Earnings Call: Q2 2021

Jul 28, 2021

Good afternoon, everyone, and welcome to the presentation of MetsoBoard's results for the first half year of twenty twenty one. My name is Mikael Jokyo, and I'm the CEO of Metzabord. Here with me, I have also our CFO, Henry Sederholm and Head of IR, Kati Sundstrom. Before moving on to the presentation, I would like to hand over to Henrik, our new CFO since May, to give a short introduction of himself. So please, Hendrik. Yes. Good afternoon, and thank you, Mikael. My name is Henrik Hedarholm. And as Mikko mentioned, I started as the CFO beginning of May. My previous position was Senior Vice President of Group Finance in Metzabord. And I have altogether about 20 years of forest industry experience in different finance and treasury roles, including also 6 years in Metzabord. I'm happy and really excited to have joined Metzabord again. Now I hand over back to you, Mikael. Thank you, Henrik. And let's move on to presentation now. As always, I will begin with the highlights from the previous quarter. The favorable development in the second quarter was a nice continuation to the already strong Q1. Demand for our paperboards remained strong in all market areas and quarterly delivery volumes reached new records. In addition, the average paperboard prices have improved during the first half of the year. Strong performance in paperboard and market pulp improved profitability. The operating result increased for the 5th consecutive quarter and exceeded €100,000,000 in the 2nd quarter. In fact, this was the best quarterly result at least in 20 years. The coronavirus pandemic had no negative impacts on deliveries or production. In our mills and offices, we will continue to take precautionary safety measures even though the pandemic situation is perhaps gradually improving. Instead, accelerating cost inflation, together with the currency effect, caused some headwind in profitability. At the end of June, we had a severe fire at the Husum Mill Mill's wood chip conveyor caused by a malfunction in electric device. Due to the fire, We suffered significant production losses, 26,000 tonnes paperboard and 55,000 tonnes pulp. Unfortunately, this will impact negatively on our Q3 sales volumes. And yesterday, after the review period, We made an investment decision to increase our annual falling boxboard capacity in Husum by 200,000 tonnes. I will come back to this in more detail at the end of the presentation. So our Q2 Petroport delivery volumes were at a record high level for the 2nd quarter in row and totaled 514,000 tonnes. For the first half of the year, volumes exceeded 1,000,000 tonnes, also a new record. Taking into account our current annual capacity, 2,000,000 tonnes, this is pretty much the highest level we can reach. And yet, at the end of the period, our order books were at an exceptionally high level. In general, the demand for falling boxboard was good in all end use segments, but especially in food and pharma packaging. As economies have gradually opened up and the mobility of people has increased, Demand for foodservicepackaging has also picked up. Growing retail in both EMEA and Americas And e commerce, especially in Americas, boost the demand for white kraftliners. Volumes in the first half of the year increased in all market areas, but there was variation in the price developments. We have announced several price increases in both falling boxboard and white kraft liners during this year. And the positive effects of those have not yet been fully realized. Our April to June sales increased by 18% compared to the corresponding period last year. For the first half of the year, growth was 11% and sales exceeded €1,000,000,000 The comparable operating result improved for the 5th consecutive quarter and was €102,000,000 The operating margin for the first half of the year was record high 18.2%. The corresponding period last year was negatively impacted by the strike at the Finnish mills by €20,000,000 Nevertheless, the year on year improvement was really remarkable. And then here I listed the main items affecting the operating result. The common positive factors for both review periods where the record high paperboard delivery volumes together with increased market pulp prices, which in turn led to improved results from Metzafiber. On the negative side, we had higher costs together with unfavorable FX impacts. We expect the full year's cost inflation, excluding pulp, to be 3% to 4% compared to the previous year, slightly higher than our previous expectations. Especially the cost of energy and certain raw material prices have risen faster than we earlier estimated. Also, the global problems with container availability continue to increase logistics costs. Strong earnings performance was reflected in the return on capital employed. Comparable return of capital employed for the first half of the year was as high as 19.3 percent and rolling 12 months was 16.1%. Both are above our long term target of at least 12%. Dental market pulp. The strong demand situation for long fiber Pulp at the beginning of the year, especially in China, weakened towards the end of the review period. In Europe, the demand remained good and was supported