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

Good day and thank you for standing by. Welcome to the Billerud Fourth Quarter Report 2023 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Lena Schattauer, Investor Relations. Please go ahead.

Thank you. And good morning and welcome to this webcasted conference call about Billerud's fourth quarter and year-end results. As usual, our President and CEO, Ivar Vatne; and our CFO, Andrei Kres, are here to hold the presentation. And after their presentation, there will be a Q&A session. So after this brief introduction, we will now get started. So please, Ivar, go ahead.

Thank you, Lena. And good morning, everyone, and thank you for joining. So we will go through some of the highlights and key financials for both the quarter and for '23 in total. I think the headline says it all how a summary of how '23 has turned out and I'll give a little bit more context. So let's move into the next slide, please. And there is no doubt that 2023 was an extremely difficult year and a year that in many ways has been a bit of a hangover from '22 and characterized by unusually high inventories across the value chain. This has led to low sales volume and in combination with sales price pressure and higher input cost, it has wiped out most of the profitability compared to last year. Now in this challenging market context, it is imperative to keep strong control of items we can influence and there are 2 particular items that I'm proud of and how we managed to drive a good performance. Number one, keeping a continued close eye on working capital to secure a strong cash conversion. And number two, how we rallied around our efficiency enhancement program and over-delivered versus the target we set 1 year ago. Another big event for the year has been our soda recovery boiler in Frovi, which is now completed on time, on spec and on budget; and this is something we're really proud of given that much of that was done and completed in a COVID time period. Now on to a bit more details around the Q4. So next slide, please. And Q4 was another quarter facing severe market headwind, but it landed broadly in line with our expectations. Volumes were soft mostly in North America while we experienced some pricing pressure in both of the region and that has led to challenged profitability. An 8% adjusted EBITDA is a performance we certainly are not happy with. Our cash flow is a clear highlight with outstanding cash conversion and this is something I'm really pleased to see as we're putting considerable effort to achieve that result. We do have some items impacting comparability minus SEK 244 million where the biggest one is the revaluation of the biological assets we are holding in Bergvik Skog and that item is minus SEK 164 million. The other item is the one-off restructuring cost related to our FTE reduction and that is SEK 80 million. Now with that, let's continue with some input on the market sentiment. So next slide, please. And as I mentioned already, market conditions remained weak throughout Q4 pretty much as expected. Second half of December shipments, they came in a bit under what we had foreseen, which was a clear sign that customers are protecting their working capital before year end and most of that has been moved into January so no real drama on that one. Now going forward and into Q1, we do expect to see some slight improvements but coming from weak levels. On the plus side, we see more and more signs that the customer de-stocking phase is coming towards an end or have normalized already and that should yield a slightly better volume demand. Now on the negative side, higher interest level is starting to bite in certain categories and pull consumption down. In that regard, we are well placed with a strong relative weight towards food and drink where consumption tend to be more stable. Hence, net-net we remain cautiously optimistic and our order books do point towards a better start for '24 versus how we ended '23. And with that, I hand it over to Andrei.

