Metsä Board Oyj (METSB) Earnings Call Transcript

Good afternoon, everyone, and thanks for joining us for Metsä Board's Half Year Results. My name is Katri Sundström. I'm responsible for Metsä Board's Investor Relations. With me, I have Essa Kaikkonen, our CEO; and Anssi Tammilehto, our CFO, who will be presenting the results today. At the very end, we open the lines for you for your questions. Remember that you can also send questions via the chat function, which I will then present to Esa and Anssi here. Before we get into the results, a quick reminder that today's presentation includes forward-looking statements and the usual disclaimer applies. With that, I hand over to Esa.

Thank you, Katri. And good afternoon, everyone. Let me first give you the headlines. We are improving. We are getting sharper about where we focus on the areas where we can really add value. That's what our strategy Lead the pack is all about. We believe that the best way to strengthen our competitive position is through service, innovation and customer proximity. Profitability improved during the period, although further improvement and the Husum turnaround remain the key priorities for us. I'm also pleased to see that our market share in European folding boxboard increased, giving us a positive momentum and we move into the second half of the year. So what actually happened in the quarter? In short, stronger volumes and better profitability. Our comparable operating results swung back into the black, reaching EUR 3 million. To put that into perspective, we lost EUR 23 million this time last year and EUR 11 million in the first quarter. So that's a quite turnaround. We saw the same positive trend in EBITDA. Paperboard deliveries increased from the first quarter and pricing started to move in the right direction towards the end of the period. The transformation program also continued to deliver as we have now reached an EBITDA run rate of EUR 135 million, together with a positive cash flow, and that's a good sign that the work we are doing is having a real impact. There were still challenges, of course. Husum remained loss-making, Pulp markets stayed weak and then the Iran conflict added pressure to logistics costs. But all in all, the direction is clearly the right one, and that's encouraging for the whole Metsä team. Let me then take you through the businesses, starting with the Consumer Packaging, our largest business area that amounted to 54% of the whole business of Metsä Board. Here, we saw demand continue to improve in the second quarter. Deliveries increased from Q1, particularly in Europe, and our market share in European folding boxboard also increased as we have been trying to increase it. Year-on-year, volumes were still lower, mainly due to the softer demand in Americas, but order inflow strengthened and pricing improved towards the end of the quarter. Then the retail packaging, which accounts for around 1/3 of the sales. Volumes were up 8% year-on-year, driven by strong demand in Europe, particularly during the second quarter. We also saw order inflow strengthening and pricing start to move in the right direction towards the end of the period. So overall, white kraftliner continued to perform well and provided a good support for our results during the quarter. But pulp was the tough one, accounting 12% of the whole turnover. Demand in both Europe and China remained soft and Metsä Fibre's Joutseno pulp mill remained shut throughout the quarter. At the same time, producers across Europe have been taking a lot of downtime and curtailing production. We'll have to see, is that enough to improve market condition later this year. As a result, our own as well as Metsa Fibers pulp delivery volumes remained below last year's levels. But now Anssi is going to take you into the numbers a bit more in detail. Anssi, over to you.

