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

Good day, and thank you for standing by. Welcome to the Billerud Q2 Report 2025 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.

Thank you. Good morning, and very welcome to this presentation in connection to the Q2 report that we have published this morning. With me is our President and CEO, Ivar Vatne, along with our CFO, Andrei Kres. They will hold the presentation and afterwards take questions from the telephone conference. So with that, we will get started. Please go ahead, Ivar.

Thank you, Lena, and good morning, everyone, and thanks for listening in this sunny Friday, at least here in Stockholm. It's a tale of 2 stories for our quarterly report. And I think it's summarized quite well in the heading here on the slide. Another excellent quarter for Region North America, while we are navigating through more challenging conditions for Region Europe. But let's get into the details. So next slide, please. And if we start from the top, we record flat net sales growth when adjusting for currency, growth in North America and decline in Europe. Our Region North America, continues to impress and record yet another excellent quarter and 22% EBITDA margin is a level we are clearly happy with. In fact, the 22% is the highest profitability level we've had in North America since end of 2022. The situation for Region Europe has been more challenging and market conditions have gradually turned more and more unfavorable during the quarter. And in essence, we are navigating in a market where we face weak demand and supply overcapacity. Now despite this and with our continued strong focus on working capital discipline, we have been able to produce an excellent cash generation coming in with cash flow from operating activities of 75% versus a year ago. The progress on our evolution journey in U.S. continues, and we've taken new important steps during the quarter. And I want to share some more details on that part. So let's get into the next slide, please. Now evolving our product portfolio in North America towards packaging material is one of the top priorities for the company. And I'm both proud and excited to see the progress we're doing. We reached another important milestone during the quarter with 1,000 tons sold of our bleached liner Tribute and low-grammage cartonboard Voyager. And overall, we see strong interest amongst both the new and existing customers to carry out trials for the new products. And overall, the feedback on the product quality and performance has been highly encouraging. It confirms again that local U.S. production within our industry is a good place to be where we can offer quality, speed, reliability and predictability. Also in terms of the capital project to enable even further acceleration in our evolution journey, we are progressing as per plan. And I'm looking forward to provide you with more updates on this exciting journey as we move along in 2025. Next slide, please, and over to some market comments. And it is challenging to give a proper market read these days. And uncertainty, in particular, in the wake of geopolitical decisions seems to be the new normal and can change industry parameters literally overnight. But there is no doubt that some of the ingoing optimism for demand recovery in Region Europe for 2025 is a memory far away. The trading conditions for most of our categories in Europe weakened during the quarter, and there are 3 main reasons for that. So number one, consumer demand is still muted and is yet to recover the growth rates we are expecting long term for this industry and most of the categories we have exposure to. Number two, we are seeing the impact of more production capacity coming online in the region, first and foremost, within board; and three, the tariff impact is real. And we see now evidence of how the trade flows have started to change. Not only with volume historically being exported into U.S., but now due to import tariffs have lost some competitiveness and is partly relocated back into Europe. We also see some Asian volumes struggling to find its way into U.S. and puts more pressure into markets in the Middle East. And overall, we do not expect the situation to improve going into Q3. Now the notable exceptions where we operate under more normalized conditions are liquid packaging board here in Europe and our graphic and specialty paper in North America. For both these cases, we are expecting to continue their solid performance we've continuously seen over the past quarters. So with that, I'd like to hand it over to Andrei.