by increased consumption of paperboard and higher operating rates of paper mills. On the supply side, the global problems with container availability and planned annual maintenance shutdowns at the market pulp mills have reduced market pulp supply. Long fiber market pulp prices have risen significantly this year in both China and Europe. The tightened market situation is likely to keep prices high in the near future as well. Operating cash flow in April June was also strong, €134,000,000 Together with improved results, Q2 cash flow was improved by changes in working capital, an increase in trade payables and decrease in inventories of finished goods caused by the strong demand, especially in paperboard. Investments during the review period were €96,000,000 And thanks to the strong cash flow and high cash funds at the end of the period, our net debt remained close to 0. This is despite the fact that in April, we paid €92,000,000 of dividends. Earlier this year, the sale of a 30% stake in the Husum Pulp Mill to Noraskook decreased our net debt by €260,000,000 Along with this, our leverage remained also at 0. We estimate that our CapEx for this year and next year in total will be in the range of €450,000,000 to €550,000,000 Our biggest ongoing investment It's the first phase of the Husum pulp mill renewal, which we expect to be ready next year. The total investment value is €360,000,000 and it includes a new recovery boiler and turbine. So far, we had invested approximately €200,000,000 in it. During the 2020s, so later during this decade, There will be a second phase of the renewal covering the new fiber line. The whole Hosurm pulp mill renewal will take us closer to our ambitious target of having all our mills fossil free by 2,030. Staying in Husum, we have yesterday decided to increase our annual falling boxboard capacity by 200,000 tonnes in there. Investment value is approximately €210,000,000 divided in 2021 to 2024. But as said, I will go through the whole investment more thoroughly at the end of this presentation. We have also launched a development program for our Kemi paperboard mill in which The annual production capacity of white top kraftliner mainly coated will be increased by 40,000 tonnes. In addition, the mill's water and energy use will be significantly improved. As part of the program, we will purchase the modernized unbleached pulp production line from Metzafibr in 2023. The total investment value for this is €67,000,000 during 2021 to 2023. Our annual maintenance CapEx is around €50,000,000 to €60,000,000 Then the outlook. Demand for fresh fiber paperboards remains strong, which is reflected in our order books. For example, our order book for falling boxboard is at the moment all time high. During the year, We have announced several price increases in falling boxboard and white kraftliners. The positive effects of the price increases will continue to be realized, And we expect to see improved average prices in the Q3 compared to the second. Despite the strong demand, our paperboard delivery volumes are expected to come down from the record high Q1 and Q2 levels. A big contributor here is the fire at the Husum's pulp mill's wood chip conveyor in June that caused significant production losses. In total, we lost 26,000 tonnes in paperboard and 55,000 tonnes in pulp, which will have negative impact on delivery volumes in Q3. Overall price, The demand situation for market pulp remained good. Europe is performing better than China. The container shortage continues and reduces market pulp supply. Also, the strong demand and price situation in the sawn Timber business is expected to improve the result share from Metzafiber. The planned maintenance Shutdowns, together with FX impacts, will have a negative impact on Q3 results. And then cost inflation continues. We have slightly raised our expectations for the full year and expect now cost inflation to be around 3% to 4% compared to 2020. So there are several factors affecting the result, some positives, some negatives. But putting them all together, we expect that our comparable operating result in the 3rd quarter will stay roughly at the same level as in the second quarter. And then before moving on to your questions, let's take a closer look at our investment decision made and published yesterday. So we have now made a decision in line with our earlier intentions to increase our annual falling boxboard capacity by 200,000 tonnes in board machine number 1 at Husum Mill. The current capacity of BO1 is 400,000 tonnes, and this investment will increase it to 600,000 tonnes per year. The ramp up of additional falling boxboard capacity is expected to start in autumn 2023 and full production capacity to be reached by the end of 2025. The main end uses in our falling box boards, including the additional capacity are in food and food service, pharmaceutical and cosmetics packaging. Additional capacity will be directed to our main markets, Americas, mainly in the U. S. And EMEA. Within past years, we have created a solid foothold in North America, and we still see a lot of growth potential in there. Our lightweight falling postboard is very competitive compared to local paperboard grades. And in