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

Good day, and thank you for standing by. Welcome to the Billerud Q2 Report 2024 Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Lena Schattauer, Head of Investor Relations. Please go ahead.

Good morning, and thank you for joining this conference. The presentation of Billerud's second quarter results will be conducted by our President and CEO, Ivar Vatne, and our CFO, Andrei Krés. After the presentation, it will be possible for participants on the call to ask questions. And with that, I hand over to you, Ivar.

Thank you, Lena, and good morning, everyone, and thanks for joining in on this beautiful summer day at least here in Stockholm. So we're excited to walk you through some of the highlights of our Q2, which has been a quarter with some very clear positives. So let's get into the next slide, please. We're back to net sales growth, and we see this growth coming broad-based across most categories in both regions, which is encouraging to see after fighting market headwind for some time. Another clear highlight is how we've been able to successfully improve our underlying profit, both versus a year ago and quarter-over-quarter. Key has been our clear and deliberate focus on driving the right mix and proactive price management. And this has enabled us to fully offset input cost inflation. I'm also proud of the continued progress we've done to deliver on our efficiency enhancement program. And now speaking about profitability, I want to highlight our region North America here, delivering 18% EBITDA in a quarter where we also include a maintenance stop. That is something I'm very pleased about. It's been a busy maintenance quarter for us with four mills doing their annual shuts, but I'm happy to report that all stop have gone well and largely in line with both time and cost estimates. Lastly, I want to highlight our ability to convert the reported profit into cash. Working capital discipline has been a big item for us over the past years, and we see another proof of it this quarter with a cash conversion close to 80%. And that's another solid number. Next slide, please, and on to some comments about the market sentiment. In general, we have experienced improved sentiment for most of our categories during the quarter. And our view is that we are operating in a normal to good conditions on average for Billerud. Customers are ordering again and the destocking we faced during most of 2023 feels like a long time ago. However, we are far from the overheated market we experienced during 2022. There is an uncertainty of how strong the underlying demand really is, and that situation differs by category. But overall, we remain cautiously optimistic that conditions will continue to improve going into second half. For Food & Drink, our biggest channel by far, we see normal conditions for liquid packaging board and good to strong conditions for containerboard and our sack and kraft business. Consumption is decent and stock levels throughout the value chain do not seem to be unusually high. For our Printing & Publishing channel, we're still coming from a relatively soft situation in the beginning of the year. Inventory have come down to more normalized levels, and the upcoming elections should fuel more positivity going forward. However, we experienced headwind with heavy cost inflation past years, which dampens the market activity. But net-net, though, we expect this channel to slightly improve going into Q3. Consumer & Luxury has also improved. Demand seems to be okay, but it is not as strong as what we see in containerboard. If we see stable condition going into second half, is a rough expectation that we will see an increased demand going into 2025. And lastly, for our industrial channel, the sack business has improved. We had normal or average plus conditions, pretty good pull in the brown sack business, nothing remarkable, a lot of effort into driving profitable mix. For white sack, Northern Europe is quite weak, while we see good pull for the Southern Europe geography. But overall, we believe our sack business will meet stable condition into Q3. So with that, I hand it over to Andrei.

