Good afternoon, and welcome to the presentation of Metsä Board's results from the first half of 2023. My name is Mika Joukio, and I'm the CEO at Metsä Board. With me are CFO, Henri Sederholm, and Head of IR, Katri Sundström. Let's first go through the presentation, and we will then open the lines for your questions, as normally. I will start with Q2 in brief. As the figures show, we had a very challenging quarter, marked by low volumes. Weakened paperboard demand led to low delivery volumes, and we adjusted production accordingly. Paperboard production decreased by 38% compared to Q2 last year. As a result of a prolonged low order intake, we have started temporary layoffs in Finland. The first layoffs were implemented this month, and we will continue them for the rest of the year if necessary and needed.
The good news is that we managed to keep the paper board sales prices at the Q1 level, and during H1, the price improvement was roughly 15% for folding box boards and roughly 5% for white kraftliners, compared to the corresponding period last year. The global pulp market remained weak, and demand for market pulp, especially in Europe, declined significantly. In addition, pulp prices have fallen sharply this year in both China and here in Europe. In June, the European Commission closed the investigation into the wood pulp sector under European Union antitrust laws by concluding that there were no grounds to continue the investigation. The investigation started in 2021, focusing on Metsä Fibre only, and did not involve Metsä Board. Once again, Metsä Board was recognized for its excellence in sustainability as we reached the highest platinum level in the EcoVadis assessment.
We have a good record behind us, as we have achieved the highest rating every year since 2017. Now for the paperboard sales and the overall demand situation. As the graph shows, paperboard delivery volumes have been declining for several quarters in a row. The weakened consumer purchasing power has reduced demand for consumer products, which in turn has been reflected in paperboard demand. In addition, destocking in the value chain has reduced volumes. Unfortunately, there are still no clear signs of a significant turnaround. During the first half of the year, the volumes were 22% down from the comparison period, and for Q2, 25% lower than in the same quarter last year. Here is the situation by region and by product. Overall, there were declining volumes in all market areas for both products.
Imported cartonboard volumes from Asia, especially from China, have significantly increased as logistical challenges have eased. Chinese cartonboard capacity has also grown strongly in recent year. Sales have mostly been directed to Turkey and the Middle East, as well as South America. This has increased competition throughout Europe. Our aim is to focus on customers who benefit from our paperboard's high performance in our main market areas of Europe and North America. In addition to the high quality of our paperboards, we gain a competitive advantage in terms of the security of supply and the service concept that helps our customers with various packaging challenges, such as reducing the carbon footprint for packaging, reducing plastic use, and improving production efficiency. For market pulp. There was rapidly weakened demand reflected in volumes.
In the first half of this year, Metsä Board's market pulp deliveries decreased by 100,000 tons and Metsä Fibre's by almost 350,000 tons compared to the same period last year. During Q2, the market situation for pulp weakened further, especially in Europe. Demand has further declined due to prolonged production shutdowns among board and especially paper producers. In China, economic recovery has not boosted demand for market pulp as expected. Market prices in softwood pulp, Metsä Group's main grade, have rapidly declined during this year. Before I let Henri move on to financials, let's have a sustainability recap. In safety, we still have room for improvement if we are to achieve our target of zero accidents. The current figure is still too high. Significantly lower capacity utilization affected our mills' production efficiency.
This can be seen in energy efficiency, where the development was in fact negative, as well as in the use of process water, where the improvement was clearly lower compared to a year ago. The end of Russian wood imports, combined with reduced wood purchases from the Baltic countries, increased the share of certified wood fiber of our total wood supply. In the first half of 2023, the share was 90%. Now, I will hand over to Henri to open the financials. Please.
Thank you, Mika, and good afternoon. Lower volumes were reflected on top line, even though higher prices offset the negative impact somewhat.
In total, sales were down by some 15% year-on-year. In the second quarter, the drop was more than 20% compared to Q2 in 2022. The comparable operating result in January-June was EUR 116 million, approximately EUR 150 million lower compared to the corresponding period last year. Next, let's take a closer look at the items that affected the results. The positive contributors are the same in both comparisons. The average sales price of all paperboards increased in the first half compared to the first half of 2022, by 15% in folding boxboard and by 5% in white kraftliners. When comparing Q2 against Q2 last year, the sales prices of folding boxboard were higher and white kraftliner slightly higher.