addition, our sales is supported by an efficient supply chain and superior customer service. In Europe, we are a leading producer of fresh fiber premium fresh fiber paperboards, including folding boxboard. And this investment will further strengthen our position in here. The investment value, roughly €210,000,000 is divided in 2021 to 2024 and mainly in 2022 to 2023. It will increase our annual sales by approximately €200,000,000 and have a positive impact of approximately €50,000,000 on our annual comparable EBITDA, both expected to be achieved in full in 2026. Investment will be financed with our current cash funds and future cash flows from operating activities. There will be a small impairment loss of approximately €5,000,000 related to the board machine number 1. This will be reported in our Q3 results as an item affecting comparability. The new capacity will naturally increase the logistics volumes of the entire integrated mill area and especially in the port. We will examine the whole Husum port concept separately and decide about potential investments later. And with this, I will end my presentation, and we are now open for your questions. Thank you very, very much. Thank you. First question comes from Robin Santavritto from Carnegie. Please go ahead. Your line is now open. Yes. Thank you very much, and hello to everybody. Now first, I would have a question related to The production problem you have had in Husum, what kind of earnings impact did that have on the Q2 To earnings and what should we expect as the earnings impact for Q3? So that's the first question. Okay. So Henrik will take this. Yes. On the second quarter, the costs related to the fire were about €5,800,000 and that was recorded in the items affecting comparability. Then what comes to the Q3 impact, it will, as Mika mentioned, Inevitably have a negative impact on the sales and deliveries in the Q3. However, we think that The higher prices of paperboard and market pulp as well will be compensating that negative impact As well as then the insurance compensation that we are expecting to get relating to the fire. Thanks. And just to check, is it certainly €5,800,000 the costs related to the fire in Q2, it was booked As a one off is not in the comparable results included? Yes, that's correct. And then I assume that the insurance payment will also be booked as an IAC. So it's only the volume loss that is impacting the comparable EBITDA from this fire? No, because then this is replacing the kind of operative deliveries. So that will be sort of replacing the normal sales. Okay. I see. Then the second question I have is related to the pulp Markets, I think, Ymika said that the European market is doing fine in terms of demand, whereas the demand is Weaker in China. What are you seeing in these markets? Could you provide a bit more detail? You're one of the biggest suppliers of softwood pulp, I think the biggest in China. What are the most recent developments So there and what are you seeing in Europe? Okay. So starting from Europe. So Europe is so European market pulp business is doing fine. The prices are increasing and volume development has been good and our estimation is that it also will be good. Then back to China. So there were a bit slower period, I would say, in May, partly in June. But now the activity has picked up now during the kind of July. So situation is now slightly better there than it was in May June and prices are stable. Good. And finally, a question related to the CapEx guidance of €450,000,000 to 5 €50,000,000 Does this now include the investment decision you announced yesterday? I think you had the same guidance in the Q1 report. So is there something removed or postponed in the CapEx? Or how should we view the CapEx guidance for the next 2 years? Yes. That includes this EUR 450,000,000 to EUR 550,000,000 that includes The Husum investment I mean, both investments, pulp mill as well as this new decision concerning Volleyboksborg. So they are included. And we haven't taken anything out. Right. So far, that was already included In the last guidance. Thank you very much for your answers. Thanks. Thank you. Our next question comes from the line of Siena Slauson from SEB. Please go ahead. Your line is now open. Yes. Thank you very much, and a good day to everyone. Continuing on that same note With capital allocation, you have quite a lot on your plate, but It seems to me that there is room for a lot more still. So maybe could you even help us with some guidance on CapEx for 2020 3, that's maybe the first question. And then second to that, if you could just Give us your broad thinking around what's beyond what you have already announced In terms of capital allocation, you have very strong cash flow generation, very strong balance sheet still after these investments. What's your thinking around further capital allocations? Are we talking about potential M and A, Greenfields potential further expansions on your existing platforms? Yes, okay. As you mentioned, we have quite a lot of stuff on the plate at the moment. So we have Husum Pulp Mill, we have Husum Falling Boxboard, we have Kemi and then all these operative investments I mean, Chemie paperboard and then all