Thank you, Ivar, and good morning, everyone. So to start off with the top line development for the quarter. Both regions were sizably down compared to the last year and the total group sales were down 20% with North American volumes and European pricing as the main drivers. We had also negative mix impact in both regions as we sold more pulp in quarter 4 this year. Currency rates continued to have a positive impact while the divested Managed Packaging business had a marginal negative impact. And on Managed Packaging, just as a reminder, so the business contributed with sales of SEK 420 million in 2023 and will obviously not contribute with any sales heading into 2024. Next slide, please. Looking into the profitability development. Also here pricing and volume are the main drivers behind the decline. For the first quarter this year, we have year-on-year input cost relief as we start to meet higher base, but also due to the input cost coming down sequentially in quarter 4, which I will get back to. The impact from our efficiency enhancement program contributed with SEK 215 million and, as Ivar mentioned, is one of the highlights for the year and also for the quarter as we saw additionally good progress. The other is roughly SEK 200 million negative where the biggest item is from inventory revaluation had a negative impact of SEK 200 million year-over-year. And as we mentioned at the previous calls, this has been a significant effect versus previous year with the cost inflation we've had, but the impact is marginally sequential development now. And then finally, the maintenance schedule for this year was slightly more intense as we had the shutdown in Escanaba mill in quarter 4. So we have a negative impact from higher maintenance costs. Next slide, please. Heading into regions performance and starting with the European region. Sales volumes were flat versus a year ago while net sales declined by 12% and the decline was driven by lower pricing for all categories except liquid packaging board; but also, as I mentioned, negative category mix with higher pulp sales. The market conditions for the European segments remained weak in the quarter with the exception for liquid packaging board, which was on a normalized level. For liquid packaging board business, we concluded pricing negotiations for significant volumes, which will have sizable and meaningful impact heading into 2024 now. Sequentially, the volumes for the region declined with 2% and we saw clear year-end effect with postponement of orders into quarter 1 and also some logistical challenges to get out volumes. Profitability for the region was down with 1/3 versus a year ago and again the main driver is the lower pricing and also negative mix. Year-over-year the region's input costs were down, which was supported by the impact from efficiency enhancement program. And we can move on and look into input cost development for the region during the quarter. Next slide, please. In line with our expectations, we saw general decline in input costs with the exception for energy costs, which increased on the back of higher spot prices for electricity. The fiber prices were down SEK 140 million versus the third quarter, chemicals down SEK 30 million and logistics down SEK 10 million. This positive impact was then offset by higher energy costs of SEK 50 million. And on logistics cost side, the cost impact from the challenges that we experienced during the quarter to get out the volumes was limited, but we see that this will have some impact heading into the first quarter. And so heading into the first quarter, we do expect that the total input costs will increase by about SEK 100 million and that is primarily from logistics of SEK 50 million, energy costs expected to increase with SEK 60 million, which will be offset by lower chemicals costs of SEK 30 million. Fiber cost is expected to increase marginally resulting in a negative impact of about SEK 20 million. So all in all, total cost increase versus quarter 4 of about SEK 100 million. Next slide, please. And heading then into the North American region. The markets remained weak in terms of volumes in quarter 4 and we continue to operate our assets at below 60% of capacity. Net sales in the quarter were down significantly versus previous year ago driven by 25% lower sales volumes. Also within the North American region, we had less favorable mix with higher pulp sales. We saw some price pressure in the quarter, in particular on specialty paper. And looking ahead into quarter 1, we expect pricing on graphic and specialty paper to come down somewhat as new contracts for 2024 start to kick in. Sequentially versus the third quarter, the volumes were down marginally and we saw a clear order postponement into quarter 1 this year where we see that order books are improving for quarter 1. EBITDA for the region was down significantly on the back of much lower volumes and unfavorable mix while we saw cost relief compared to the last year, primarily on energy and logistics. Next slide, please. And just a quick comment on the cost situation for North America, which remained stable as we also expected and really no big call-out for any particular cost bucket. Overall costs were flat versus the third quarter and the minor changes we had within the different buckets canceled out each other. That's also what we expect heading into quarter 1 with flat cost development. Next slide, please. In quarter 4 we continued with our cash flow efforts and reduced our working capital further, which resulted in an excellent cash conversion of 99% for the full year. And I'm very pleased with the efforts that we put in to reduce our inventories during the year, which was the main building block behind releasing SEK 700 million in working capital in 2023. The cash flow focus implies also that we end up with a leverage of 1.6x, well below our target of 2.5% despite the profitability-wise challenging year. Capital expenditures for this year amounted to SEK 3.2 billion, which was SEK 200 million above our guidance as we chose to proceed with some of the investments on the back of stronger cash flow. The capital expenditures for the next year is SEK 2.3 billion, unchanged from our previous guidance. Board of Directors proposes a dividend of SEK 2 per share corresponding to a payout ratio of 65% of adjusted net profit for the year, which is also in line with our policy. Subject to the AGM's approval, the dividend would be paid out in the quarter 2 this year and result in a total dividend amount of about SEK 500 million. With that, I would like to hand it over back to Ivar.

