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

Good day, and thank you for standing by. Welcome to the Billerud Q3 Report 2025. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Lena Schattauer, Head of IR. Please go ahead.

Good morning, and welcome to Billerud's Q3 2025 Earnings Call. As usual, our President and CEO, Ivar Vatne; and our CFO, Andrei Kres, will give you an overview of the results and the highlights in the third quarter. The presentation will be followed by a Q&A session. So with that, I hand over to Ivar to begin.

Thank you, Lena, and good morning, everyone, and thanks for listening in this early Thursday morning. Yet again, it's a tale of 2 stories for our quarterly report, summarized quite well in the heading here on the slide. It's been a quarter that landed quite close to our expectations with another strong quarter for our Region North America, while weak market conditions are weighing down on Region Europe. Let's get into the details. So next slide, please. And if we start from the top, net sales is down 8% versus a year ago, where half of that decline is currency related and most of the remaining decline is due to lower sales volume in Europe. Our Region North America continued its impressive trend and recorded another strong quarter. Currency-neutral net sales growth of 4%. And despite some maintenance costs during the quarter, the region delivered strong profitability coming in at 16% EBITDA. And for total Billerud, EBITDA landed at 11%, which is down versus a year ago, but up sequentially by 2 percentage points. We maintain our working capital discipline also for Q3 and record a very strong cash conversion and cash delivery. And so far in 2025, we're way ahead in terms of cash generation versus same period last year. Last but not least, we did announce mid-September a new cost-saving program, targeting annual savings of SEK 800 million and more details about that program a bit later. Some more comments on the market sentiment. So next slide, please. And as I mentioned during my introduction, we are continuing to meet very different market sentiment between our 2 regions. In the U.S., where we have our biggest exposure towards graphic paper, the favorable conditions are continuing, and we are in a great position with local supply and close proximity to a large customer base in the Midwest. Post implementation of the U.S. import tariffs in August, we've seen accelerated customer interest in the wake of our strong value proposition. And we do expect the favorable conditions in the U.S. to maintain also now in Q4. Now in a bit of contrast, we are facing and continue to face weak market condition for our Region Europe, across the board, and we expect the condition to stay weak also now in Q4. And this is an industry and sector challenge where we're doing our utmost to navigate through it. And on the Billerud side, we are impacted more within our Board categories while our paper grades are holding up better. Now you'll meet some of the usual suspects when trying to identify the key drivers behind the development. So next slide, please. And although these drivers are probably not equal in a way, there are 4 main reasons that continue to impact our Region Europe. Yes, we are still seeing high prices on Nordic pulpwood. And yes, we do face currency headwind. But the bigger challenge right now is related to weak consumption and muted consumer spending. And we see that across most of our key categories and channels at the moment. Growth is stagnant and much below the long-term growth expectation. Short term, we don't see any evidence for recovery, certainly not in Q4, but at least in our discussions now with several customers regarding their 2026 forecast and volume projections, it indicate a more positive view. Secondly, production overcapacity, first and foremost, within Board products, too much supply is available right now linked to new capacity coming online in combination with reversal of some of the trade flows that historically went from Europe to the U.S. Now on our side in Billerud, we do remain focused on excelling within the areas we can control, and that has been the mantra for some time, and that is what we intend to keep doing. So next slide, please. And hence, we've taken another proactive step during Q3 to further strengthen our competitiveness and reduce our cost base. And this will be our second cost and efficiency program in 2 years. We target annualized savings of SEK 800 million, which we expect to reach the full run rate towards the end of '26. We estimate SEK 500 million impact in 2026 with an exponential impact from Q1 and onwards. It will impact up to 650 positions throughout the company, first and foremost, in the Region Europe and corporate functions. And right now, we are in dialogue with the unions regarding scope and impact, and we'll have a clear picture of the planned elements towards the end of the year. Linked to the program, we did record a nonrecurring cost item of SEK 350 million now in Q3. Next slide, please. Now on the other side of the Atlantic, the strategic direction remain very clear: Stay committed to a graphic and label paper while evolving our product portfolio towards packaging materials. And the progress is starting to click into gear and yield results. And we have several trials and tests ongoing to offer locally U.S.-made container and cartonboard. Order flow is strengthening, and we move towards 2026 with significant momentum, both for our Tribute liner product and the cartonboard Voyager proposition. And I'm both proud and excited to see the progress we've been doing and have made in '25. And for '26, we obviously have a much higher ambition of what number we aim to achieve. So with that, I'd like to hand it over to Andrei.