Thank you, Ivar, and good morning, everyone. Let's start by looking into net sales, which increased by 8% compared to last year, and that was largely driven by volume and mix improvement, which was the case for both regions. Our total pricing impact was still negative with only pulp and liquid packaging board segments, which showed year-over-year price increases. And as we previously pointed out, we have announced several price increases for our European segments in both quarter 1 and quarter 2 this year, and we see sizable sequential improvement, which offset the cost inflation in the quarter. And we will continue with our pricing efforts also heading into quarter 3 and expect pricing to further improve into the third quarter. Next slide, please. Moving over to profitability development. And also here, higher volume and improved mix were the main drivers behind profitability uplift. Raw materials and logistics costs were more or less flat. And although the pulpwood costs in the Nordics were significantly higher compared to last year, other broad-based cost declines more than offset the pulpwood cost impact. And we had yet another strong contribution from our efficiency enhancement program with a total impact of SEK 190 million. And inventory revaluation had also significant positive year-over-year impact just south of SEK 210 million. And that impact was also positive sequentially versus quarter 1 with SEK 150 million. Now moving over to the regions and starting by region Europe. So the region continued to have a solid order book and also a positive market momentum in most of the segments. Price increases were implemented for sack and kraft segments and also containerboard, and these price increases fully offset sequentially higher input costs. Profitability for the region improved significantly versus last year to a margin of 9% in EBITDA terms. And in quarter 2, as Ivar mentioned, we executed several maintenance shutdowns. For region Europe, this had a total EBITDA impact of SEK 400 million. So clearly, underlying profitability for the region is improving also compared to the previous quarter. Sales volumes for the region were up 6% versus last year, but down 5% sequentially versus quarter 1, and we expect the volume to be more or less flat heading into quarter 3. All in all, this was a positive development for the region with clear pricing improvement, which offset the pulpwood cost increase. Now looking into the cost development for the region. Next slide, please. As we expected and also talked about, the pulpwood prices continued to increase in the quarter and also reached all-time high levels. The total impact from pulpwood cost increases versus quarter 1 was SEK 120 million and also cost for purchased pulp increased and added SEK 60 million versus quarter 1. Costs for chemicals were up SEK 10 million and logistics EUR40 million. Seasonally lower energy costs had a positive impact of SEK 100 million. So all in all, we had a cost headwind of SEK 130 million versus first quarter this year, which, again, was fully offset by price increases performed during the quarter. Heading now into quarter 3, we expect additional cost headwind in the region of SEK 180 million, where SEK 140 million is from pulpwood and remaining SEK 40 million is from purchased pulp. Other cost items, we expect to remain stable. And also for quarter 3, we expect further price increases to fully offset the cost headwinds. Now heading to region North America. Next slide, please. Our North American region saw clearly more positive market sentiment, in particular, for specialty paper during quarter 2. Volumes increased by 14% versus a year ago and by 4% sequentially. The region continued to operate below 70% in operating rates, but delivered excellent profitability with EBITDA margin of 18%. Profitability for the region was impacted by SEK 120 million in maintenance shutdown costs at our Quinnesec mill. So underlying profitability for the region is remaining very strong despite fall from full capacity utilization. And heading into quarter 3, we expect further positive pricing impact from pulp prices and also slightly improved volumes. Next slide, please. Also a couple of words on cost situation for North America, which again is very different from Europe. As we expected, the input costs remained stable in the quarter. And although we did have seasonally slightly higher pulpwood costs, that impact was offset by minor declines in other input costs. So all in all, very flat development. And we expect cost to marginally decrease into quarter 3, but again, very minor movements, and we're talking about tailwind in the region of SEK 10 million. Next slide, please. Looking into cash flow development. And as Ivar mentioned, we had a solid cash conversion in the quarter. The cash flow in absolute terms improved significantly versus a year ago and also sequentially. Operating cash flow conversion was at 77% for the quarter. We maintained our working capital position despite sequentially higher sales. Our leverage was up versus a year ago at 1.6x EBITDA, but we improved our leverage position compared to quarter 1 from 1.9x despite dividend payout of SEK 500 million in this quarter. Our capital expenditures for the first half year amounted to SEK 1.3 billion, and we will have additional SEK 1 billion in base CapEx for remainder of the year. So all in all, our CapEx guidance of SEK 2.3 billion for this year is unchanged. And now handing it back to you, Ivar.