Thank you, Andrei. Now our efficiency enhancement program has been one of the biggest successes for '23 and something I'm very pleased to see how we've been able to mobilize as a company and create a strong momentum. The FTE reduction program is proceeding as per plan and we are on track. We are right now in dialogue with unions on how the plans will be executed across the company. And as already mentioned, we booked a provision of SEK 80 million now in Q4, which is the best estimate of a total one-off cost and we do not foresee at this stage any additional cost. Now in Q4, SEK 250 million additionally was added to the program and that takes our total '23 delivery just north of a revised target of SEK 600 million. Now many of the biggest initiatives over the year are efforts that requires more collaboration and systematic work across our functions and that was exactly one of the main purposes behind the program. Having said that, this is not a sprint, but a program expected to run over several years and I'm convinced we have potential to extract more going into '24. And with that, it might be a good bridge to the next slide, please. So for '24, we have 3 main priorities and we will keep coming back to those. #1: first and foremost, we are proceeding with preparation for our strategic project and here the U.S. transformation is the most important one. Now we continue to evaluate alternatives of how this transformation can be executed and that means exploring scope and phasing and we're obviously doing this in close collaboration with suppliers. We will continue to keep you updated on our progress during the year. As well for our BCTMP project with Viken Skog in Norway, the visibility study is completed, environmental permits to the Norwegian authorities have been submitted. Priority #2, we will do a selective strategy upgrade for Region Europe. And I keep referring to the point that the premise for Nordic pulp and paper production has changed and we need to brace ourselves for higher fiber costs going forward. Now inflation and input cost is not a problem per se as long as you can pass on that pricing. But this will partly be a challenge in certain categories where we operate with global players, which don't necessarily see the same cost situation as in Nordic and Europe and that means we need to be agile to stay competitive and think differently from today. More information will follow here, but there is no doubt that we need to improve our efficiency of our mills. And not least, we need to make some bold moves to secure cost competitive fiber sourcing. And here we will talk partnerships, reducing fiber consumption and a further increase of our field fiber purchases. Priority #3, keep delivering on our efficiency program. I already mentioned this. We're off to a good start, but we need to do more and that's why we set the bar even higher for '24 and have a target to deliver SEK 700 million and we will report our progress quarterly as we've done throughout '23. So next slide, please. So to round it up, conditions for Q1 a bit more positive versus what we saw in Q4, but more of a gradual improvement. We do expect volumes to improve as the customer de-stocking phase is coming to an end and we will see a positive sales price impact from liquid packaging board, which would more than offset some of the high price pressure in other categories. Input costs expected to increase driven by logistic and energy as Andrei already mentioned and we will continue to drive our efficiency enhancement program with priority. So with that, I hand it back to operator for Q&A.

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

First question on your guidance for the first quarter, if you could maybe expand a bit on that. First of all, do I understand it right that you see input costs increasing sequentially by SEK 100 million? And also do I get it right that you're actually seeing increasing prices and then what's the combination of this? What's the net balance of sequential input cost increases and sequential price improvement?

So let me start off with the input costs. As you pointed out, SEK 100 million in increased cost is what we expect heading into quarter 1 and this is entirely coming from Region Europe while the North American input costs are expected to remain stable or flat. In terms of pricing, I'm going to split it up between regions. So as I mentioned, we have had sizable price increases on liquid packaging board which will start to kick in, in quarter 1, but that will be offset with the pricing decline primarily within paper as we also there see quarter 1 contracts kicking in. So in total, we expect a price increase of about 1.5% for Region Europe in quarter 1 compared to quarter 4. And for Billerud North America, the pricing will come down as we also see new contracts for this year kick in. We expect the price decline on total for Region North America of 2.5%.

Perfect. And then maybe moving to capital allocation and maybe if you could provide some kind of update with regards to North America. What are the options on the table really and what kind of a timeline are you looking at? What are the parameters which are crucial from your point of view here?

Linus, it's a good question. I just want to continue on what I mentioned already back in October that we remain confident about the whole business opportunity and the context that the paperboard locally produced in North America can yield and provide. But it's very clear that this is a very big move for Billerud and we want to make sure that this is right and we take our time now to evaluate different options. And it needs to land on a very strong proposition, I'll come back to that in a second, and surely create shareholder value. I think the 2 pieces we look at mostly now is to explore different versions of scope and timing and I think all of them have pros and cons and these are typically weighted up towards not least the CapEx it will require. But I have to say at this stage I literally do not have much more information to offer. I know that there's a lot of interest in this topic so you can surely or rest assured that we will update you on the progress during '24 and will come back as soon as we have something more to say. And I don't really yet have that, call it, estimate; but you will be updated I think in all of our quarterly report how we're progressing and it is key. I mean I just want to say this from what are we looking for? It's obviously a balance that this is a project that has to be clearly positive from a net present value. It also needs to give us return overall on capital employed and surely that should be north of what we have as a bit of a guiding star of 13% and we look into this also in terms of what the CapEx program will mean and how it weighs down on the balance sheet. So all of this, we will kind of weigh up towards in a big pot and try to find a good solution on this. But more to come, Linus, on that later down the line.