Thank you, Ivar, and good morning, everyone. So starting with our top line, which declined with 8%. That was largely driven by strengthening of Swedish krona, primarily versus U.S. dollar, but also versus euro, and that hit our both regions. The volume decline of 3% is a combination of strong volume growth we experienced in North America with 4%, while the European volumes declined with 6%. And pricing is slightly down versus a year ago, positive development in Board primarily, but pulp pricing taking it down to minus 1% on a total level. Next slide, please. Our profitability is down versus a year ago, driven by really 3 key items. The biggest impact is from raw material cost inflation comprising of energy and pulpwood costs in Europe. Looking at other elements, the raw material situation has been stable year-over-year. We already talked about FX headwind. The profit impact here is both from transactional exposure in Europe and translational exposure for our North American operations. And then the third major item is pulp pricing foremost in our U.S. business, while Europe is neutral on pulp exposure. Now our quarter 3 results were impacted heavily by planned maintenance shutdowns at our 3 mills with a total cost impact of SEK 360 million or almost 4 percentage points on our margin. And as we now move into quarter 4, we will be less maintenance heavy. Moving on to regions and starting with Region Europe. As Ivar already mentioned, we are continuing to fight weak markets in Europe. We have sales decline across all categories, except pulp and also lower sales volumes, together with maintenance shutdowns weighing on profitability in quarter 3. Now heading into quarter 4, we will have, as I mentioned, lower maintenance activity, and we also expect positive impact from lower pulpwood costs to start impacting the results. This cost shift will lead to negative inventory revaluation impact of approximately SEK 70 million in quarter 4 versus quarter 3. Our order books for quarter 4 are soft for Board categories. And at this point, we expect somewhat lower volumes within Board segment. The paper business is holding up better. And we already went through the cost saving program that will primarily impact Region Europe and start contributing in 2026. Now moving over to Region North America. The North American business continues to deliver strong results. Comparison versus last year is impacted by significantly weaker U.S. dollar and also somewhat higher raw material usage during the annual maintenance shutdown in September. Excluding the maintenance shutdown, the EBITDA margin was at solid 19% for the region. In quarter 3, we saw volume growth in both graphic and label paper and see continued strong order books within both segments also moving forward. The announced price increases on graphic paper will start contributing now in quarter 4. During the quarter, we maintained operating rates at 75% of capacity and are, of course, looking to increase these rates with continued ramp-up of packaging volumes, as Ivar talked about. Next slide, please. A couple of comments on cost development. And as expected, the cost situation remained stable in the third quarter in both regions. We had only minor movements across raw material categories with an overall positive sequential impact of SEK 20 million. And in the fourth quarter, we do expect continued stable cost situation in our North American operations. For Europe, the pulpwood prices are coming down, but we also expect seasonally higher energy costs to offset that impact now in the fourth quarter. Next slide, please. Now we've mentioned it a couple of times, and it is quite significant declines in pulpwood prices that we've seen since the peak levels over the past years. And it has been broad-based declines across both Nordics and also the Baltics. Looking at our sourcing mix, approximately 2/3 of our pulpwood is sourced based on Swedish price list, while remaining is impacted by prices in Baltics, Finland and Norway. And moving forward, we continue to see good availability of pulpwood and better supply-demand balance, which also supports potentially even further price decreases as we move on. Next slide, please. One of the key highlights already mentioned for this quarter was our excellent cash performance with OCF conversion once again well over 100%, and that is largely driven by our strong working capital discipline across both of our regions. The strong cash generation is supporting our strong balance sheet with leverage of around 1 in relation to EBITDA and well below our target. In terms of capital expenditures, we are further reducing our CapEx spend for 2025 now to SEK 2.9 billion due to phasing of our strategic investments. The strategic investments in North America are proceeding according to plan, but some pieces of that CapEx will now fall into '26 instead of '25. And at this point, we expect 2026 capital expenditures to be in line with this year at SEK 2.9 billion with the same proportion of base and strategic CapEx. And the strategic CapEx is primarily targeting our revolution journey in North America. And on that note, I hand it back to you, Ivar.

Thank you, Andrei. And to round it up, going into Q4, we do expect the strong sentiment in North America to continue and deliver another solid quarter. And in Region Europe, challenging and weak conditions, Board products are more impacted while we expect to hold better in our paper categories. And on the input cost side, we are starting to see the impact of lower pulpwood cost in Europe. So with that, I do hand it back to the operator for Q&A.

[Operator Instructions] We'll now take our first question. This is from Christian Kopfer from Handelsbanken.

Just a few questions from my side. Firstly, on the pulpwood cost, you mentioned that you see them coming down in the region of 10% for the regions and despite -- or except for the Baltics then. But if I do the calculation, I think you have 7 million cubic meters a year you're buying for the Nordic operations and these prices are coming down with, let's say, GBP 100 or so. So those -- that should be a meaningful impact for you going into next year, right?

Yes. That's correct. I think in terms of the consumption, it is around 9 million to 10 million cubic meters per year in our European business. And the 10% decrease in pulpwood costs would imply somewhere in the region of SEK 900 million on a year-on-year basis, yes.

Is that -- is it fair to say that 70%, 80% of that tailwind is coming for next year? Or will it be more for Q4?

