Billerud AB (publ) (BILL) Earnings Call Transcript & Summary

Good morning. We have today published BillerudKorsnäs third quarter results and our acting CEO, Lennart Holm; and CFO, Leva -- sorry, Lennart Holm and Ivar Vatne will now hold the presentation. And after the presentation, we will open up for questions from the conference call. So without further delay, I would like to hand over to you, Lennart, please go ahead.

Thank you so much, and good morning, everyone. Well, the heading for our third quarter report is resilient performance with strong cash generation, and let's start by looking on the key highlights for Q3 2020. Stable sales volume despite challenging markets, successfully accomplished maintenance shutdowns. We'll talk more about that. Accelerated delivery of cost and efficiency program, strong operating cash flow generation and recyclable flow wrap product launched. Just very briefly, figures for Q3. Net sales, SEK 5.561 billion, adjusted EBITDA of SEK 570 million, which gives a return on capital employed of 3%. Ivar will go into the details of the figures in just a couple of minutes. What I would like to start with today is just to also point at the fact that we are a very innovative company. And we have, during the quarter, actually introduced our new product, the recyclable flow wrap, which we were proud of. It's a paper-based packaging solution, which actually enables a shift from plastic materials, wrapping materials to paper products that are both recyclable and based on renewable raw material. This has been a joint project together with [ Synthego ] and the switch R&D center -- Swiss R&D Center. Based on primary fibers, renewable and biodegradable, as I said, suitable for confactory -- confectionery and bakery products. This packaging solutions has excellent barrier properties with medium to high barrier requirement papers. The good thing with this product is that it can run on existing flow wrapping machines after installation of an upgrade, rather limited investment, and it can run with no speed restriction, which is quite unique for a paper. So here, we have all of a sudden, a paper product that definitely can compete with plastics for wrapping of candies and chocolates, et cetera. So I think this is a product that we have big expectations around going forward. Looking more on our running business. Let's have a look on the business status and outlook. If we the different segments we're active in food and drink. We've seen during third quarter, rather stable business trend there. And the outlook for Q4 remains stable, no big change. There are sectors, subsegments within food and drink, of course, that some of them are doing better and some of them less good. Medical & Hygiene, here, we actually have seen during the third quarter a more challenging trend than before. And this we see is directly related to the fact that COVID-19 now takes all the resources of the segment in terms of hospital care, et cetera. And this has a negative effect on many of our products. Consumer & Luxury. There, we see a stable development during the quarter, and we don't see a big change going forward. It does not mean it's on a good level, but it's at least stable. Industrial, very much the same development. We -- so overall, I would say, if we look on our entire business portfolio, the trend during Q3 has been fairly stable with some small upsides and some downsides in terms of mainly some pricing pressure on certain grades, such as liner and fluting and white sack and some of the MG AMF assortment. The big thing for us has been and remains, of course, KM7, and let's have a look on KM7 and Q3. Overall, we see very positive progress. The progress continues. We had maintenance shutdown or stop in September, which was very important for us. There were certain modifications. We had identified a need of doing, and these were completed successfully during the quarter. So all key activities went as planned, and we executed upgrades that were required. This will enable both a higher speed and higher stability on the machine going forward. I'm also happy to say that we've seen a very positive customer feedback now on the material that we have delivered to customers from KM7. And this is, in particular, valid, I would say, for the coated grades, where we're very pleased right now. It means that we can produce today all the products that we intended on the board machine within our set specifications, which, of course, is very important for us going forward. The negative EBITDA impact is decreasing. In Q3, we could see a negative impact of SEK 80 million, which means that for 2020, the estimate for the full year is going to come out around the SEK 450 million, but the trend is positive. So going to the next slide. Capturing the value of KM7. Our focus has now moved from, let's say, the technical aspects of the ramp-up into commercialization. We're focusing fully now on commercialization. We can produce all the products that we want to produce on the machine. We have, however, seen that the combination of COVID-19-related market effects have slowed down the commercial ramp up somewhat. And this, of course, you can see in our figures. We can see that our customers' priorities have shifted during the COVID-19 period. They have limited evaluation ability. Let's say, that their ability to evaluate new suppliers and new qualities is reduced during this COVID-19 period, which perhaps is not so surprising. We've also seen somewhat weaker market for containerboard, more price-wise than volume-wise. For KM7, we do expect to reach EBITDA breakeven during 2021. And then the journey, of course, continues towards reaching the full potential of KM7. And this, we intend to reach by commercializing more volumes in financially attractive segments, scale and flexibility in our 3 board production sites, which is an important factor. With KM7 now we can optimize much more what grade, what product we produce on different machines. So we can really focus on producing the most suitable grades for every single machine. And this will, of course, increase our efficiency going forward. We will also see now going forward that we will get out lower fixed costs at the Gruvön mill due to efficiencies that we can accomplish, by the fact that we've closed down a lot or a number of smaller machines. We now run one more modern machine and after introducing and let's say, educating staff and so on, we can pick out some of those costs. Let's have a look on what we see as perhaps the most important parameter going forward when it comes to KM7, and that's driving the right mix, which is instrumental for the KM7 contribution. I think what we need to be aware of is, it's very easy to talk about volumes, but there is much more to the contribution than volumes. What we have seen, and I think if you look on these graphs here, is number one, to the bottom left then. In Italy, when we started the machine, you can see that there was quite a high degree or percentage of waste and secondary grades that were produced. And the prime product output was lower. Step-by-step, now we have increased the prime output and reduced second grade and waste. Second grade is basically now down to 0 level. And the vast chunk of what we produce now is prime grade. This is important because basically, when we get second grade quality and even more so with waste and especially in a market such as the one we've seen right now with COVID-19, it's very difficult to sell these grades and get any contribution. So just the fact that we're now running a higher and higher share of prime grade does increase our contribution in itself. If we look on the top left graph, material produced. What you can see -- start to see there also is that exactly as we have communicated earlier on. We started up with uncoated material and some second grade product production. But now since a number of months back, you can see a trend, the bottom right there with the dark green. That coated material is month-by-month now increasing, and this is the material that is supplied to our customers. So a combination of improvements of the development of the mix and eliminating waste and second grade is what's going to drive the positive trend for KM7, naturally in combination with some volume increases as well. But contribution per tonne is very, very important here. With that, I think I'll ask Ivar to have a look on the -- and dig a bit deeper into the financials for the quarter.