That's fair enough. May I just ask on CapEx. You guide 2024 CapEx of SEK 2.2 billion base plus SEK 100 million relating to Frovi. That's what you're detailing. Apart from that, what might be added? I mean could we assume that nothing relating to Viken or North America will show up in 2024 or is there anything else potentially which could make CapEx bigger in 2024?

I mean both of them can I mean hypothetically. Not something that we really have any estimates on today because, as I said, for both of the cases we're not in a position yet where we are ready to move ahead at all. So for the time being, this is the kind of 2 items we do have. That's the base CapEx, as you mentioned, in the last tail of the Frovi recovery boiler and that's best view at the moment. Depending then on how we progress on Norway and the U.S., it can add something, but literally nothing I can either hint on what that might mean. That will be information we come back to potentially later in the year.

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

First of all, regarding the efficiency program you have. What are the key items in that program and how much of a sequential improvement in earnings should we expect already now in Q1 Q-on-Q?

Yes. I'll start with that and then I'll let Andrei just comment on the potential impact it had for Q1. Now listen, I think the main purpose of this program is not first and foremost the cost reduction and that's also why we deliberately call it efficiency enhancement program. I think we have recognized over the years that still when we look at project across different functions that we need even tighter collaboration, that potential has not been at a satisfactory level. So if you look at examples, I mean it's a pretty long and broad list, but I can surely give you some examples to give some context of what that is. I mean [ trim ] is a pretty known challenge in this industry on how do you use the whole width of the paper rolls in a good manner. That's not something that either operation or commercial can do alone, but they have to do that in pretty good tandem and that's a pretty big piece. I think we're still looking forward to look at for instance consumption of all of our chemicals, experiment different alternatives of chemical usage, how we can further stretch ourself of optimizing some of the recipes even further. And that is something that very often you would have both commercial operations and board supply in a good spirit to make that as successful. Another example, maybe talk about the outbound logistics in particular for Europe and how that can be optimized even further with kind of less trucks and more boats and more trains. It's an area where we're already quite advanced that we feel good about that hey, there should be even more into that potential. And we already mentioned this in Q3. We've already added now all the FTE reduction of 350 into this program. So that should give you some sense of what we're looking for. It's a pretty long list of a big project, but I think the key denominator is we look for more collaboration across. Maybe I'll hand it to you, Andrei, for the Q1 impact.

Yes. And Robin, on the sequential impact if we looking to quarter 1 2024, we estimate that the impact will be in the region of SEK 50 million to SEK 60 million compared to the fourth quarter.

All right. Second question I have is related to this strategy upgrade work in Europe you have. Probably sort of early days, but can you expand a bit on that? And also you said efficiency needs to be at a high level in mills. So is it likely that, that sort of the end game will be sort of something that will lead to material CapEx investments in the next few years or is it other stuff that you're looking at?

Yes, but I'm happy to do so. And I think as you say, we will probably come back even later with more content on this, but I did mention already quite consciously that there's 2 items and let me just take them piece by piece. When we look at the efficiency of our mills, we're doing all right, but I think it's fair to say that we're not doing great and that's what certainly we are striving for and that typically if you use the benchmark of OE as a bit as a proxy. And I think it's a complicated question of what drives that. I think in particular when we looked at our board mills, we do recognize that we've come quite a long way since we started off the KM7, how the board mills work as a unit. And we put the different, you can say, production segments on each of the machines that are best equipped to do that job. Now having said that, there is just more potential out there. And I think we can also quite comfortably say that we also expect more from our paper mills and this is on average and kind of in a general statement. First and foremost, this will be ways of working, standardization and how we really take the company on a higher degree versus we have done in the past. So I do not expect at this stage that this will come with a very big CapEx build, actually to the contrary. Our main going assumption is that most of this effort should and will be covered from the base CapEx that Andrei already talked about. More to follow on that. I think the other one is around the whole fiber situation in Nordic. And there is no doubt that we as the biggest fiber buyer in Nordic, we need to be courageous and we have to take certain moves given that the situation is certainly starting to tighten up and we've seen that it has tightened since the war in Ukraine. I think for us it means we need to look at many different parameters. Partnerships is one. We already talked about our chapter in Norway with Viken Skog, which is something we're excited about. Then you talk about fiber optimization and even a higher degree of CTMP is key for us. I already mentioned this as part of our efficiency program how we continuously need to challenge oneself of what is the optimal and what is even a better recipe formula in light of now that the fiber market has tightened. And I think the third one is we have already taken steps during the last quarters and year to increase our presence of what we call field fiber purchases and that has yield results that we are good and happy with. Maybe we want to do more. So that at least give you a little bit more context of some of 2 items. But as you said in the beginning, this is an area we are expected to come back with more information during '24.