these operative investments, and they will keep us quite busy during the coming 2 years, 2 or 3 years. At the moment, it's too early to say what is the CapEx allocation for 2023 because one issue there also is that or the timing of the decision concerning the second phase of Husum Pulp Mill. So remains to be seen. It's later during this decade, but when that's still open? And then concerning the second part of your question is that, of course, we are planning also then Other investments, as I have said earlier also, in order to grow our business after this or simultaneously with this falling post port capacity expansion at the moment in Huson. So Our intention is to continue to grow also in the future, being anywhere the market leader of these products. Right. And yes, so let's leave Housum Paltz Phase 2 aside for a minute, but how much of the Husband BM1 Expansion CapEx would still come beyond the EUR 450,000,000 to EUR 550,000,000 total CapEx 2021 2022, I guess that's my main question here. Okay. Henry will take this. Yes. As mentioned, it will the CapEx will be mostly in 2022, 2023. So You can assume sort of a roughly fifty-fifty split. Okay. Great. That's helpful. That's helpful. Thanks very much. And then just on the Rather, the new cooperation that you have with Noras Gorg on the wood supply side at HUSUM. I wonder if you could maybe give us an update About the changes on the ground since you started that cooperation, What kind of synergies you may be seeing already? And maybe specifically, how much Imports of wood do you have to Houston for the time being? Yes. So already during these 1st 6 months, we have seen that the share of the Imported wood has decreased. But then, of course, the full We can fully utilize this cooperation when the new fiber line is up and running. But at the moment, we have already seen lower share of imported wood in Husum. And also then we have seen the increased share of certified wood in Husum, so precisely what we targeted. So we have already seen this during these 1st 6 months. And by when, if so, are you expecting The imports to completely disappear. And import disappear, you meant? The word imports, yes. Yes. It's very difficult to say whether it will be, I mean, totally, totally disappeared, but significantly reduced when the new fiber line is up and running. Great. Okay. Thank you very much. Thank you. Our next question comes from Johannes Goncilias from Kepler Cheuvreux. Please go ahead. Your line is now open. Yes. Hi, everyone. It's Johannes here. I wanted to ask you about a Few things on the cost side, on the pricing side, but you help us giving the cost inflation, but that's for the full year. I was wondering if you could give some color on how you see the cost development for the second half, perhaps even more details on the Q3. And If you can also help us to think about or help us with the thinking about price increases, Where do you see the strongest pricing power at the moment? Because it's you click send a message here, obviously, that you will be able to take up underlying EBIT margins. That's my question. So if I take first this paperboard pricing and then Henrik will take this cost side. So we have increased several price increases at all markets, I mean, in Europe as well as Asia Pacific and Americas. And our intention is to continue to increase our prices. And we'll see that during the Q3, the prices will be higher than Paperboard prices as well as in pulp, but I'm talking about paperboard now. So they will be higher than in Q2. And then our clear target is to increased prices for next year also to the customers that we have not been able to increase this year, meaning the customers that we have annual deal. So that has been quite openly communicated to our customers. So our intention is to continue. And of course, the main reason is very, very heavy or strong demand, both in white kraftliners as well as then in foodserviceboard and folding boxboard. So it's pretty much demand and supply case. But then coming to costs, Hendrik? Yes. So as Mika presented, so we are estimating that the full year cost 1. Will be between 3% 4%, and that means translated into euros, about €40,000,000 to €60,000,000 on an annual basis. What we can say more detail about that is that we think that the pace will slow down Slightly on the second half from the first half. Okay. Yes, that's helpful. If you if we're going back a little bit on pricing, where do you see the most positive delta in the Q3? Is that more on the pulp side? Or is it more on The board side? It's both and. It's difficult to say in relative terms where It will be better, but in both segments, soap, pulp and paperboard, our expectation is that the prices will increase. And also a question I have is how much of the pulp in MetsoFibre and your own excess pulp It's being shipped to China in, let's say, Q2. And what you see in Q3, are you now shipping more volumes to Europe because of relative pricing Between the continents. I don't have the exact figure for you. But during Q3, Our expectation is that the volumes to China together with Metsofabo, Metsoboort, they will be higher than in Q2. But I mean, then of course, there is a limitation, and that is the