The impacts from foreign exchanges after hedges, as well as the sale of unused emission allowances, were positive in both comparisons. Now, let's move on to the negatives. The common factor for both comparisons was significantly lower delivery volumes in both paperboard and market pulp. Due to the low demand, we have run the production clearly below capacity, which has burdened the profitability. The rapid deterioration of the pulp market also weakened results. For Metsä Board, pulp market impacts are high through our ownership in Metsä Fibre. Metsä Fibre's profitability took a hit from lower sales volumes and prices, higher wood costs, and weaker sawmill business. Metsä Fibre has also adjusted their pulp production to meet lower demand. Finally, cost impacts. Overall costs in the first half without pulp increased by 10% compared to the corresponding period last year.
The main contributors there were higher wood costs and chemical costs. In energy and logistics, the negative impacts were slightly more moderate. It's also important to note that even though the cost inflation has slowed during 2023, the benefits are not coming fully through due to low production levels and inventory turnover. The decline in profitability was naturally also reflected in the comparable return on capital employed, which was 9.3% in the first half and 4.6% in the second quarter. The rolling 12-month rate still remained above the targeted level of at least 12%. Capital employed at the end of period totaled EUR 2.6 billion. One of our key priorities now is efficient use of working capital. Production adjustment measures have kept our inventory levels moderate.
The operating cash flow in the first half of the year was EUR 142 million, some EUR 50 million more than in the corresponding period last year. However, last year, the rapid increase in working capital impacted cash flows. Metsä Fibre's dividends are paid in the first quarter, and they were some EUR 25 million higher in 2023 than in 2022. Metsä Board's own dividend of EUR 206 million was paid in the second quarter. In addition to that, EUR 23 million was paid to minority owner of Husum pulp as dividends. Finally, the financial position, which continues to be strong, leverage at 0.6. Dividend payments impacted the net debt, which grew by roughly EUR 250 million from previous quarter. I will let Mika continue with investment review.
Thanks, Henri. Regarding investments, there will be a lot of activity in the rest of the year. In Husum, we will increase our annual folding boxboard capacity by 200,000 tons. Investment shutdown is scheduled from late August to early October. After this investment, the total capacity of Husum's board machine number one will be 600,000 tons per year. Due to the fast cost inflation, we have updated the investment value to EUR 230 million from the previous EUR 210 million. In Kemi, we will increase our white kraftliner capacity by 40,000 tons, after which the annual capacity of Kemi's kraftliner mill will be 465,000 tons.
The startup of the new capacity is at the end of the third quarter, and full production capacity is expected to be reached during 2024. Investment will also improve the mill's energy and water efficiency. Our initial investment value estimate was EUR 67 million, but it will also end up higher. Our associate company, Metsä Fibre, is starting up their new bioproduct mill in Kemi in third quarter, replacing the old pulp mill. We are proceeding with our pre-engineering for the new folding boxboard mill in Kaskinen, about which a possible investment decision can be made next year at the earliest. For the full year of 2023, we expect total investments to be in the range of EUR 250 million-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 old fiber lines with a new one. The investment values for these two projects will be specified in the context of possible investment decisions. Now, for the near-term outlook. Fortunately, the operating environment remains uncertain, and the visibility of paperboard sales development remains weak. Growing import volumes of cartonboard from China are increasing competition here in Europe. Rising living costs affect consumers' purchasing behavior and the overall demand for consumer products. Inventory adjustment measures in the value chain are expected to follow the market situation.
Paperboard sales prices are expected to remain stable in the Americas region, but to decrease slightly in EMEA and Asia Pacific compared to the second quarter. The total cost level is expected to remain stable. However, additional costs can be expected from more maintenance and investment shutdowns in Husum and Kemi. The total impact will be some EUR 10 million compared to Q2. The demand for market pulp in Europe is expected to remain muted as production curtailments in the board and paper industry continue. Seasonality may provide a slight boost to demand in China towards the end of the year. Pulp prices are expected to decline in Europe, but remain stable in China compared to Q2. FX will have a small positive impact compared to the previous quarter.
