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

Good day, and thank you for standing by. Welcome to the Billerud Q2 Report 2026 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.

Hello, and welcome to this presentation of Billerud's Second Quarter Report. Great to have you this morning -- to have you with us this morning. I'm joined by our CEO, Ivar Vatne; and our CFO, Andrei Kres, and they will take us through the highlights and developments of the quarter. After that, we will, as usual, open up the call for questions. With that, we are ready to start. Ivar, the floor is yours.

Thank you, Lena, and good morning, everyone, and thank you all for listening into our presentation this Friday morning. In many aspects, it's been a quarter we have seen progress across several areas, and it's certainly been a good step in the right direction for us. But let's get into it. So next slide, please. And as expected, our Q2 result was a clear improvement versus the first quarter. North America had a very strong sales quarter with FX-neutral net sales up 11% versus a year ago, which is another testament to our attractive U.S. position, offering local supply. For Region Europe, the main focus over the last months have been on improving profitability, and that is exactly what we managed to do now in Q2. And our performance is stronger and improved, both when we compare to last year and versus Q1. I'm naturally pleased to see this as we mobilized the organization early in the year to move us forward and decisive actions on pricing, reducing both fixed and variable costs and driving a more profitable mix are now yielding results. Focus on working capital is another clear priority for us and a 97% cash conversion during the Q2 is another good performance. So next slide, please. And we have a clear philosophy to focus on the items we can control and drive continuous improvement. And in that regard, our fixed cost saving program is proceeding well and according to plan. We recorded SEK 150 million savings now during the quarter, and that is SEK 50 million incremental from Q1. All staff reductions are now completed. And in Q2, we did have the first quarter with a leaner organizational model and somewhat simplified ways of working. And I do like to take the opportunity to thank the whole Billerud organization for showing agility and determination to deliver on the standards we expect. It certainly has been an important building block to improve both our productivity and competitiveness. In this program, we expect the benefit for '26 to land in the area of SEK 550 million with further SEK 250 million to be delivered in '27. So next slide, please. And another very important company priority is to evolve our portfolio gradually towards packaging materials in North America. We are picking up sales momentum after a long period of trials and qualification, and it is in particular true for our liner proposition Tribute. The interest in our coated liner has so far exceeded our expectations, and we are now expanding our offering also to include uncoated liner. We will do some selective CapEx investments now during Q3 to further strengthen our production capabilities within the area. And there is no doubt that we also expect further sales acceleration into the second half of the year. Now over to some words about the market sentiment. So next slide, please. And if I start with North America, the market conditions, they remain favorable and stable. Now the overall consumer sentiment in the U.S., it did take a hit, post the crisis in the Middle East. But so far within our categories, Q2 was another quarter with good demand. Our order books are strong, and we are expecting to see operating rates above 90% going into Q3. If we change over to Europe, the market sentiment is a bit different. I mean, overall, it has been muted, but we are starting to meet different conditions between our sales channels. Within Food and Beverages, conditions have improved and are starting to normalize. Luxury is still weak, while the industrial channel also has improved during the quarter and in some sense, is starting to normalize. And lastly, some words about Asia and Rest of the World. The situation has also improved slightly during the quarter. And Food and Beverages, and that means for us, mostly [ liquiding ] packaging board that has performed surprisingly well during the first 6 months of '26 and has reached normal conditions. And also within the industrial channel, where our exposure is mostly found within the sacks, the sentiment has strengthened a bit during the quarter. So with that, I will hand it over to Andrei.

