our purchased wood will be certified by 2030. To help our customers, we launched 360 Services to improve the resource efficiency and performance of packaging.In addition, we constantly collaborate with our partners to find more innovative and sustainable packaging solutions that are in line with the circular economy principles. As part of Metsa Group, we created a "Metsa For All" vision to promote diversity, equality and inclusion in our working community. And as a recognition of our leadership in sustainability, we achieved an outstanding AAA score by CDP in all 3 categories: climate, water and forest, an excellent achievement.Finally, a few words about the European Union taxonomy. Metsa Board's main business activities, paperboard and market pulp are currently not included in the taxonomy's technical screening criteria. As a result, the share of the company's taxonomy eligible business, especially in terms of turnover is low. We are reporting more about this in the Board of Directors' Report, which will be published with our Annual Report during week 8.And now a closer look at the fourth quarter. Average sales prices of our paperboards continued to improve, but delivery volumes decreased slightly from the Q3 level due to the usual seasonality impact. In addition, we still suffered from capacity limitations caused by the fire at the Husum pulp mill in the summer. Energy and chemical costs continue to rise and logistics created challenges around the world. The worsening coronavirus situation was also reflected at Metsa Board. However, thanks to the effective safety measures, it had no negative impacts on production or deliveries.In December, we signed an agreement to sell our fully owned subsidiary, the port operator, Hango Stevedoring to Euroports Finland. The transaction is expected to be completed in the first quarter of this year, and it will not have a material impact on our key financials.And now the dividend for 2021. The Board proposes to the Annual General Meeting on 24th March, a distribution of EUR 0.41 per share. This is in accordance with our dividend policy of at least 50% of the net result and represents a significant increase from last year's profit distribution of EUR 0.26 per share. And here are the quarterly deliveries. The fourth quarter this year was very similar to the corresponding quarter last year.If we look at the whole year development, we can see high levels in the first and second quarters. With Q2 exceeding our maximum capacity of 0.5 million tonnes per quarter, the second half of the year was then affected by capacity constraints. The fire at the Husum pulp mill chip conveyor in June cut our paperboard production by roughly 30,000 tonnes. In addition, most of the maintenance work and investment shutdowns took place in the second half of the year. Full year deliveries exceeded 1.9 million tonnes.COVID-19 has shifted consumption from services to products. The need for food, beauty and healthcare packaging has increased. The pandemic has also accelerated sales in e-commerce, especially in food. All these have increased the demand for both folding boxboard and white kraftliners. In addition, plastic substitution and the reduced availability of recycled fibers have increased the demand for fresh fiber paperboards.Metsa Board's paperboard deliveries grew in all market areas and in all end-use segments. Our annual delivery volumes to the Americas exceeded 500,000 tonnes. The target that we set in 2016, along with our Husum's folding boxboard capacity expansion. Most of this capacity was originally targeted at the Americas and especially in the U.S. Our success in the U.S. has been supported by competitive products and efficient supply chain and a superior customer service team.And before I hand over to Henri, let's have a look at the pulp market. In 2021, our delivery volumes declined compared to the previous year. The main reason here was the fire at the Husum pulp mill, which resulted in a production loss of 50,000 tonnes. Our associated company, Metsa Fiber’s pulp deliveries grew by 7% and totaled 3 million tonnes. In Europe, demand for long-fiber pulp was supported by increased consumption of paperboard and paper.In China, the strong demand for market pulp in the first half of the year weakened after the summer. There were several reasons for the decline. For example, government restrictions in energy use, which led to extensive production curtailments of paper and paperboard mills. In addition, high logistic costs decreased paper and paperboard exports. Demand picked up again towards the end of the year and has since remained at a good level.But now I'll let Henri go into more detail on the financials. So Please go ahead.