With these assumptions, we expect our operating result in the third quarter to be weaker than in second quarter. To summarize, the second quarter was marked by low volumes, both in deliveries and in production. Short-term uncertainty will continue as demand for consumer products remains low, and the value chain continues to implement strict inventory adjustment measures. We focus on customers who benefit from the high performance of our products and services in our market, main market areas, Europe and North America. In addition, we will continue our production adjustment measures to meet the demand. Despite the short-term challenges, we continue to develop our business and invest in sustainable and profitable growth. The long-term demand drivers for sustainable packaging materials, which are increasingly replacing plastics, have not disappeared anywhere.
The coming months will be busy as two of our ongoing investments will be completed, and the ramp-up of new capacities will start. With that, we end our presentation and are now ready for your questions. Thank you very much.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Robin Santavirta from Carnegie. Please go ahead.
Thank you very much. Hello, everybody. I have a couple of questions. First, in terms of the production curtailment, are you taking in both paperboard and in pulp? Could you shed some light about the amounts that you have curtailed in paperboards now in Q2, and what do you expect for Q3 and H2? Also, if you could talk about Metsä Fibre's sort of curtailment and what we should expect down the road this year.
Yeah. As far as paperboard and folding boxboard especially is concerned, so we have curtailed production pretty much based on the demand. Target has not been to increase our inventories, and then that has then, of course, been the limit for production. I don't have a kind of a exact figure for you, but maybe you can read between the lines if you compare the deliveries. Pretty much same for pulp. We have curtailed production also by Metsä Fibre, as well as then ourselves in Husum, as well as BCTMP production, Joutseno and Kaskinen.
I was looking at the Metsä Fibre's pulp deliveries. They were down by more than 30% year -on -year. Should we sort of think that perhaps the curtail production is ballpark in that sort of area? Do you know if they have increased the inventory of pulp?
Yes. In paperboard, the picture is pretty much as I explained, and then in pulp, the curtailments has been lower or smaller compared to demand. You are right.
Right. A bit less curtailment so far in pulp. I have a question related to input costs. When I look at the paperboard business or Metsä Board, excluding the associated or Metsä Fibre, it seems as cost per ton is quite significantly up year- on- year, and if I go back a couple of years, it seems cost per ton is up some 50% compared to the average a few years ago. I do understand pulpwood cost or wood raw material costs have increased quite significantly. Then we have energy, chemicals, and logistics. I guess that is 50% of your cost base, and those are essentially at historically low levels at the moment.
How should we sort of think about the input costs and certainly going forward, how should we model it H2? Perhaps if you have some idea or guidance for the next year as well.
Okay, Henri will take this.
Yeah, you're right about your comments on the cost level. As we stated, we had about 10% inflation compared to the first half year last year. And historically, we are still on a very high level. We have seen some cost elements sort of starting to stabilize, even decrease. But as also said earlier, there's a time lag between that will hit the P&L. It's partly because of the low production volumes that hits the efficiency, and then also obviously the inventory turnover, which makes the time lag. We don't really give a guidance to the kind of rest of the year. Remains to be seen, but now it seems that it's gradually coming down.
I understand. Thanks. The final question I have is related to paper board volumes. When I look at the past five, six, seven years, it seems current delivery volumes are some 20%-25% lower than the average over many years. Now you guide for the same amount of deliveries to continuing Q3. I guess it's too early to expect any kind of major improvement in Q4. Is it so that we should expect a bit of volume recovery to come in 2024? Or what is sort of the current visibility? What do you hear from your clients when it comes to demand and this inventory, destocking, and end consumption?
As I said already in the presentation, that the visibility is very uncertain, very difficult to predict what kind of volume development we will see. For that reason, then we say that the volumes will pretty much be at the same level as in Q2. Hopefully, I'm wrong, but I can't say anything else. Then, of course, seasonally then Q4 normally is a bit lower than Q3 and Q2, but remains to be seen. I mean, due to Christmas time in December. At the moment, it's very difficult to predict, and for that reason, the best estimate at the moment is that the volumes will be stable in Q3 comparing Q2.
I understand. Thank you very much. Thanks.
The next question comes from Linus Larsson from SEB. Please go ahead.
Good afternoon, gents, and hello, everyone. Mika, you mentioned increased competition in Europe. Could you please elaborate a bit on that? Where do you see that? How substantial is that? Is it a major headache? Does it impact pricing? Are you losing market share? Could you just maybe expand a bit on that return competition, please?