Thank you. Good afternoon also from my behalf. So let's take a closer look at the first half sales and profitability. So as mentioned in sales, we were down from '25 levels when the market environment really started to change and the decrease has mainly come from sales volumes, but also from prices and foreign exchange rate. Seasonally, Q2 is typically stronger, but we also witnessed a strengthening order book towards the end of the quarter or already in the second quarter and also the price increases started to show in the late Q2. We were able to push the comparable operating profit to the positive territory in the second quarter, and this really underlines the successful execution of the transformation program. So this is really a key ingredient in this whole turnaround. Of course, the commercial operations and actions around that play an important role in this turnaround. And please remember that this was all done despite the increased cost pressure due to the war in Middle East, and this had an impact on Q2 numbers as expected. Then to the result bridge first half year-over-year. If we then take a first look at the volume, a slight decrease in that one. in that one, but also related to the market, the price and FX that was, in a way, significant in this sense. We already saw that the FPB volumes were down by 61 kt and linerboard volumes up, then again by 20 kt, market pulp, then again down, and the net impact is there. But really, the 3 first columns are a sign of the market. Then when it comes to our own performance, we were able to squeeze on the variable costs. This is a very good achievement by the whole team and visible now in the results. So we have clearly been able to find more efficient ways how to operate the mills, how to basically operate the supply chain. And the second column, the fixed cost bar, that's a substantial one. And this comes from various sources, personnel costs, less services being spent, less spend overall, but also good to note that the impact of TACO closure is also there in the first half comparison. And then last but not least, Metsä Fibre, our share of that, that had a negative impact of -- sorry, negative impact, and then we land at minus EUR 8 million for the first half. If we then look at Q2 versus Q2 last year, we can see that especially production volumes play a big role in this one, we were able to increase the production rates, which then has an impact on us absorbing more costs into the inventory, which is then visible in that bar. Then as mentioned, price and FX had a negative impact. But then also in this comparison, you can see clearly the variable costs and fixed costs playing a big role. If we then take a quarter-to-quarter comparison, I think the picture is interesting in that sense, we were able to increase our sales volumes and as mentioned, seasonally, Q2 is typically stronger, but also a more strong or stronger order book plays a big role in that one. Price impact flat from Q1, FX flat. Variable costs, once again, more savings. But then seasonally, fixed costs typically are higher in Q2. And now we had maintenance activities and also, for example, summer workers are visible there. And then we landed in the plus EUR 3.1 million. So happy to see us back into the black. And of course, work continues and a bit on that, how do we continue? The transformation program is actually going very well. It's going as planned. maybe highlighting still the first row taking into account the cash release. So we were able to have a positive cash flow in the second quarter, and that is, of course, a sign of good turnaround EBITDA, but also strict capital discipline in our working capital side of things. We can be more efficient, and I think there's more to come. Of course, we then continue to focus on our procurement, the mill productivity and then, of course, the commercial actions, including also the growth in the preferred segments where we want to grow, and this is also a key ingredient in the strategy of Metsä Board. So Esa mentioned, EUR 135 million run rate improvement by end of Q2. And here in this slide, you can see the trajectory. And happy to say that, of course, after 4 quarters out of 10, -- this is already a good achievement, but we need to pay attention to the upcoming quarters so that we really meet the targets, and I don't doubt it at all. Already EUR 45 million cumulative impact in the P&L, which I think is a good achievement. So very good work in that sense and strong progress. Cash flow. Also very pleased to see that returning back into the black. And this is, of course, supported, as I mentioned, by the improved EBITDA level, but also managing the working capital tightly. And as you can see from the history, this is not something that we have seen that much. So I think it's very good that we now have been able to squeeze ourselves into the positive territory also in cash flow, including free cash flow, which was at positive EUR 5 million due to quite low investment levels. And as I will talk a bit later on the investments in general. Capital discipline remains a high priority for the company also going forward. And I think this is something that the whole company understands. What does this then mean from our balance sheet point of view? If we look at the financial position after the second quarter, the liquidity remains strong at EUR 547 million. The noteworthy topic in this slide is that we were able to secure a refinancing of the EUR 250 million bond that was maturing in '27. So we took the bridge facility in '27. And this is something that gives us flexibility in our financing needs also going forward, and we are then able to enjoy a good margin level still through the bond maturity. So that's a good achievement in second quarter. The net debt stood at EUR 341 million, so same level as end of Q1. Leverage elevated still to the weak last 12 months EBITDA. And no change in the investment-grade rating by the agencies, Moody's and S&P. With these words, handing back to Esa, please.