[Henri Sederholm, Chief Financial Officer]

Thank you, Mika, and good afternoon.Let's start with the sales and operating result. Higher prices and volumes boost our full year sales above EUR 2 billion, a 10% increase compared to 2020. And as we see here, profitability development has been remarkable. Operating result for 2021 was EUR 387 million, or 18.6% of sales. As Mika already mentioned, profitability was the best ever. The operating result in the fourth quarter was EUR 91 million, clearly higher than in the corresponding period last year, but a little lower compared to the previous quarter. However, this was in line with the guidance we gave after Q3 results.And now the main items affecting operating results, starting with the quarter-on-quarter comparison. The main positive impact was derived from improved prices, both in paperboard and market pulp. And higher pulp prices also boosted the result share from Metsa Fiber. We also booked the insurance claims for the Husum fire of roughly EUR 10 million in the fourth quarter. This partly compensated for the volume losses due to the fire during the third and fourth quarters. The main negative impact came from higher costs in energy, chemicals and logistics and the maintenance. The negative impact from FX was EUR 16 million. High energy prices were also reflected in the price of emission allowances and the gain from the sale of unused rights was EUR 10 million higher than in the same period last year.And now for the full year comparison. The 2021 operating result improved by 75% year-on-year. The main positive and negative items were mainly the same as in the quarter-on-quarter comparison, improved prices but higher costs. In addition, higher delivery volumes in paperboards boosted profitability and the gain from the sale of unused emission rights was EUR 15 million higher than last year. The strike at the Finnish mills had a negative result impact of EUR 20 million in 2020. Unfavorable FX development weakened the 2021 result by EUR 56 million, originating mostly from the U.S. dollar and to a much lesser extent, the Swedish krona.Now a few words about costs. The main elements in 2021 cost inflation were energy, chemicals and logistics. Fixed costs also increased due to higher personnel costs as well as healthcare and testing costs related to the pandemic. Energy costs were boosted especially by higher electricity and natural gas prices. In chemicals, the main increases were seen in the prices of Latex and PE.Wood prices remained stable. This year, we expect cost inflation to continue. The cost pressure is on the same cost elements as in 2021: logistics, energy and chemicals. Metsa Board's electricity self-sufficiency is now 70% and will increase to 85% after the Husum recovery boiler starts up. To mitigate the risk of rising logistic costs and the container shortage, we are focusing on careful route planning and long-term contracts with our transport partners. Wood costs are expected to remain fairly stable and fixed cost to increase slightly compared to last year. The strong earnings performance was reflected in the return on capital employed, which in the fourth quarter was 16.1%, and for the full year 18.7%, significantly above our long-term target of at least 12%.Now cash flow, which also continued its strong development. In 2021, operating cash flow was EUR 330 million and free cash flow, taking investments into account, was EUR 116 million. And thanks to the strong cash flow, our net debt was clearly negative. Earlier this year, the sale of a 30% stake in the Husum pulp mill to Norra Skog decreased our net debt by EUR 260 million. Along with this, our leverage was negative, supporting our investments in sustainable growth, about which Mika will tell you more.So over to you, Mika.

[Mika Joukio, Chief Executive Officer]