Yes, the kind of, the Asian producers have been more active now, not only here in our area, I mean in Middle East and Turkey, but also in South America. The reason is that there has been new capacity or startups of new capacity, both last year as well as then early this year. That has then impacted on. Also, our deliveries, for example, to Turkey and South America, and that has tightened the situation all in all. Even though they are-
And this-
... they are not here in kind of main, so to say, continental Europe, but they are in the areas like Turkey, like Middle East, like South and Central America. That then because the kind of paper board flows, they are global, and that then tightens the situation.
Right. Is it your feeling that it's still increasing, or is it has it stabilized at a certain level, or what's kind of the trend for the time being?
Yeah, that's difficult to say. Historically, I mean, these Asian producers, they are coming and going, based on the currencies and based on the local demand, especially in China and so on. It depends on what will happen in China as well as far as the GDP growth is concerned and, how the local demand continue to develop. These producers, they don't have any kind of remarkable service concepts, for example, for these markets. They just simply deliver by container by container, and that's the way they are operating in this business. At the moment, the volumes are higher than they have normally been.
Right. Right. Great. That thanks for clarifying that. Then just maybe jumping back to the production curtailments that we just discussed. I think this was the third quarter in a row where shipments have exceeded production in your paperboard operations, so you were cutting inventory effectively. Now in the third quarter, you have quite a bit of maintenance activity. I understand this whole inventory situation, the main problem isn't on your side, it's in the supply chain altogether. How do you look at your own inventory situation, you know, are you aiming to lower inventory situation, or are you pretty happy where they're at?
Yeah, concerning paperboard, we are happy with the current level. Of course, Q3 as well as Q4 partly, but Q3 especially is interesting because we have this 45-day shutdown at Husum mill. Actually, what we are doing at the moment, we are increasing inventory for Husum customers in order to then serve the customers during the shutdown and during the, this startup period. I see that at the moment, the inventory level of paperboard is okay. In, in maybe in BCTMP and pulp, story is a bit different, intention is to still further go down with the inventories.
Great. That's very helpful. Thank you very much.
The next question comes from Andrew Jones from UBS. Please go ahead.
Hi, a few follow-up questions to what's just been asked. I mean, one of them is just on those imports coming from Asia and how cost-competitive they are, because, you know, the traditional narrative used to be that Chinese producers would be, you know, buying in a lot of the fiber from elsewhere, and it would generally not be too cost-competitive. You know, given the rising wood costs in your part of the world, I mean, how do you stack up if you're shipping to Turkey or somewhere in the Middle East versus some of these new projects? That's my first question. Secondly, just on the cost lags, I mean, you were talking about flat costs in 3Q.
Could you just talk about the typical sort of time lags that we should expect for some of these cost elements between when the, you know, the index goes down, whether it's, you know, power prices or, you know, caustic soda or whatever it is? What are those typical lags that we should expect, and, you know, will we see some cost deflation in 4Q? I just have a sort of question on Kaskinen. You know, given how high wood costs are, how weak volumes are, you know, and the fact that, you know, that, I think a lot of investors I speak to are not convinced that the market will be there for such a large, new machine, especially with tight wood market and, you know, raw material side.
You know, why are you still considering going ahead with this mill? You know, in the current market environment and given where wood costs are, it does seem, you know, it does seem risky, and, you know, I'd be curious as to, you know, why you're still proceeding with this at the moment. Thank you.
Okay, if I take the question number one and three, and then Henri will take number two. First of all, the Chinese cost- efficiency, I think they are buying their, the raw materials like pulp, like latex, latexes, like pigments from the world market. For that reason, then the prices are pretty much, I mean, comparable to, for example, European producers' prices. From that angle, they are not more cost-efficient. Then, of course, then the kind of, also partly related to Kaskinen, but I mean, these Chinese producers, they have huge machines.
I mean, 1 million tons machines. Of course, that gives some advantage because, I mean, big is beautiful in this business, and bigger the machines, the more efficiently you are able to run those. As I said, raw material prices are pretty much comparable to our prices, and for that reason, they are not remarkably more cost-efficient than, for example, we are. Coming to Kaskinen, I mean, the long-term trends are still there. I mean, plastic replacement and all these urbanization and, I mean, that kind of trends, which boost, which really support the consumption of fiber-based packaging materials.