Thank you, Andrei. We keep the focus on our efficiency enhancement program, and we're adding another SEK 190 million to the program for the quarter. And I'm both happy and proud to see the progress we made, and we're ahead of ambition since we launched this company-wide priority 18 months ago. And as we tend to do, in this gray shaded box towards the end of the slide, you can see some real examples of initiatives that have contributed to the program during the quarter and the list of activities we go after throughout the company. And for 2024, in total, we are well on track to deliver a target of SEK 700 million. The next slide, please. So over to North America, and I'm sure most of you are aware of the new direction of moving our product mix towards packaging material. This is something we announced and talked about end of May. We have a well represented and multifunctional team in place to work further plan details, meaning what grades do we expect to start with and how the sequential plan will look like and not least some clear indication on what investment level this will require. This work is progressing well, and we do expect to share a more comprehensive plan in the Capital Market Day. We haven't locked in the date for the CMD yet. We expect this to take place in the back half of Q4. And we will obviously share the details as soon as we have them ready. The next slide, please. The company priorities for 2024 remain more or less unchanged from what I've shared earlier in the year. Number one is the continued work of our strategic investment projects. We have a change of scope in the U.S., as I just talked about, and we are in the waiting mode for our BCTMP project with Viken, where we do expect to get some news on the environmental permit during second half. For Europe, we are adapting to a high cost situation on fiber and securing cost competitive wood supply, and it will remain high in our priority list for the foreseeable future. And lastly, fuel the momentum of efficiency enhancement program going into the second half and finish 2024 off in a good manner. So next slide, please. So to round it up, a couple of comments with outlook for Q3. Market sentiment has turned more positive during the first half of '24. And we do expect this to slightly improve going into Q3. Input cost inflation is something we will continue to fight first and foremost in our region Europe. Hence, we will continue our strong focus on driving pricing and mix improvements. And as Andrei mentioned, we do expect in Q3 on total for the company to be able to offset increased input costs through pricing and mix. So with that, I hand it back to operator for Q&A.

[Operator Instructions] And your first question today comes from the line of Christian Kopfer from Handelsbanken.

Just a few follow-ups from my side on how you see the guidance into Q3. Just to see if I interpreted in the right way here for volumes. So more or less flat volume for Europe into Q3 and U.S. a little bit higher. And when it comes to costs, SEK 180 million increased cost in Europe and EUR10 million lower cost in the U.S. And then on prices, you say that you expect prices to offset. So we should expect prices in Europe and North America realized to be up 2%, 3%? Or how do you see it in Q3 versus Q2?

Yes. Christian, so on the cost side, you were correct in SEK 180 million in Europe and a tailwind of approximately SEK 10 million in North America. On the pricing, we do expect to increase prices for our European paper and board segments with 2% to 3%. And if we look at North America we expect more or less total flat pricing development with some increases within pulp, but we will also have some worsened mix due to more pulp production.

All right. So the mix -- so Andrei, you included the mix. So the European price outlook, that is also including mix effects, correct?

So we have 2% to 3% that we expect for the paper and board segments and also increase in pulp.

So that's including potential mix changes as well.

Yes.

We will now take the next question and the question comes from the line of Ephrem Ravi from Citigroup.

You made an 18% EBITDA margin in the U.S. even with less than 70% operating rate. So sort of three follow-ups on that point. One, can you give us a sense of what kind of utilization rates are you budgeting there for the second half? Secondly, what's the kind of operating leverage you can expect, let's say, a 10 percentage point increase in operating rates in the U.S.? And third, you are also calling out very strong net sales growth fueled by volume in North America, yet low operating rates. Does this mean that there was a lot of sales from inventory in this quarter in North America? And the reason for this question is that we don't have a huge amount of track record with the former Verso assets. So just trying to figure out how 70% operating rates can lead to such high margins.

It's fair questions. Listen, I think we probably expect to get slightly above the 70% threshold going into at least Q3. As Andrei mentioned, we do you expect to get some more volume, first and foremost, on graphic. We are pretty much fully booked on specialty. So there's nothing really much there. But it is no doubt that we do not expect to reach 80%, 90% utilization, at least for this second half of the year. And all the indication indicates that we are not going to see that either going into 2025 in our margin. This is very much the core of our, call it, strategy of what we want to do in the U.S. where these two -- well, graphic segments we're operating in, in coated freesheet and coated round wood, they are on a pretty heavy annual decline year-by-year, just because of consumption is coming down. And we will need to start adding more volume into other paperboard grades. So that is something we will come back to. So if I try to summarize it, we are pretty careful to assume that we will fill the machines right now on the portfolio, but we will start adding more volume and share those details in CMD. And hopefully, then you will see that we have some good plans to get to a higher utilization down the line. But that will be a gradual program starting in 2025 and probably move towards 2030. I think the last point, if I got you right, in terms of our net sales per tonne, no, I do not at all go ahead and say we have a lot of old inventory got rid of. That's not the case at all. That was a pretty clean situation that we've had. It's just literally been mixed between the grades. We had a bit lower pulp sale for this quarter also because of Quinnesec was having their maintenance shut, and that's the biggest pulp, yes, producer we have in our assets over there and also specialty went well.