Thank you, Ivar, and good morning, everyone. So starting with our net sales, which were down 2% versus a year ago, and this was driven by the pricing development in Europe. Sales volume for the group were in line with the last year, with North America up 7%, while the European volumes were down close to 3%. Currency continues to have an impact on both our top line and profitability as we have stronger Swedish krona compared to Q2 last year. Next slide, please. The profit decline versus last year was driven first and foremost by price pressure in Europe and loss of emission rights. Now most of the impact was offset by our decisive actions to reduce costs, our volume growth in North America and pulpwood cost relief in the Nordics. Our EBITDA margin of 7% was a clear improvement sequentially given we also had heavier maintenance schedule now in Q2. Excluding the impact from maintenance shutdown, adjusted EBITDA increased with 4 percentage points versus quarter 1. Next slide, please. Moving over to regions. And first of all, I'm very pleased to see that our actions to improve profitability in Region Europe are yielding results as we see improved profitability both sequentially and versus a year ago. We did see sequentially lower volumes across most categories, but clearly, that impact was more than offset by our pricing and mix actions together with cost reductions. Pricing was up with close to 1% versus quarter 1, and we expect additional pricing carryover into the third quarter of 1% to 2%. In terms of input costs, as expected, we had significant pulpwood cost relief compared to previous quarter. partly offset by cost inflation due to the Middle East crisis. And looking into the third quarter, we have solid order books, which are partly supported by the seasonal impact from temporary capacity adjustments in the Nordics. And as Ivar mentioned, the underlying demand remains somewhat muted. Now moving over to Region North America. North America continues to enjoy favorable market conditions and had the highest sales volume since late '22 with more than 250,000 tons sold in the quarter. Sales grew both within graphical and label paper, while pulp sales were slightly down compared to last year due to Quinnesec maintenance shutdown. The positive volume development means that we now operate at considerably higher operating rates, which were above 90%, and we expect that level to also continue into Q3. The biannual maintenance shutdown at Quinnesec was slightly more expensive and had approximately SEK 50 million higher cost impact, which was related to some start-up challenges, but the mill performance has progressed throughout the quarter, and we are now back to strong operational performance. And for the third quarter, we expect the favorable market conditions to continue. And similarly to Europe, we have strong order books. The price increases that were announced earlier in the year will now fully materialize in quarter 3, and we expect a positive pricing impact of 2% to 3% for the region compared to the second quarter. Next slide, please. Turning over to some comments on the cost development. And first of all, in the second quarter, as we expected for Europe, we saw continued pulpwood cost decline and also seasonally lower electricity costs, which contributed positively. That impact was partly offset by cost inflation on most and foremost logistics due to higher oil prices. All in all, we had a sequential cost relief of approximately SEK 150 million for the region, in line with the expectations. For North America, we saw likewise cost inflation related to higher oil prices, which impacted fiber, chemical and logistics costs. Energy costs were somewhat lower due to seasonality. And overall, the input costs were down approximately $20 million compared to the first quarter. Next slide, please. Now looking forward, for the third quarter, we expect overall flat input cost situation. But clearly, due to the events in the Middle East and volatile oil price, it is somewhat unpredictable environment. For Europe, we still expect further pulpwood cost relief, although the decline is now flattening out. At this point, we expect both lower pulpwood costs and seasonally lower electricity prices to offset the cost increase we will experience on chemicals. And we would look at the total sequential cost relief of around SEK 40 million for the region. For North America, we expect input costs to increase somewhat into quarter 3. But here, we are talking about quite small increases with a total negative impact of around SEK 20 million. And with that, I will hand it back to you, Ivar.

Thank you, Andrei. So some comments on cash flow and balance sheet. And as already mentioned, the cash conversion now in Q2 was another solid performance with close to 100% conversion. Our balance sheet remains healthy and leverage ended at 2.2x after the dividend payout was executed during the quarter. Our CapEx guidance remains unchanged for '26, and we are planning to invest SEK 2.6 billion. Most of the strategic CapEx is related to project evolution in North America, and we do expect that program should be close to completion by the end of the year. And we will get back with the CapEx guidance for '27 in conjunction with our coming Q3 report. Now so to round it up and next slide, please, and closing remarks on the near-term outlook. And for Q3, we would expect continued favorable conditions in North America. The situation for Region Europe is a bit more uncertain and unpredictable, but we are seeing some positive momentum at least within selected channels. And for both regions, we will see positive pricing impact now in Q3. So with that, I hand it back to operator for Q&A.

[Operator Instructions] And your first question today comes from the line of Johannes Grunselius from SB1 Markets.

It's Johannes here. I have a question, Ivar and team, on your comments on positive pricing. Did you say on the call what kind of price magnitude we are talking about? Or does that remain to be seen? It will be very helpful if you could sort of give us some indication on the magnitude there, please.

Johannes, so as you know, we announced price increases broadly during the first quarter, and they are now materializing. We did see some pricing impact in Q2. Heading into the third quarter, we expect for Region Europe additional pricing impact of 1% to 2% compared to the second quarter. And for Region North America, a pricing impact of 2% to 3% compared to the second quarter.

Okay. Very helpful. Then on your comment about strong order backlog, how should we interpret that? First of all, if you can expand a bit what you mean with this in terms of periods of order backlog and so on? And do you think this will materialize in sort of better mix quarter-over-quarter and also higher volumes quarter-over-quarter?

Johannes, I can start and maybe Andrei chip in at the end here. The way we would look at this is that North America had a pretty solid quarter in terms of sales volume. We would expect that to continue also into Q3. We are operating now in the 90%-ish operating rates in North America and that you expect to continue now in Q3. We had some maintenance shut in Q2 in Quinnesec, and we will have Escanaba now in Q3. So in that sense, still going strong. The mix question there in North America is we had a bit lower pulp sales in Quinn. That we would expect to pick up now, since Quinn is back to full blaze, and that typically has a bit of a subdued margin. So there might be some small negative impact on the mix in North America. For Region Europe, it's a bit of a mixed bag. But in general, order books are very strong, and we do expect to run a pretty solid production pace now going forward. We probably would expect some pickup in terms of the volume. But you might see some offset since in this quarter here now, we would expect to sell a bit more than we produce and part of that volume uplift could be offset by some fixed cost absorption. But in general, good order books and good production pace is also the case for Europe in Q3.