Yes. Thank you, Lennart, and good morning. If we start with some comments on the net sales bridge. As Lennart already mentioned, it's 5% down versus a year ago, 2 percentage of that is currency related. So we're talking organic net sales of minus 3%. On volume, we are flat. So despite some positive mix, it's basically the market relating pricing that pulls down the number to minus 3%. We'll come to the product area figures in a second. But like the story has been over the past quarters, it's within product area. Paper and solutions, we will see there the biggest net sales decline. If we follow-on into the EBITDA bridge, I mean we already communicated this as part of our Q2 report. This has been a heavy impact of this maintenance phasing. We still have a negative pricing component, which is close to 4% of net sales, and that's obviously quite significant. But from there on, we are able to offset most of this negative impact through a series of positive and mitigating actions. We have a sizable help from raw materials and consumables, where the biggest factor here is from the lower fiber cost. Our cost and efficiency program keeps delivering, and we add another SEK 95 million of structural savings. We have a volume mix help of SEK 65 million. We have a currency help of SEK 20 million, which is mainly a result of the positive hedging result, which leaves us in the end with SEK 570 million EBITDA. That's 11% down versus a year ago. But please keep in mind that this has been in a quarter with significant higher maintenance phasing and quite the tough market conditions. So if you move into a bit more detail on the commercial result. Starting then with product area board. So product area board is down 4%, where currency is roughly half of that. So we're talking an organic result of minus 2%. And this is weaker top line performance from Board versus what we've seen over the past quarters. And I'll come back to some of the items impacting this because it's a little bit different perspective per segment. I mean, liquid packaging board is down 3% and has had a tough quarter. It's partly impacted by the maintenance phasing in Gävle. We've seen an inventory adjustment some of our customers. We also had some start-up challenges after maintenance stop in particular in Gävle, which has been reflecting our availability. For cartonboard, it's coming in slightly negative, but there's a couple of nuances in that number that I'd like to convey. Volume growth is still very strong and in line with what we've seen over the past quarter. It's plus 12% versus a year ago. That means that we've had a relatively low net sales per tonne in this quarter, and that's mainly related to the first commercial cartonboard volume coming out of KM7. And there's no doubt that also going forward, we expect that net sales per tonne number from cartonboard from KM7 to come in line with our category average. Containerboard or that will be the fluting and liner is growing nicely, in particular with the liner volume growth. We also have volume growth on fluting. In total, we've had 24% volume growth in containerboard versus a year ago. However, there has been a market pricing correction in containerboard from the beginning of July. It leaves us with an EBITDA margin of 9% clearly then impacted by maintenance phasing. If you would've taken that out, we would actually have been an EBITDA growth of 3%. Moving onto product area paper. We are down 12% of net sales, currency being 3%. So we're talking organically, minus 9%. Sales volume is down 3%, but a lot of that is down to pulp. So actually, if you look at more of the commercial grading and looking at paper, excluding pulp, volume is up by 4%, which is versus year ago, which is encouraging. Sack is down 7%, and it's clearly a better performance for brown sack versus white sack. In fact, if you look at the volume for brown sack, we've had double-digit growth versus a year ago and also growth versus Q2. So this trend is very encouraging. The situation for white sack continues to be challenging. For kraft paper, we're down minus 6% versus 0 go, and a bit like the situation is for sack. The kraft paper volume is performing much better. It is slightly up versus a year ago. And in particular, if you look within the kraft paper grades, it's the white MG, which is still having the most difficult conditions. Other grades are doing clearly better. In terms of the profitability for product area paper, we're holding the profitability flat versus a year ago, which is a result in also very strong cost and efficiency mitigating actions that we've taken over the year. Moving into solutions, we're down 19% decline, and it's very much a reflection of still tough market conditions. Most of our business in managed packaging still sits with North American brand owners, and they are heavily impacted by the COVID-19. Although we do see one step towards normalized level in Q3, and the performance in Q3 has been stronger versus what we saw in Q2. Also for solution, we've been able to protect profitability well through a series of cost and efficiency mitigating actions. If we move on, Lennart mentioned already this a bit in the beginning, but our cost and efficiency program is performing well. We've added another sizable contribution, I mean, in Q3, SEK 95 million, meaning that we year-to-date has delivered SEK 235 million. And there's no doubt that we look at now an accelerated delivery versus then the ingoing target for the year, which was SEK 250 million. And we foresee now to land 2020 of SEK 300 million plus. We also, with this now and based on 3 quarters of a pretty good confident run, we raised ambition level of the program by SEK 50 million to SEK 650 million. Same time dimension, as we talked before, that all of this should be in place as a run rate of Q4 when we come to 2021. If you move into next page, talk a little bit about our input and raw material cost. Starting with the pulpwood and the fiber, decreased slightly in Q3, roughly SEK 20 million help versus Q2. And then we look forward a bit and particularly for Q4, we see that there will be a further slight help for that cost item, partly then of a full quarter impact of the price reduction that we saw in -- well, during Q3 as of August. Besides that, there's not really any items that we expect we should have in help in the area of SEK 50 million Q4 versus Q3 as situation looks right now. In terms of, yes, caustic soda, part looking into chemicals, we had a SEK 50 million cost increase in Q3. A lot of this is actually based on the pricing that we saw during Q2, and then there's a certain time lag before it hits our P&L. In Q3, we have seen that the pricing had come down at least slightly on caustic soda. There's been a bit offsetting items, but we do expect a slight help in the area of SEK 5 million in Q4 versus than Q3. For energy, I mean, versus Q2. I mean, spot prices increased by almost 50%. So it's been extremely volatile over the last couple of months, which I'm sure some of you already have read and seen yourself. If you just looked at on the spot prices, that will be a SEK 44 million hurt, and we've been able to get rid of half of that through our hedging position. So we had in the area of a SEK 20 million hurt versus Q2. And then what we expect in Q4, it's very tough to say. The situation is extremely volatile. We expect close to flat development for the energy versus what we have seen in Q3. Moving on to a cash flow situation. We have had a very strong operating cash flow. And it's a combination of several things, but we've already talked about the underlying EBITDA result. If you look at some of the other items worth highlighting, we've had a very good working capital improvement. And this is mainly, if you look at that change versus a year ago, it's partly because of payable change post on the KM7 program. So that's impacting more of what we understand from the base last year. For this year, we also had some receivable, good performance by very close monitoring and some slight inventory adjustments. From the net financial items, the amount there is mainly due to tax payment phasing or timing. The operating investment, reflecting a new normalized level versus then a very -- a much higher number last year, which is clearly linked to the ramp-up or the payments of the KM7. That means that we are looking now at a slightly lower net debt versus EBITDA ratio versus Q2. It's down to 2.3. I know that the last bullet points on this slide is a lot of interest. We do expect a decision regarding the Frövi soda recovery boiler in Q1 '21, and we do not have any more comment at this stage. So it's getting closer to a decision, but there's not really much we want to say more on that regard today. So with those closing remarks, I'm just handing it over to Lennart.