Your next question comes from the line of Lars Kjellberg from Stifel.

Just a couple of questions from my side. When you're looking at the different performance between the different segments and describe containerboard being strong and consumer board okay-ish, what do you ascribe that difference to? Are you still seeing some destocking on your customer side on the consumer board side, while, of course, containerboard, that already seems to be done? Also, if you could allude to if you expect any further inventory revaluation to benefit the third quarter and second half numbers, just to get some clarity on that. And at some point, I guess, I understand, of course, you're going to share more details on the North America situation. But it's equally interesting to see the profitability, which seems to have structurally somewhat changed relative to what it used to be in coated papers. So is it really worthwhile taking a risk to adding supply into a somewhat crowded packaging market in the U.S. when the coated paper business is doing as well as it is? Why not just milk the assets?

Lars, I'll start it off, and I think Andrei will help on the second point. No, but listen, I think just a couple of comments. I'll just make some general and try to also tie back to your question. But listen, for containerboard for us, I mean market is still strong, especially on food. And there's certainly more pull both on the volume side, but several pricing waves in the industry, which is coming through. And the whole market is moving. It's quite a lot helped by also the pressure that is seen on recycled containerboard. And there is no secret that pretty much everyone, in particular in Europe is feeling this input cost inflation, which is first and foremost going back to the fiber cost. And that pricing corridor between virgin container and recycled is certainly also something that get a little bit of tailwind. We see customer inventories are in good levels. Underlying consumption feels good. Us, in particular, food and vegetable, it's a channel that we are heavily exposed to, and that seems to be in good shape. And I think on carton board, listen, it is a bit different situation. It's quite a lot of volume out there and supply and in particular, overseas, it's no doubt that part of the consumption, if you look at some of the categories we're exposed to with electronics and luxury and some of the more finer categories. That consumption is under pressure. I think it's fair to say that interest level, which has been taking a toll in most markets has influenced this. So this is also a little bit to my comment earlier on that now that we start to see signs that interest level will start to ease up, we have at least some cautious optimism to believe that consumption will start also in carton board, but that's more later in the year and maybe more into 2025, if anything else. Andrei, you want to take the second point?

Yes. So on the inventory revaluation, I mean, normalized level would be somewhere between 0 and SEK 50 million that we would expect to come in the quarterly impact. Now heading into quarter 3, we do expect that to be a positive effect due to increase in the input costs. And this is what we would look for at this point.

And listen, last point on your third. It's not an unreasonable comment, I can say that for me, I love graphic paper. And we would be in that category for quite some time. And that's certainly something that we will still have as a big part of our identity in North America way into the '30s. Having said that, there's just no doubt that there is a pretty heavy and call it, secular decline in those category. Yes, the U.S. still is a market that's SEK 400 million plus, but we see the same trend as Europe has maybe been a bit earlier on. And there will be a challenge to fill those mills at a good level in the long term with that exposure. So we will need to supplement that we are not going to do anything stupid. We have a very good connect and dialogue with our customers on graphic. We want to be the preferred supplier. We want to be located in Midwest U.S. and establish fantastic relations, often many decades and those we will keep. But then, again, gradually starting to put more of paperboard where we are good in Europe. This is where we have the know-how. We have the, I call it, widespread expertise to be drawn. So we think actually, we will have a very exciting U.S. plan now with this more evolution approach than maybe the more revolution that we initially had planned.

Your next question comes from the line of Oskar Lindstrom from Danske Bank.