Thanks, Henri.So let's take a look at our investments. Our largest ongoing investment is the first phase of the Husum pulp renewal, including a new recovery boiler and a turbine. The whole investment value is roughly EUR 360 million, of which 70% has already been invested. Due to some delays in installation works, we have updated the start-up time, which we now expect to take place in September.Our previous estimate was during the first half of the year. The investment will enhance our pulp and energy production. And the anticipated positive impact on our annual cash flow will be around EUR 35 million, starting from 2023. The second phase of the investment will include a new fiber line. And staying in Husum, in July, we made an investment decision to expand our annual folding boxboard capacity of BM1 by 200,000 tonnes. The investment value is EUR 210 million from last year to 2024. The estimated start-up for new capacity is during the second half of 2023, meaning that we need gradually to build up stock for the shutdown during the start-up period.And finally, in Kemi, we are expanding our annual kraftliner capacity by 40,000 tonnes and improving water and energy use. As part of the program, we will purchase the modernized unbleached pulp production line from Metsa Fiber. So our total CapEx for 2021 was EUR 220 million. And for this year, we expect it to be around EUR 300 million. This includes annual maintenance CapEx of EUR 50 million to EUR 60 million.And then now the outlook. Strong demand for our sustainable paperboards continues. We expect the paperboard volumes and average sales prices for both folding boxboard and white kraftliners to increase from the Q4 level. As always, there will be no major maintenance shutdowns during the first quarter. Cost inflation continues, especially in energy and chemicals. Global challenges in the availability of transport equipment remain, increasing logistic costs.In market pulp, we see solid demand in Europe. In China, demand has improved, but we are still a little cautious about its stability. In addition, the bottlenecks in logistics will continue to impact pulp deliveries to Asia, and we expect no major impacts from FX. And based on these assumptions, we expect that our comparable operating result in the first quarter will improve compared to the fourth quarter.And now to summarize. 2021 was our best year ever, and the Board of Directors proposes to Annual General Meeting a dividend of EUR 0.41 per share. This is significantly higher than last year. Demand for sustainably produced fresh fiber paperboards has been 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. However, we believe that most of the negative impacts will be offset by our own risk mitigation actions and the strong performance of our business. And in the long term, several ongoing investments will drive our sustainable growth. Our solid financial situation provides strong support for our work.And with that, we end our presentation and are now open for your questions. So thank you very much.

[Operator]

[Operator Instructions] Our first question comes from the line of Linus Larsson of SEB.

[Linus Larsson, Analyst]

Thanks very much, and a good day to everyone. First, a question on Metsa Fiber and the Kemi investment. I noted that there is a slight cost increase relating to the project, but a couple of questions relating to Metsa Fiber. Do you see any risk of delays? And how should we see the timing of the startup at Kemi? That's the first question.Do you see any risk of equity injection from your side, Metsa Board? And also actually relating to Metsa Fiber, what dividend should we expect from Metsa Fiber this year? Last year, obviously, there was no dividend at all.

[Mika Joukio, Chief Executive Officer]

Okay. Starting from the timetable. So timetable is unchanged. So start-up is expected to take place third quarter of next year. So Q3 next year. And as far as the equity injection is concerned, at the moment, there is no reason to believe that we should do something like that.Henri continues concerning the last part of the question.

[Henri Sederholm, Chief Financial Officer]

Yes. We are also not seeing any impact on the dividend policy of Metsa Fiber on this. And I think you asked about the dividend for last year. So the policy has been around 50% of the net result. So that would indicate about a EUR 60 million dividend for Metsa Board.

[Operator]

Our next question comes from the line of Robin Santavirta of Carnegie.

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

I have a question related to costs. What was the input cost inflation for the full year of 2021 and what do you expect for 2022? Do you expect input cost inflation to accelerate or remain at this level? Or could you specify a number for us?

[Mika Joukio, Chief Executive Officer]

Okay. Henri will take this.

[Henri Sederholm, Chief Financial Officer]

Okay. So last year, first. So what we indicated in autumn was that the inflation will be at least 4%, and it definitely was. And it ended up in the range of 5% to 7%. So clearly higher than that we estimated early on in the year. Of course, energy costs have definitely increased a lot towards the end of the year. When it comes to the cost inflation, this year, we are not able to give any exact figures. It's very difficult to estimate. We definitely think that there will -- it will continue. And the main cost pressure is in logistics. And when it relates to the kind of bottlenecks in the availability of logistics, so it's very difficult to give any number on how much we need to, for instance, buy on the spot market, this capacity, logistics capacity.

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

Okay. I understand. But you're not willing to take a stance whether the input cost inflation for the full year '22 will exceed at 5% to 7% you had in last year?

[Mika Joukio, Chief Executive Officer]

I think it's too early to say at this point.