fire at Husum Pulp Mill. So of course, that will curtail then our volumes in market Pulp side. But all in all, Q3 volumes to China from Metsa, whether it's MetsaFoib or MetsaBoard, will be higher in Q3 than Q2. Yes. A final question. You said you saw July being better than, Yes. May June. Is that basically order activity? Or can you give us some anecdotes why you see this? Maybe in Q sorry, in May June, then the pulp customers, They waited for a while in order to see where the prices go. But then when the demand there was anyway quite good in paperboard and paper, so tissue paper packaging materials as well as the normal so called normal paper grades. Then they started to buy again. Thank you. Our next question comes from Michael Dubel from UBS. Please go ahead. Your line is now open. Thank you. Good afternoon, everybody. Just a couple of questions here. Firstly, on the folding boxboard business. Could you give some indication of the magnitude of the achieved price increases in that business? And also, How much of those volumes are on annual contracts? Just trying to figure out what the impact is from the pricing in that segment this year and what Expect for next year. That would be my first question. I can't I don't give a Clear figure for you, but anyway, the price increases so far both here in Europe as well as the Asia Pacific and Americas, North America, especially, they have been clear and significant, so clear some percentages. And then concerning now these annual deals in North American market, we don't have any annual deals. So they are practically until further notice based deals. And then here in Europe, I would say roughly fifty-fifty is the share. We can check it and come back to you if you like. But that is roughly the figure here in Europe. Okay. Yes. That's fair enough. That's good. Then I would also ask a bit about the Metsa Fibre results, which you booked as an associated income. I was wondering if you could give some indication of How much of that business is actually saw and timber? I mean, we have seen quite The meaningful price increases for Santinbur into Q1 and Q2 this year and also now some of your competitors guiding for 50% increases into Q3. So I would assume that, that could be quite a big driver also for the I think we have seen there in your share of associated income. But is there any more color you could give on that? For example, how Big share of the revenues as on timber, how much is pulp? Anything you could help us with there to better understand the dynamics and the earnings there? Okay. Henrik will take this. Yes. We cannot give you exact figures on that. Clearly, it is Way smaller than the ball up business. But what we can say is that definitely the difference Between last year's first half has been remarkable also in the saw and timber business, but we are still talking about sometimes of 1,000,000 of EBIT level difference. Okay. All right. Good. That gives some color. And then just finally On the Husum port concept, which you mentioned, and obviously, given the higher volumes, you We need to make some investments there. So I was just wondering when do you plan to take a decision on these investments? And is there Any indication that you can give on the magnitude of those investments once you decide upon them? No, at the moment, it's too early to say. Of course, we are as I said, we are the market leader here in Europe, and we need to act I mean, responsibility is very important here. So we are calculating different options, as I have said during several times during this year. And then the best options then, of course, will be selected. But at the moment, it's too early to say whether it's Some kind of big bang? Or is it just slowly increasing the current production line capacities or what is the solution. We are calculating different options. Okay. And then just finally on the maintenance, if you can give any indication of the maintenance impact Q3 compared to Q2. And maybe also Q4 compared to Q3, I think in the report you mentioned some additional downtime at Curam. Okay, Hendrik. Hendrik will clarify that. Yes. So the maintenance negative impact is sort of roughly around €5,000,000 Q3 versus Q2 and about the same Q4 versus Q3. Okay. That's very clear. Thank you very much. Thank you. The next question comes from Karl Osborne from Jefferies. Please go ahead. Just on White kraftliner, I'm just wondering What has been the demand drivers there that you're seeing pulling this through? And then if we do get the brown kraftliner price increase Dick, in August, do you think there's scope for that market to edge high if demand remains strong is the first question. And then the second one on folding boxboard, Your U. S. Peers have been raising pricing. Demand and inventory balances seem very strong there on the boxboard side. Will you be benefiting from those price increases as well? And how does that relate to Europe going forward from here? Thank you. Okay, starting from Poland, Postpord and the North America's market. So of course, in that market, we Follow the global because we are anyway relatively speaking quite small player comparing to the SPS players. So we follow the SPS prices. So when they increase, of