And the next question comes from the line of Cole Hathorn from Jefferies.

Maybe just like a little bit of commentary focusing on Europe. Could you give any differences in what you're seeing maybe not by end markets, but by categories? How are you seeing kind of containerboard? How are you seeing sack and specialty into 2024 as well as cartonboard? You've been quite clear on liquid packaging board. And then on the European region and the opportunities there, it sounds like you're focusing on kind of optimizing the product mix and footprint. I mean are there actions you could take to focus on kind of the value over volume side, potentially consolidate some volumes from some mills or some machines to keep your lower cost assets at better operating? And would this analysis include thinking about some rationalization of capacity at all?

Cole, I'm actually going to start with the second question before I go into the first. But I think you're absolutely right and this is something we need to ask ourselves continuously and I'm very sure that the same question is being asked by all the players now in the Nordic region. I think we need to be very clear on what mix and what profitable growth we can see going forward. That's a very important piece on how we can be even more selective on what offering we bring now to the market. It also means that potentially the offering we used to have in the past is not necessarily which is '24 and onwards. It certainly also means that how do we ensure that all of our assets, and that means mills and machines, they stay competitive and not lose their ability to pass on that potential cost inflation that comes away. I know that is a bit of a generic answer in combination to what I mentioned already on the fiber option. But I can only say that this is now more important than ever in the Nordic region and it's very high on our agenda and part of the Europe strategy. If I move into kind of your first question, I can do a little bit of a tour on comments per category. I mean starting with cartonboard, I think the underlying theme there that is still a weak underlying demand and we see that both in premium and power products. And de-stocking is getting there, but probably that is one of the few categories where we can see some signs that it's still not completed. And in the main market Europe for us, macroeconomic demand is kind of stable but at a low level. So it's not really finding the gear yet versus what we see in other categories. And if I go straight into containerboard, I mean underlying demand is not strong and there are some challenges also there. But the situation is definitely more manageable for virgin than recycled and, as you know, we are first and foremost in the former. And inventories have certainly come down and almost to the point we can say that the de-stocking is kind of a past chapter on that one. Fluting for us is a tight market, but we're still all right. We do selective price increase and pushes for sub-charge, et cetera, for the affected geographies. But underlying consumption is relatively unchanged. I mean on liner, I think we can even get more confidence to say that hey, although de-stocking is done and it's still on a relatively low level, but getting maybe little bit better and we see some small signs that order books are picking up. I think in North America containerboard is still very weak. But for us, this is not a big market at all at the moment. If you move over to sack, I mean Europe is still weak and driven by low activity in construction. Emerging market is slightly better and we do see a bit of a pickup on order books there in particular for the brown sack. We've even announced now we will have a price increase of brown sack of 8% from March 1. No plans for anything on that on the white sack, which is still a bit weaker and first and foremost finding its home in Europe. But I can confirm that the volume for sack is expected to increase in particular when we go into Q1 versus Q4. And if you go to kraft paper, I mean underlying demand is still tough and I think it's a little bit different if you go brown versus white. I mean brown kraft paper for us towards e-comm is certainly still pretty depressed. And the white which goes more towards food service is better and there we can also confidently say that we see very clear signs that the de-stocking is completed and hence we do expect also there the volumes to start coming up. but not much is happening on the price. So hopefully, that gives you some flavor of where we stand on the categories.

I mean maybe just going back to the first question, you alluded to it but kind of optimizing the product mix, thinking about how you produce that will benefit your fiber costs. I have 1 more which is on your maintenance guidance for 2024. I know the maintenance costs seem a bit lower than they did last year. Is that just because where we are in kind of the cycle? And I noticed that Quinnesec, which in the past you talked about kind of a big maintenance spend every kind of 2 or 3 years, it just seems a little bit lower. So I'm just wondering if there's anything in the maintenance schedule that we should be aware of?