Our intention is to grow in fiber-based packaging materials and renew our operations. One reason also why we are planning Kaskinen is to improve the overall cost- efficiency, and we are the market leader in Europe, and we need to take care that the market leader is the most cost-efficient player in this game. Two reasons, of course, for Kaskinen is that we see that the demand continues to be ensure in the long term positive and growing, and then this cost- efficiency overall is another reason. Maybe if Henri, you take this question number two.
Yeah, about the time lag of cost inflation coming through. First of all, we have quite different kinds of agreements. Some costs are basically on a spot basis, some are on a quarterly basis, in chemicals typically, and then we have contracts for annual or even several years for logistics purposes. There is no really simple answer that what would give you a sort of weighted average on that one. Also two other things that I've mentioned before that are impacting then this lag is the production efficiency. The basically, lower the production, the lower the efficiency, and therefore, we are not getting all the benefits of decreasing costs. Then thirdly, the inventory turnover.
We need to have, particularly in our U.S. business, have inventory there locally to be able to have a good service level. That's something also impacting on in this current market environment, it's fair to say that the inventory turnover has slowed down a little bit.
Just to follow up on that. You're saying with the chems, a lot of them are quarterly contracts, so we would model, say, a one-quarter lag if we're thinking about chemicals prices coming down. With the logistics, when you say they're often like annual contracts, I mean, what sort of time of the year do you typically tend to, you know, reset those? I mean, are we going to see a decent, like, down in logistics costs in 3Q or 4Q? You know, on the pulpwood side, you know, what's the lag on the income statement between seeing the pulpwood prices start to come down and then that flowing through into your costs?
In the logistics contracts, typically the longer contracts are for calendar years, so that would be the typical timing when those changes would take place. In wood, depending on the market situation, we have some few months, sort of, inventory that creates some lag. Again, to have to remind about this production efficiency and the level of production that impacts that. I don't want to speculate on the Q4 cost level at this stage.
Okay. Awesome. Thank you.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. The next question comes from Harri Tiitinen from Nordea. Please go ahead.
You refer to the likely or potential pickup in sort of seasonal pattern in China, is there anything you can sort of see in the order behavior at the moment or anything, or is it just sort of just referring to normal yearly pattern? That was the first question. The other question is about the paper board. I mean, given that the cartonboard prices are sort of 20%-25% above the pre-pandemic levels, of course, the key question is how the industry can kind of maintain the price levels. How much of your volume, you know, how much of your total volume could sort of have a change in pricing during this year? How much comes from renewal in January?
I remember that it's about half of FBB, which is negotiated at the start of the year, more or less. Is that correct?
Yeah, that is still correct, Harri. It's pretty much the situation.
Yeah.
Yeah.
Yeah.
Concerning the pulp in China, actually, that assumption comes from kind of historical figures that normally Q4, at the end of the year, has been kind of more active as far as the Chinese pulp market is concerned.
Mm.
So.
Yeah. Okay. Or was there still something you wanted to say? Okay. Just a sort of really quick, kind of on the, just confirming that the EUR 10 million increase in the maintenance cost, I mean, that includes the startup costs as well. Just, or is there any sort of extra cost that we should be aware of on for the Q3 or Q4?
No, that is just the maintenance and these shutdowns. The startups will take place in Q4.
Yeah. Any kind of early indication on how much we should be prepared to kind of have operational impact from that?
Difficult-
Okay.
Very difficult to say.
Yeah. I understand.
Indication is to as low as possible, but, I mean, you never know what kind of startups there will be.
Yes, yes.
Mm.
Yes. Again, as a minimum or that you know that, you know, there will be a cost, I mean, assuming everything goes right, I mean, is that, you know, like, what should we budget for? In a way-
I can't-
... one type, one of type.
I can't give you any exact figures.
Oh.
It's very difficult.
Okay.
It would go wrong anyway.
Yes, right. Okay, understand. Thank you very much.
There are no more questions at this time. I hand the conference back to the speakers for any closing comments.
Okay. Thank you, everybody, for participating this session, thank you very much for the questions, interesting questions. With these words, I then wish you nice and warm continuation of the summer, summertime that still continues. Thank you, and see you next time.