course, we increase and then follow the kind of development there. But the North American market is quite Separate I mean, there are not that much connection between European market and North American market. The dynamics are different. Then coming back to white kraftliners, so demand boosters, of course, very strong retailer Business at the moment, especially in Americas, but also here. And then of course, e commerce plays important role. So they are the main key drivers, a strong retailer business at the moment in both continents and then, of course, growing and a strong e commerce. And we have a question from Harry Taitinen from OREA. One. Two questions. One is about the Husum, The first phase on the recovery boiler and turbine. Now that the start up is getting nearer, is the can you sort of remind them, Maybe give some additional clarity to the financial impact from just from this first phase. And also the timing wise, you indicate the first half Of next year. But what would be the factors kind of driving it towards the end of the first half or towards the Early part of next year. So that's about that. And then the second question is about the EU fit for 55 and the forest strategy documents. So what and just Kind of if you can give it's a big question, but if you can give your first take and of your impression how what the impact looks like on your Product portfolio and the use of the alternative barrier materials on consumer board. Okay. If I take this second question first. So this European Forest strategy. Of course, it's still a bit unclear what will be the really The kind of impacts on, for example, in paperboard business, that's more on the forest side. I mean, how we one. What will happen in the forests kind of harvesting and so. So it's too early to speculate what will happen, what will be the kind of effects and impacts on paperboard business. Hopefully, we of course, we have discussed internally a lot about that topic, But I think there will be more clarification during the second half of this year. And then coming back to Your second topic, I mean, the barrier development. So we are developing barrier materials. Of course, today, our biggest barrier material is PE from Husun, so PE coated products. But as we know, That lands under this single use plastics kind of directive. And Then of course, that will impact also our product development, and we are working actively there. Then the Husum Pulp Mill Phase 1, so it proceeds as planned. Now the project resources, they had their holidays in July. Project still so it was not standing still. There were work at the site. And then now after summer break, then the activity will be even higher and more and more I mean, the headcount At the project, we'll be higher and higher. And at the moment, we haven't seen any kind of Drawbacks or problems, whether they are timetable or schedule kind of related or then cost related. So next year this time, hopefully everything is up and running. But then coming back to these Are there other impacts? Maybe Hendrik, you can open up that. Harry, can you repeat your question on those? Yes. I think, I mean, When this the project was first communicated, then there was some kind of fairly broad indication on the potential kind of the financial impact. And I can't remember if it was for the 2 phases together or that. So if you could remind how the 1st phase about the financial impact or the return targets for that first phase. It looks like now that the That'll be getting nearer. Unfortunately, I don't have that figure with me, so we can revert to you with that one. We'll take it afterwards, yes. Thanks. Thank you. We have a final question from Johannes Koncilias from Kepler Cheuvreux. Please go ahead. Your line is open. Yes. Hello, again. So I just want to come back with one question. I'm trying a bit to reconcile the Q2 numbers. And I was wondering if you can help me a little bit with rough figures. How much did you hike the Holding boxboard price on realized terms quarter over quarter. And the same question on your the kraftliner side. So as I said earlier, so I don't have a kind of clear Exact figure for you, but we have seen that the price increases, they have gone through not fully, which is a normal situation, but significant share of our intention. And I mean, the estimation is that also in Q3, that will be the case. So prices are increasing. Because when I now see the delta in the sales, try to compare it with the volume change, I mean, it just appears to me that you have Pretty big increases in realized price per ton, but it might be so that you have a change in mix or it might be a big step up in Maybe the pulp sales as well, of course. So yes, but you're indicating to me that there is nothing like It's not significant price rises quarter over quarter anyway. You are right. Yes. Okay. Thank you. Thank you. Thank you. And as there appear to be no further questions, I return the conference to the speakers for any closing remarks. Okay. Thank you, everybody, for the questions and participation to this webcast. And I wish you nice continuation of the day as and also a nice continuation of the summer. Summer is still Ongoing. All right. See you next time. Bye.