Thanks, Anssi. A quick word on investments because this is a real shift for us. The big spending phase is now behind us, as we have been pointing out earlier as well. Investments were just EUR 25 million in the first half. And looking ahead, we expect annual CapEx to stay clearly below EUR 100 million, with around half of that being maintenance CapEx. That frees up cash in the future as well. Then we have been showing this slide also earlier, and this is in Husum's special slide in that sense and saying that Husum's profitability is currently being weighted down by a challenging operating environment, while the mill remains highly sensitive to market movements. At the same time, Husum is a key focus area within our transformation program. We see a clear potential to improve both cost competitiveness and performance over time. That's why Husum remains one of those most important drivers of future profitability improvement and focus areas for the management as well. We have stated clearly that Winschoten investment and acquisition that we did in the Netherlands was one of those elements that we were launching this year. Then looking ahead, near-term outlook, I'd say that the overall picture is improving, but operating environment remains still mixed. In the paperboard, we are seeing encouraging signs, as we stated earlier as well by Anssi and myself. Demand and pricing improved towards the end of the first half, which should support the market environment in H2 as well. Pulp remains a different story, though. Demand is still soft in both Europe and China. And while a lot of capacity has been taken out from the market through curtailments and downtime earlier this year and last year, it is still too early to say whether that will be enough to improve the market balance going forward in the latter part of this year. And then Iran conflict continues to drive volatility also in the logistics, energy and raw material costs, although commercial actions have helped offset part of that impact already in the last quarter. For Metsä Board, gas generation remains a key priority, as we have explained earlier as well. We expect paperboard deliveries to remain broadly stable, while the transformation program continues to improve our cost competitiveness support. That said, Q3 will be significantly affected by the long Husum shutdown. And in addition, Metsä Fibre result contribution expected to remain negative due to the extensive maintenance activity and continued low pulp production utilization rates due to the weak pulp market. So this is important to understand. And then moving on the strategy as well a bit, I'd like to spend a moment on this slide. Strategy only matters if the progress can be measured and these KPIs, as we have been doing this on the quarterly reports as well, are how we'll track the progress going forward. They cover our 4 pillars of the strategy: safe, shift, scale and streamline. Some of these metrics move slowly, others much faster. But together, they give us a clear picture whether we are heading in the right direction. What I'm particularly encouraged by this progress we are seeing in streamline. The transformation program has already reached an EBITDA run rate of EUR 130 million, as was explained by Anssi. And we've also made a good progress in capital management and cash generation. These metrics help us stay focused and -- but just as importantly, they help us -- help our stakeholders assess whether Liftepak is delivering the results we set out to achieve. So one of the key ideas behind the strategy is that we don't compete on volume alone. We compete through service, innovation and close customer investments such as in Winschoten that I was explaining earlier, this seating capacity, extra seating capacity that we have been acquiring. And our Milan design studio strengthen our customer offering and help building long-term growth in our core markets, Europe and North America. I'm pleased to see that this is translating into the results as well. During the first half of the year, we gained market share in the European folding boxboard while pricing also started to improve. So clear evidence of strategy working as well. So if I leave you with the 3 messages today: first, improving market conditions translated into higher volumes and better profitability, good sign. Second, our transformation program is delivering tangible results that everything in there is in our own hands. And third, while we are moving in the right direction, the work is far from done. So we will be continuing this. This will be a continuous journey, continuous improvement. Our priorities forward remain clear: cash flow, improving thusen's performance and disciplined execution of our strategy. That's the picture from us today. Thanks for listening. And with that, we are very happy to take your questions. Thank you very much.

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

I'm encouraged to hear you talking about improving market conditions. However, just in the very short term, coming back to Husum and how to think around that, particularly in the third quarter, is loss-making as is and now we are going to see a maintenance shutdown. And in addition to that, if I understand you right, additional market-related downtime. So how severe will that be in terms of a P&L impact in the third quarter? And to what extent can that be balanced by other factors, please?

Well, that's a good question, Linus. Thank you for the question. We are not disclosing numbers on each of our assets. But of course, that will be -- there are 2 things. First of all, the pulp and then the FBB side as well, which is impacted by the U.S. situation and the fact is that it's a nominated capacity -- has been nominated capacity predominantly to the U.S. market. So that -- having said that, that will have a negative impact, which is then described in details in our report. I will not go to the -- more on the details, but that's an excellent question. And as I said, it remains to be the biggest opportunity as well for us.

Because one can read it differently, of course, because as said, it already is loss-making. So does that mean that the downtime isn't as impactful as we normally would have assumed?

Well, of course, giving the magnitude on that, it depends on the sales activity also in the Q3, how we are releasing the operative net working capital as well and what is the situation with our speaking and then how well we are able to ramp up the mill. So there are so many different elements in related to Husum during the quarter. So it's really difficult to give any specifics. If we could, we would have given those.