Thank you, Ivar, and good morning, everyone. Let's start by looking at our sales, which declined by 5%, and that was entirely driven by the FX headwind meaning our currency-neutral sales were flat versus a year ago. Now the strengthening of Swedish krona we've experienced, first and foremost, by the end of the first quarter is now fully impacting both our sales and also results. The positive pricing of 2% is mainly coming from our Europe region, while North America was quite flat versus a year ago. Volume-wise, the negative impact is entirely from Region Europe, while North American region had a solid volume growth of 8%. Next slide, please. EBITDA margin in the second quarter was in line with the last year at 9% and also here, a tale of 2 stories. North America improving margin with 4 percentage points, while Europe seeing corresponding decline. And despite significant change in FX rates versus last year, the impact on our results was relatively limited due to our hedging program in place. The year-over-year cost inflation, mainly from Nordic pulpwood cost was more than compensated with improved pricing. However, the volume growth in North America was also offset with decline in Europe and volume was weighing negatively year-over-year. Despite significant inflationary pressure on our fixed costs, not least through the salary increases, we are maintaining strong cost discipline, and we were able to limit the cost inflation year-over-year. The negative amount in other is almost entirely related to negative year-over-year effect from inventory revaluation. We had no major impact now in quarter 2, but we had sizable positive impact last year. Now our quarter 2 was maintenance heavy with 3 mills in Europe having a maintenance shutdown, and those were executed as planned and also on budget. Excluding the heavy maintenance costs, our performance for the group in terms of EBITDA margin was in line with quarter 1 despite lower volumes. And now let's move over to the regions. Next slide, please. Performance in Region Europe weakened during the quarter, and we did end up with sequentially lower sales volumes for the region across most categories. The earlier announced price increases for containerboard and sack and kraft paper were partly implemented with clearly better implementation rate within sack and kraft, while containerboard has been more challenging. Into the third quarter, we will have somewhat lighter maintenance schedule with cost impact of around SEK 280 million. And now let's move over to Region North America. Next slide, please. The reported sales for the region declined by 5%, but clearly heavily impacted by weakening of U.S. dollar. Currency-neutral sales were actually up by 5%. The EBITDA margin, as I said, improved with 4 percentage points versus a year ago and was also up percentage points sequentially versus the first quarter. And it's now been a sixth consecutive quarter with positive margin trend, which has been driven by volume recovery and continued stable cost and pricing situation in the region. The sequential improvement from the first quarter was primarily driven by price increases for our graphic paper. Operating rates for the region continued to increase to 76% in the second quarter, and we are now actually coming to the levels we haven't seen since beginning of '23, which is very encouraging. Now heading into the third quarter, we will carry out maintenance shutdown at Escanaba mill, and we will have additional maintenance partly in preparation for the Evolution program. So we expect sequentially higher maintenance costs of SEK 160 million for the region. Next slide, please. And I would like to spend a couple of minutes on the input costs. Now in terms of the input costs for the regions, we are now in a much more stable situation also in Europe. The cost development during the second quarter was fully in line with our expectations, and we had a net cost relief of approximately SEK 40 million, primarily from electricity prices in Europe. Heading into the third quarter, we expect continued stable cost situation for both of our regions. And on the Nordic pulpwood, we now see a trend shift. The pulpwood prices are coming down. We decreased our price list during the quarter and have seen further downward adjustments by other wood purchases. We see good availability that will continue into the third quarter and expect also that the downward pressure on the pulpwood prices will intensify. With that said, the cost impact for Billerud in the third quarter will be limited, and that is due to our sourcing mix during the summer, where many of the sawmills are closed, but we certainly expect the cost to come down further into the year. Next slide, please. Now with the newly introduced financial targets, we are emphasizing cash generation as one of our key priorities. And I'm particularly pleased with the cash conversion of 131% for the second quarter. Our cash flow from operating activities more than doubled compared to the first half of last year. And we are making a good progress on reaching the cash conversion of above 80% for the full year. The strong cash generation is certainly supporting our strong balance sheet. And even after dividend payout during the quarter, we maintain our leverage in line with the first quarter at around 1x EBITDA. In terms of the CapEx for the rest of the year, we now estimate a total CapEx of SEK 3.1 billion for '25, which is SEK 400 million lower versus our previous outlook, and that is primarily driven by slower investment pace for our Evolution program in North America. And we now expect that, that amount will be pushed into 2026. With that, I would like to hand it back to you, Ivar.