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

All right. All right. Then related to Q4. You seem to have a couple of, in a way, one-off items supporting earnings, so the CO2 allowance sales and then the insurance claims. Can you specify the CO2 allowance sales? Was that EUR 10 million in total? Or was that up EUR 10 million Q-on-Q? And if so, what is the total amount? And how should we look at 2022 when it comes to Q1 and so forth? What is the schedule? When do you sell this? Is it always in Q4? Or is it also -- I think in '21, you did also sell something in '21. So how should we look upon that? And finally, related to costs. What was the impact of the extensive maintenance shuts you had in Q4 on the EBIT?

[Mika Joukio, Chief Executive Officer]

Okay. Henri will take this.

[Henri Sederholm, Chief Financial Officer]

Okay. So starting with the emission rights. So last year, we sold for EUR 5 million on the third quarter and then EUR 15 million on the fourth quarter. So altogether, about EUR 20 million [ worth ]. And in 2020, it was only EUR 6 million, and that was all in Q4. What comes to this year, we are not giving exact guidance, but it's fair to assume that we would be selling roughly the same amount of allowances of around 300,000 tonnes during this year, which is the surplus based on the free allocations so far. Of course, it can change between years, but that's the working assumption. And as you know, the emission rights prices have increased dramatically. So we are rather thinking this year to smooth it between the quarters more and not only sale towards the end of the year.

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

I understand. That is helpful. And final little bit a more holistic question. I understand there is extreme tightness when it comes to demand of paperboards, especially for consumer products to North America and in Europe. What is the reason for this? Normally, paperboard demand, well, it can grow a bit more and then it's 1 percentage point or something like that. Now it seems to be -- is it sort of much higher demand growth? And if so, why is it supply constrained? What is the reason that companies like Starbucks, et cetera, have difficulties to source the amount of paperboards they need?

[Mika Joukio, Chief Executive Officer]

I think there are 2 reasons. First of all, the demand. So pandemic impact has been so that people are buying more products than services. That's very clear. And then, of course, in the supply side, there has not been new capacity either here in Europe or then in North America. And when the demand has -- or market has grown, then I think it's natural that demand-supply situation is tight. And then, of course, in the supply side, we can see also the situation that Chinese producers are not present at the moment in Europe due to the high -- very, very high logistic costs. And of course, then that helps European players and tightens the market, of course.

[Operator]

Our next question comes from the line of Harri Taittonen of Nordea.

[Harri Taittonen, Senior Director & Sector Coordinator]

Yes. Maybe with the pandemic impact with regard to the guidance for the first quarter, I mean, just going to confirm that you haven't lost any kind of production volume this year. I'm just thinking that there was quite an acceleration in the sort of sick leaves and all that during the beginning of the quarter. And sort of how meaningful is there a kind of a risk in postponements of shipments? And have you allowed any of this in the guidance or...

[Mika Joukio, Chief Executive Officer]

Yes. Concerning production, we haven't lost production due to COVID. But of course, there has been, for example, I mean, remarkable costs. Millions of euros has been used for testing. And so -- but we haven't lost a single tonne. And of course, that's very good and shows that we have made right things at the mills and in supply chain altogether. So that is the case.

[Harri Taittonen, Senior Director & Sector Coordinator]

Okay. Okay. Then I don't know if you want to answer it, but if you think of them, the difference between cost inflation and the price -- average sales price improvement for the first quarter that no part of your guidance is based on volume increase. But if you just sort of ignore the volume change, would there still be a case for margin improvement because of the prices moving up more than costs? Or is it possible to comment on that.

[Mika Joukio, Chief Executive Officer]

Yes. If we compare Q1 to Q4, estimation is that prices will increase.

[Harri Taittonen, Senior Director & Sector Coordinator]

And that would be kind of more than offsetting the cost -- anticipated cost for the first...

[Mika Joukio, Chief Executive Officer]

That is pretty much the case, yes.