Fair enough. And then if I may, I'll shoot one market-related question, maybe on the theme of improving market conditions, as you mentioned. And there have been quite a bit of movement in the markets now in containerboard, and we've seen strength in the brown segments now for some time, price initiatives, capacity closures in North America, et cetera. And it seems to me that, that is now spreading into the white grades as well. we've seen some price announcements in the U.S., especially. Could you please describe what you are seeing if you are taking part in this price initiative that we're seeing in the U.S. and also possibly in Europe?

Yes. The market logic is that we see, of course, from the statistics as well that in both FBB and WKL prices have turned upwards slightly during the quarter during this quarter. And on this white top kraftliner, which is the product that we are selling in the U.S. there is always a time lag a bit when the prices are starting to move that's a niche product in the market, and there is a kind of a time lag before these prices are moving upwards. But we are seeing a positive momentum in the U.S. as well. It happened already in Europe in Q2. But then Q3 onwards, we are positive on the prices in U.S. on the white top kraftliner as we have been explaining that earlier as well. But we don't -- it is such a niche product in the containerboard market that we will be following the market trends in that sense. And clearly, there is always a time.

The next question comes from Joni Sandvall from Nordea.

Maybe starting with still the demand situation in U.S., especially for the folding boxboard. Have you seen any improvement on that side or any early signs of improving demand?

Well, in the FBB market in the U.S., we are the biggest player in that market and competing against the local SPS. And I think that we have seen some positive signs in the whole folded market in the U.S. and that's where we are encouraged as well to say that we see weak signs of a positive development on the FBB side at the same time. There that we could start to climb back on the growth path in the U.S. market with FBB as well. As we've been stating as well that it will be remaining our focus area to get back on the growth track. And we have a growing customers there and we have a competitive edge against the other folded products. So I believe that at the end of the day, we will be seeing substantial growth as well, and we are focused to deliver.

Okay. Okay. That's clear. And then maybe coming back still Husum, it's still loss-making, but given the improving trends in Europe and you take market shares here in Europe, could you give any expectations where you -- when should we expect breakeven levels in Husum in the current market environment?

As soon as possible, of course. But having said that, it is really difficult to say that how these actions are then moving onwards, and it depends quite a bit on the annual contracts that we are starting to negotiate during the autumn as well. But the important fact that we have been earlier delivering is that we are aiming back to the growth track in the U.S. market with FBB, Husum and then also in Europe to grow Husum's market share in the European market. And because of the fact that it is a new product of technical fine-tuning and sales activity, but we are committed to deliver higher volumes in European market also for Husum.

If I may add, I think it's good to note also that a large share of the transformation program is also steered towards Husum. So of course, we are doing also cost side of -- or cost measures in Husum to stay competitive. But as mentioned, it takes time to build up the sales ramp-up, and this is something we focus on quite heavily at the moment.

Yes. That's clear. Then coming back regarding your actions with the transformation program. But what about the TAO and Kyro profit improvement measures that have been taken? Obviously, TAO is closed and the fixed costs have been taken down. But how about this Kyro program, how has that evolved? And have you reached your targets with Kyro?

Yes. If I recall it correctly, I will be rounding up some of the numbers, but we said that the overall program GW program initiated EUR 30 million EBITDA improvement roughly, and we are seeing some 75% of that executed. So that's Anssi is nodding his head, so...

Yes, exactly. This makes sense. And as mentioned, it's also visible in the results, but 75% is a good proxy for that.

Okay. And last question from my side. Are you actually expecting any tariff refunds from U.S. in the -- during '26?

Yes, absolutely, we are expecting those, but those are the things that we'll need to then, of course, discuss with the customers as well that we'll have really extra discussions during the autumn that what will be the final impact because there are new tariffs as well that are now in force in the level of 10%. So that will be something that we will be discussing and taking to the table with the customers and seeing that how then the potential refunds will be then distributed.

The next question comes from Andrew Jones from UBS.

A couple of questions. Just first of all, on that U.S. market situation. I mean, clearly, the SBS prices have gone up, I guess, like $40 to $60 in the last Brent. But we've had obviously inflation in the freight costs, that's gone up in dollar per ton terms, but curious on that. And obviously, your cost base has inflated with the recent round of Ian issues. I mean, net-net, I mean, has profitability on spot sales into the U.S. actually meaningfully improved or margins kind of where they were? And I have a second question, but I'll let you...

Maybe I will hand over to answer this one.