Yes. Congratulations on very good result. Two questions from my side. One, sort of focusing on Q2 and especially in North America, where you saw that very good underlying earnings improvement. Could you perhaps explain a little bit more about how this was possible with continued, relatively weak volumes and capacity utilization? Was it only price? Or I can't quite bridge that, but maybe you could provide a little bit more details there. That's my first question.

Can we just get the second as well? And we will happily answer both, Oskar.

Yes, sure. so my second question is more long term. And looking at your financial target for at least 17% EBITDA margin, I mean you're now achieving 9% margin in a quarter that you described as quite -- where market conditions were normal in most of your segments. So what are the building blocks really to reach that 17%, which is quite a jump from where you are now? Is it enough to just sort of go for price increases? Or are there also more structural changes needed? That's my second question.

Yes. Good. So Andrei will start the first and I'll tag on to the second.

Oskar, so on the profitability in North America, I think if you look sequentially versus quarter 1, we did have some volume uptick, which is obviously one of the explanations to the improved result. We had also a quite significant mix effect with lower pulp sales as we carried out the maintenance shutdown in Quinnesec, and that's where we sell less pulp during the maintenance shutdown. We had also quite a significant help from lower fixed costs overall in North America with a very conscious focus on the fixed cost level. And those, I would say, were the main drivers for the profitability uplift here.

Yes. And listen, if I go into the second one, it's a good point, Oskar. And let me say the following though, that you're absolutely right that this quarter has been certainly better and it's a bit more normalized. I just want to remind all of you, but I'm sure you have that on your radar 9% EBITDA with a very heavy maintenance cost. If you strip that out and then you are at 14%. Now it is also true that over a year, some quarters we'll need to carry that. So you cannot completely exclude but it gives indication that this is a nice step-up from what we've seen for the last 4, 5 quarters. But I think on this financial target, this is certainly something we have on our mind. It will be a very natural topic when we have the CMD towards the end of the year. We are a different company now than we were at the time when we met last time, not least with the U.S. now on board. And we will take this into account. I mean just in terms of our capital allocation details going forward, that will be a big topic when we meet. And certainly, things have changed in Europe now. But I can say that given how we look at the fiber situation where we don't see this as a short-term spike and going up. This is now a bit more the new normal we need to operate within. We have to do more ourselves, okay? So we need to be better, we need to be slimmer, we need to be lean and mean, and we have always opportunity to just challenge ourselves if our cost base is right and we need to do further adjustments on the costume. But you cannot save yourself to glow in this situation. So price and mix management is just instrumental. And that means we will have to take further tough positions and value over volume. That is a very big mantra for me now in this situation. And I think U.S. is a very good example of this, running below 17%, but having a phenomenal value mentality, you see the numbers for yourself. And it's not unreasonable that this is something that we're going to drive hard also in Europe going forward.

Right. I'll look forward to that year-end Capital Market Day.

And the next question comes from the line of Linus Larsson from SEB.

Could you just drill down a bit more on price and mix, which surprised me quite a bit in the quarter and I would guess it surprised you as well. So you saw an acceleration here of -- I mean price mix was up more than 6% in both North America and Europe sequentially, a strong acceleration actually from the first quarter. Now you're talking about an abating pace in Q3 from Q2. So is this largely mix-driven, this surprise? Or what is really behind those big figures here?

So in terms of development sequentially here into quarter 2, I think if you look at our net sales performance, and as you mentioned, 6%, you could split those in roughly equal parts of 2% pricing, 2% mix and also 2% FX. We did have some significant impact from the FX quarter-on-quarter. We also did make quite significant moves in terms of improving our mix, primarily within Europe. And we should also bear in mind that quarter 1, we delivered all-time high volumes within liquid packaging board. Now we're probably on the margin, delivered more of the paper grades, which improves the total net sales. And now heading into quarter 3, we do expect the mix effect to be much lower. But what we guide for is to a large extent then pricing effect.

Great. That's very helpful. So what we see in Q3 on Q2 is largely price, and we shouldn't expect mix and FX to have an impact really?

Not at this point in time. I mean, as we see it, it's to a large extent, going to be price.