Thank you, Andrei. Now an essential part of our strategic framework, the way forward is to focus on items we can control and avoid being distracted from mix factors that we literally can do nothing about. And challenging conditions mean we truly need to be at our best to further improve our competitiveness and outperform our peer group. We have successfully been disciplined on fixed cost spending and need to be even more aggressive and creative on finding new additional saving opportunities throughout our cost base. As you just heard from Andrei, protecting our cash flow is of utmost importance, and we certainly aim to continue the strong start of the year and end the year with 80% plus conversion. Another priority is to carefully drive our most profitable and most structurally attractive mix opportunity with focus. And lastly, improving our mill efficiency across and secure supply chain reliability and predictability towards a large and diverse customer base. These points have been our priorities for some time, and they will continue to be so. So next slide, please. So to round it up and going into Q3, we do expect continued solid conditions for Region North America. In Region Europe, there are some variations across channels and categories, but overall, we would expect the market to stay weak and input costs should stay quite flat across the regions. So with that, I hand it back to operator for Q&A.

[Operator Instructions] And your first question comes from the line of James Perry from Citi.

Just a couple. I'd first like to ask about the wood costs. You mentioned that you've seen the first price reduction in the Nordic wood prices. Are you able to share what kind of magnitude of price decreases you're seeing and whether you think this is temporary relief or negative momentum from here? And secondly, on North America, you said about the positive sales volumes and higher interest in domestically produced products. I know it's difficult to determine, but do you have any sense as to whether customers are looking for a temporary workaround or have they been interested in long-term contracts?

James, I will start by commenting on the wood cost. So as I mentioned, we have seen a good availability in the beginning of '25, and that situation has continued also in the second quarter and will continue into the third. We have seen prices in Baltics and also in Norway coming down. We decreased our price list with 5% to 10% from the list prices and seen additional price reductions since then. As I mentioned, the quarter 3, we have a bit different sourcing mix. But if we would look at the impact beyond that at this point and with the price changes we have seen, we would estimate a positive cost impact of SEK 40 million to SEK 50 million, but again, not much of that in quarter 3.

So James, I can take the second question about the North America. I think it's difficult to get customers to sign in, rather this is long term. But I can say that, that process of going through the qualification and changing a supplier is, to a certain extent, a bit painful. There are some efforts being required on both sides. And you can certainly say that once you come to the step that you have been finding a way in, that is expectation it will remain and it stays, so hence, a much more long term. So we are clearly very much under the view that once we start opening the doors and can illustrate a good performance, that is the start of the journey. And we expect just this now to snowball further into bigger figures going into 2026.

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

Just a follow-up on the pulpwood one. You mentioned Baltics and Norway prices have declined. And then you talked to list prices, which I suppose refer to Sweden. That's not the same as prices are coming down just because you call list prices down. So the question is, are you having any success in lowering those list prices, i.e., wood flowing in at lower prices also in Sweden? And then I just wanted to get some color on Asia. You mentioned liquid paperboard markets being particularly challenging and competitive. And we can kind of see from your liquid paperboard sales that they're down quite a bit. Are you seeing then local competition in particularly in those Asian markets in liquid paperboard, which used to be sort of a broadly speaking, oligopoly between 3 producers? And of those, if that is indeed the case, are they breaking into other markets? You mentioned some volumes generally, I suppose, from China coming into the U.S., but it would be interesting to hear some color on that specific market. And then finally, in North America, you speak to a solid performance. But then again, if we actually take away the benefit of the maintenance activity, the schedule change, you're actually down in North America. So what explains that sort of, call it, SEK 50 million drop year-on-year in underlying performance adjusted for maintenance? That's my questions.

Lars, I will start by providing additional comments on the pulpwood. So when we look at the price list in the Nordics, in Sweden, again, those are underpinned by good availability and the moves we see on the price list. And we certainly expect that we will be able to purchase wood going forward on the newly announced price list.