[Harri Taittonen, Senior Director & Sector Coordinator]

Yes. Okay. Maybe sort of final -- just last question on the currency because there was quite a meaningful appreciation in the dollar versus euro in May to November last year. And then again, the corona weakening sort of November. But when do you start to have an impact from these changes on the underlying earning side? When does the -- is the hedging profile? Has it become any different from the previous ways you have hedged?

[Mika Joukio, Chief Executive Officer]

Okay. Henri will answer.

[Henri Sederholm, Chief Financial Officer]

Yes, sure. It hasn't and so we are around 6 months hedged. So that's pretty much the kind of a time lag that we are then seeing the most of the impact of the spot prices, whether they are positive or negative. So that is still valid.

[Operator]

And our next question comes from the line of Mikael Doepel of UBS.

[Mikael Doepel, Executive Director & Analyst]

A couple of questions here. Firstly, on the U.S. boxboard or cartonboard markets, what kind of average growth rates do you expect to see over there going forward? And is this the primary target for the incremental volumes from the Husum investment?

[Mika Joukio, Chief Executive Officer]

Yes. So the growth rate in the U.S. market as well as in Europe, historically, it has been around, let's say, 1.5% to 2%. But now all this plastic replacement and/or substitution and then, as I said, then good, I mean, retailer business, et cetera, our estimation is slightly higher than this 2%. Whether it's 3% or 4% remains to be seen. But anyway, we see higher growth than in the past for several reasons. And as far as then the Husum investment is concerned, of course, we target both markets, the U.S. market as well as then Europe. But the main or bigger share of that increase is targeted to the U.S. market, the new customers and old customers.

[Mikael Doepel, Executive Director & Analyst]

Okay. And in terms of the secular trends you mentioned, just a follow-up on that. Do you see those trends in the U.S. as well, the plastic substitution happening? Or is that mainly a European phenomenon for now?

[Mika Joukio, Chief Executive Officer]

No, it's both end. And I think it's global. We have seen that in all our markets. Okay? In Asia, also, even though Asia is not a big market for us, but in Europe as well as in the U.S. market.

[Mikael Doepel, Executive Director & Analyst]

Okay. Okay. No, that's clear. Then staying in the U.S. I mean one of your competitors has announced quite a significant investment plans there to penetrate the U.S. SBS and FBB market in a few years. What is your take on that? How do you see that impacting your business in the U.S., if at all?

[Mika Joukio, Chief Executive Officer]

Yes. I don't want to comment on competitors' moves. They do what they see fits best for them. But of course, we need to follow the development, no doubt, no doubt and then act if we need to act. But at the moment, I'm not that worried about the competitors' actions, whether they are in the U.S. or here in Europe.

[Mikael Doepel, Executive Director & Analyst]

Okay. That's fair. And then just a final question. I just started to think about your commentary there in the presentation about being a bit volume constrained in the second half of last year. Now there were, of course, reasons for that, the conveyor belt and the [indiscernible] and all of that. But when we look into this year -- I mean you've been fully booked, I guess, throughout '21 overall, do you see room to grow your volumes on a year-over-year basis still? Do you have that capacity to continue to grow mid-single digits this year?

[Mika Joukio, Chief Executive Officer]

Yes. As you mentioned, last year, we had this -- have these constraints like fire at Husum and then these maintenance shutdowns. Concerning this year, then, of course, we hope that we don't have any fire or so. But then this year, we have less investment shutdowns than last year. For example, last year, we had investment shutdowns at Kyro mill as well as Aanekoski mill, not that long. But anyway, a couple of weeks, for example, in Kyro and one week in Aanekoski, that won't be the case this year.And then also our estimation is that this year, we don't need that long 2-week shutdown at Husum mill, because we will take this new boiler and use in September and that shouldn't require a very long shutdown. So we have more capacity. But then if you think about the sales last year in January, when the year started, our stocks, our inventories were clearly higher than this year. So last year, that was the starting point. And you might remember that we invoiced or we sold in -- during the first half of last year more than we produced. And that then, of course, came from inventories. And then in the second half of last year, we had these maintenance shutdowns and the fire. So when starting this year, the inventory level is quite low. So there are several reasons. But our target is to grow this year in volume.