Thank you. So trying to summarize the third quarter then. As we've said now a couple of times, resilient performance, stable volumes and strong cash generation. We have also successfully accomplished maintenance shutdowns. However, as Ivar was into, we did have, I have to say, some start-up delays after these maintenance shutdowns. Partly, I would say this is a result of all the precautions and planning -- careful planning, we had to do in order to safeguard the health and safety of our employees and external contractors in the situation we have now with COVID-19. And that has made things a bit more complicated. We have also accelerated and -- our delivery on the cost and efficiency program. I think this -- here, we now raised on the ambition to SEK 650 million as the total result. And we have launched our recyclable flow wrap, new paper that we have big expectations on where we have seen already now significant interest from major brand owners who have successfully tested these products. Q4 outlook then. Well, we have to say that uncertainty remains. It's -- the visibility is limited considering COVID-19 and what is happening now, not least in here in Europe. We do expect raw material costs to decline slightly during the quarter. There were a number of maintenance stops also planned for the fourth quarter. Frövi and Skärblacka, there, we have actually done these, and those 2 mills are up and running again now. And Pietarsaari in Finland, they are doing their shutdown right now and expect to start-up again on the -- I think it's the 27th of October. So everything there seems to be going according to plan. We also continue the ramp-up of KM7. And we're building this now which I'm extremely happy to say, on a very positive customer feedback that we're getting on the qualities that we are supplying. So with that, I think we basically have taken you through. Next time it will be [ Christoph Michalski ], who presents, and I'm very pleased to say that. So with that, I think we're done and open for questions, Lena.

[Operator Instructions] There are no questions at this time. Please go ahead, speakers.

Okay. No questions this time. So then we conclude this conference call. Thank you for participating and welcome back when we report our year-end results, the 29th of January. Thank you, and goodbye.