Yes. Lars, I'll jump into the second. I think it's a fair question. And let me just try to give some color on what we see on the liquid packaging these days because it is a bit of a mixed picture. We are seeing that the market is more or less flat, and that is more on the kind of global basis, around 0% to 1%. But there are some pretty hefty regional differences. China now is in decline, while we see more growth in India, other items in Southeast Asia, North America and Europe is also quite flat. And our business then in terms of the supplies into Europe are performing well and more under stable conditions. So it is so that much more challenging Chinese market and consumption being much more muted, that hits us as well as that is a big market for us to deliver into. And hence, that Asia is not growing and in decline, that is certainly an effect to deal. It is also so that some of our customer base in some of the key markets in Asia are losing share. And that also, of course, impacts us based on our exposure to a certain customer base. But I can confirm to your question that, yes, we are meeting some competition from local players in China, in particular, and they've been able to gain some meaningful share over the last time -- you take that out, Andrei.

Lars, going back to the performance in North America. They have, of course, been heavily impacted or the results in the Swedish krona has been heavily impacted by the change in FX. So that's shaving off approximately 1 percentage point in EBITDA year-over-year.

Got you. If I can just have a follow-up or another question. Kraft paper seems to be comparatively stable and reasonable in Europe. Can you share any color on how that market has progressed? You called out better pricing realization in the market, which would suggest less of an issue with, I guess, excess supply and less demand weakness, but some incremental color on that would be helpful.

Yes. I can take that one. Yes, I mean, there is no doubt that the excess supply is certainly most notable within board, particularly within paperboard. I think from what we see on our side is, yes, a bit more balanced market, but the underlying consumption is still weak and it worsened a bit during the quarter. Yes, customers holding a bit back on some orders. And it has just been a sentiment that we just felt more on the demand side. But yes, it is in a relatively better shape versus what we see on the Board side.

Your next question comes from the line of Robin Santavirta from DNB Carnegie.

First question is related to the demand in Europe. Looking at your delivery volumes down 6% year-on-year, and I think you provided 3 reasons for that. But I was also wondering whether there's potentially some destocking among your clients given this uncertainty that we have after Liberation Day? Or is this underlying demand is minus 6%?

No, I think it's always difficult to pin it down exactly what drives what. But yes, I think there is a part of that maybe towards the end of the quarter, where, in particular, a lot of our customer base as well look to protect their cash generation since market is tough. And yes, I mean, I think if you also look at some -- the historical behavior will meet when pulp pricing tend to fall as it has during the quarter, I'm sure also there are certain customer behavior that would expect material packaging pricing to follow and again, hold a little bit back. So there's a part of it for sure, especially towards the end of the quarter, difficult to pinpoint exactly how big that impact is.

Second question I have is related to the pulpwood pricing. Could you just provide a bit more detail about like per cube where we stand at the moment? Is it so that you have cut the price by SEK 30 per cube and then there's some SEK 50 sort of per cube pulps out there right now? And if that would be the case, wouldn't the impact be a bit bigger than SEK 40 to SEK 50 once that would bump through the P&L fully?

Yes. I can continue, Robin. So we have decreased our price list with SEK 30 per cubic meter on the softwood and SEK 50 actually on the hardwood. And these are also the changes we have seen happen since then. In terms of the impact for remainder of the year, it depends on which price list you purchase on, in which regions to which mills. But currently, our assessment is that will be in that region.

And can I just ask what is the P&L lag from sort of you buying this wood at lower price? Is it 3 months or...

It's 2 to 3 months approximately.

A final question, just a quick one on capital allocation. The balance sheet is still quite strong. I understand it's tough out there, particularly Europe. What about potential share buybacks? Is that something that now the stock is close to, what is it, a 5-year low? Is that something that you could take a look at this autumn?

Yes. No, it's a fair question. I can just say that there's no discussions happening with the Board on this, but it's obviously not -- yes, a normal discussion that will surface during second half of the year. And of course, we will come back if there are any news or any intervention, we would decide or the Board will decide. But for now, there is nothing. It's full focus on our side to continuous improvement of the items that we can control.

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

A couple of questions on Europe, if I may, starting with volumes. Shipments in the second quarter were on the lowest levels that we've seen for many years actually. And I think they were even somewhat lower than you had expected yourself. So is your message now that you're expecting the same level of shipments from Region Europe in the third quarter? And also in relation to that, how are you looking at this in terms of potential restructuring when you look at your current footprint, are there certain measures that you are evaluating?