[Mikael Doepel, Executive Director & Analyst]

Yes. But do you see a need to replenish your inventories as well, I guess, and that's going to limit external sales to some extent?

[Mika Joukio, Chief Executive Officer]

That's true, but it's not remarkable in the big picture.

[Operator]

[Operator Instructions] And currently, the last question in the queue is from our Johannes Grunselius of DNB Markets.

[Johannes Grunselius, Research Analyst]

Yes. Hello, everyone. It's Johannes here. So most of my questions have been answered at this stage. But maybe you can give some color on the order books you are saying in the report, they are very strong. If you could indicate for how many weeks of business are you booked at, and what's the normal situation at this time of the year?

[Mika Joukio, Chief Executive Officer]

Yes. So the normal order book -- I mean the good order book as far as then the production planning, et cetera, is concerned is 3 weeks to 4 weeks, so around 24 days, 25 days. That is the optimal and that is quite typical also in the past. But today, the situation is not that. So order books, both in white kraftliners as well as folding boxboard, they are clearly higher than these 3 weeks to 4 weeks. And of course, that creates challenges in supply chain.

[Johannes Grunselius, Research Analyst]

Right. Okay. Okay. But are they sort of twice as long as normal? Or maybe you don't want to comment that but just to get a [ view ].

[Mika Joukio, Chief Executive Officer]

You can use that figure.

[Johannes Grunselius, Research Analyst]

Yes. Okay. Okay. Got you. And I was just wondering also on the sort of pricing side because, obviously, we saw price hikes in the market coming at the end of 2021, a bit early here in 2022. Should we expect sort of -- I mean is it fair to assume that you will enter then second quarter with higher prices than in Q1 because of the normal time lag on price hikes? Could you help me understanding that dynamics?

[Mika Joukio, Chief Executive Officer]

That is a little bit too early to speculate because as I said, the Q1 prices will -- our estimation is that they will be higher than Q4, but then what will be the difference between Q2 and Q1, I wouldn't like to speculate on this.

[Johannes Grunselius, Research Analyst]

Okay. All right. Got you. And perhaps a final question. Since the market are very strong at the moment, demand wise, do you see any opportunities for changing your mix a bit, perhaps pushing out more flagship products with sort of higher quality or avoiding some markets and selling more in some other geographical markets? Or maybe this is not how your business is working, but can you comment on that, please?

[Mika Joukio, Chief Executive Officer]

Yes, of course. So in the past and also in the future, and today, so we are optimizing the customer mix. We are optimizing the product mix so that we are able to maximize or optimize then profitability. But of course, we need to remember that we can't change customers all the time. Also this is kind of long-term play and long-term game. But we do what we can, concerning the product mix and customer mix and market mix in order to then maximize the profitability.

[Operator]

And we've had one further question come through. That's a follow-up from Harri Taittonen of Nordea.

[Harri Taittonen, Senior Director & Sector Coordinator]

Yes. A quick follow-up on the -- regarding the emission rights and just sort of a technical question in a way. How are they booked in your current sort of books? Are they booked at some sort of meaningful value? I'm just thinking if you continue selling, how should we look at the kind of gains from the current market price versus the book value. So that's why I'm curious about how -- what sort of value is the basis in your balance sheet for those?

[Mika Joukio, Chief Executive Officer]

Right. Henri will tell you.

[Henri Sederholm, Chief Financial Officer]

Yes. This is very simple. So they are booked at 0 value as it's based on the free allocations. So it's pure capital gain when selling.

[Harri Taittonen, Senior Director & Sector Coordinator]

Well, that's easy to remember.

[Operator]

As there are no further questions on the phone, so I'll hand back to our speakers.

[Mika Joukio, Chief Executive Officer]

Okay. Thank you. Thank you. all participants, and good discussion, good questions. And I just then wish you a good continuation of the day and the week. Thank you. See you next time.