No, I think if we look at the price development during 2025, I mean we peaked during 2025. So in the beginning of the year, we had somewhat lower pulpwood costs compared to midyear. So it will have a significant impact, and we'll look to benefit of that in 2026.

And Andrei, I think you mentioned that you expect prices to come up in North America on the products, but down on pulp and in Europe, slightly down, as I understand it. Can you provide us with some figures on it for these 2 regions for Q4?

If looking at the region of North America, we announced, as I mentioned, price increases on the graphical paper, which will come through in quarter 4. Pulp prices are expected to come down. In total for the region, we estimate around 1% in positive pricing impact for quarter 4 sequentially. For our European business, I mean, we mentioned a couple of times that the weak market environment we are experiencing. And we do expect pricing pressure during the fourth quarter. Now our position is to, of course, defend and fight for our pricing, but we need to admit that we are in a market where we need to address the weak situation and pricing pressure, primarily containerboard and cartonboard.

All right. So slightly down on prices in the European system seems. And then finally for me, maybe for Ivar, you mentioned that you see some light in the end of the tunnel, if that wording is correct. Just interested to hear what you see from your customers? Is it a better underlying demand? Or is it seasonally better into Q1? Or what do you see here?

Christian, it's a good question. And as I said, I think there are some indications. They are quite loose. I have to admit that. So we have to admit that there's a portion of hope and some data points that's starting to at least draw a picture. But again, some of the customer dialogue we have now around their 2026 expectations and their own, you can say, preliminary forecast, they do indicate a bit more of a normalized year. Clearly, that is some expectation also on their side coming from their customers to have a bit of a pickup. Nobody is in our dialogue talking about a kind of a sharp recovery and a quick, -- yes, steep increase into beginning of the year, but some indications given some of the macro pictures are starting to be a bit better. I mean we do see in the euro area, you can say the consumer confidence starting to be a little less negative, if we can say it like this. And of course, in Germany, which is a massive market for us, we've had some GFK data that is also starting to show a little bit better trajectory. But it's still coming from low levels. And I want to stress the point that there's nothing in Q4 that we see that support this. But again, some at least early signals that we might at least see something better when we come into 2026.

We'll take our next question. And this is from Johannes Grunselius from SB1 Markets.

Johannes Grunselius, SB1 here. I have a couple of questions. But if I start with the cost-cutting program, needless to say, it's very ambitious. It's a lot of people. I think it's like 15%, 16% of your old staff in Europe. Can you talk about the risks that things can be adverse impact like do you see any risk that, for example, that operational risks are coming up and so forth? I'm sure you have thought about this, but if you can give some color on it.

Johannes, I can start with that one. Yes, I think as you say, it's a significant program. The numbers are big. It's going to challenge us as a company in many areas that we haven't seen before. I think there's a couple of things I just wanted to convey. We earmark or you can say that we focus this program, first and foremost, in Europe and overhead or staff functions. Operation in U.S. is, to a very large extent, exempt for this as we are doing top speed at the moment in North America and have a very strong momentum, and that's what I want to continue with. But we are going after a quite significant cut on, as I said, overhead. We are also going for pretty aggressive cut on some white collar share of our European mills, try to protect at least to a higher extent the blue-collar population, which is the biggest. Yes, I think that there will be a couple of things. We need to work even harder with simplification, automation. We will accept that we will reduce some of our own, you can call it, capacity to carry out a lot of projects. We need to stay more focused and say no to more things. I mean that starts from the top and needs to flow downwards. I think we have the whole management team behind us that this is important to drive our competitiveness to make us stronger when also the recovery in the market will come and it will come, we will have a stronger Billerud on the other side of that tunnel.

Okay. That's helpful. I was also wondering if you sort of can indicate where you believe operating rates are in the industry for Europe at the moment and your operating rates? And also, I'm very surprised to see how much your volumes are down and not just you or the whole industry, given that you are sort of exposed to relatively stable consumer end segments. I'm sure like groceries are not down 10%, 12% in Europe. So it has to be some kind of inventory adjustment in the system or reverse trade flows. If you can share some thoughts on that, that would be helpful.

Yes, I can start with that and then maybe Andrei jump into the back half of the question. I -- again, it's a good question. It's a complicated question. I'm not disagreeing with you that if you go through some of the retail figures, it's not down as much. But I think we see right now a couple of trades, especially when consumer spending is more strained that there's a bit of a downgrade on the consumer side to cheaper products and private labels, et cetera, that tend to have a more dominant share of their packaging in cheapest possible and fossil-based packaging. I mean that's certainly one. I think also on other channels outside of retail, if you think about nonfood and more electronics and more consumer durables, consumption is certainly down, and they are down in the areas. I mean it's difficult to answer for the whole industry in terms of what the rates, but I think it's fair to say that right now, we are seeing lower operating rates in Europe than we've seen for many, many decades. And maybe, Andrei, if you jump in, can maybe give some light in terms of what we're seeing on our side.