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

You talked about somewhat improved market conditions in Europe. I wonder if you could shed some more light on that possibly. Which segments are we talking about? And how do you interpret that? Is this part of an inventory cycle? Or is it your view that we are seeing some real demand improvement, some more constructive customer behavior out there?

Yes, I can start with this. It's a good question, first and foremost. And I think the honest answer here is that I think we continue to ask ourselves that question. And I'm the first to admit, we probably need a bit more evidence and months under our belt to really feel that this is a longer trend. But I can just confirm that right now, we are seeing better demand in food and beverages. As you know, that's our biggest channel in Region Europe. And liquid packaging has been strong from pretty much the beginning of the year, and we are pretty confident that will keep up at least into Q3. For containerboard, I think also we see a pretty okay situation. Fluting pretty much is fully sold out in terms of our machines going forward. And there's a nice pull from our strong position in Latin America given our product performance on this Billerud Flute. Liner is a bit weaker, but still it's holding up better than maybe we thought 3 months ago. So luxury and for us, that means a lot of the exposure to cartonboard is still the weakest part. That has been weak for some time, and I think we don't expect much change on that. Certainly also, this is an area that has a lot of overcapacity. We're doing better than others on brown. But on white carton and FBB, it's still a pretty muted and weak situation. And I think for paper, sacks now is kicking in quite nicely into gear, and we have more pull now on brown sacks than probably we had for many quarters. And we certainly also sold out on that piece. And maybe somehow a bit of a surprise we see that industrial channel has picked up, and that's not only in Europe, but a lot of the regional exposure we have on brown sack is found in Middle East, North Africa and also into Asia. That has been better, yes, than what we've seen for some time. White sack is a bit muted, but still better than maybe it was. Kraft paper in this case, MG and MF is still a little bit softer than we see on sack, but also a bit of an uptick versus what we saw for the last 2 quarters. So I think if you sum it up, it's still not fully back to maybe the old, let's say, sentiment that we have 2% to 3% category growth consistently. But it's certainly now a step in the right direction, and we are seeing for some time on better pull on many of the channels we have exposure to.

Interesting. Because that improvement is not visible in your Europe shipments numbers for the second quarter. So I guess what you're alluding to here is that we will see a pickup in Europe shipments volumes in the third quarter. Are we back to year-on-year growth in terms of European shipments in the third quarter?

No, I don't want to comment necessarily that. We also had some maintenance shuts in the quarter that impacted, if you think quarter-over-quarter. But I can confirm we are expecting a volume uplift now in Q3 versus Q2, although that impact, as I mentioned also on the previous question, would be a bit more reduced given the impact that we expect a bit bigger impact on the fixed cost absorptions as we would expect to sell a bit more in the quarter versus production. But in general, the underlying sentiment still remains that we should have a better sales volume quarter in Q3 than Q2 for Europe.

Great. And then just finally, also on the market situation, but in North America, you've had a fantastic recovery in terms of operating rates over the past several quarters by now. And with regards to trade barriers, et cetera, could you -- and your very special market position, could you give us the snapshot here and now with this kind of operating rates what's the trajectory of profitability, pricing, et cetera, from here do you see? How is this tariff dynamic working out in your market segments in the U.S.?

Yes. I think the situation has been favorable in North America for some quarters and certainly has been a phenomenal performance over years now that we got used to from our colleagues in Michigan. And we expect that going forward. I think so far in '26, graphic paper has been outstanding and surprised us also a bit that it is a category in secular decline, as you know. I think so far, this has hold much better, and it might actually be right now on a more flat category development. That is not something we would expect as the new normal. There's clearly been some big events now with both the World Cup and also the midterm election that is, in some sense, pumping some extra energy into the category. But we have a great position. We are one of the few remaining locally produced suppliers. And I think our value proposition of predictability and reliability and a near-term partner is really paying off. So graphic is still going to be the cornerstone of that for some time. We do know, and I'm repeating myself, it is in secular decline. We have other legs to stand on. Our label paper is also one of that. And there, we see more favorable conditions and growth of 1% to 2%. And there we have a leading position for some time, and we expect to have that. And then we do come back to the point around our journey to gradually go into packaging materials. Yes, there's numbers are still in, call it, a scale-up or start-up mode, but we are getting now to the point where more and more of our qualification trials are turning into successful and tangible results and that momentum should go forward. So I think we would expect strong performance for the, call it, foreseeable future in North America. Input cost situation is much more stable than in Europe. I think we come now with pricing in Q3 that will also take a good step into the gross margin and operating rates should be on the higher side for at least some time going forward. That's our best estimate right now.

Your next question today comes from the line of Cole Hathorn from Jefferies.

I'd just like to follow up on the comments that you made in the -- in your statement about evaluating all opportunities to play an active role in addressing the industry challenges. I know the market is very difficult and that comment leaves the scope open for footprint rationalization and M&A. And I'd like to ask on the M&A side, do you also take the view that with a bigger footprint, it's easier to reallocate volumes and it's easier to close capacity when you have scale. I'm just wondering if M&A is on the table and how you think about it within the industry.

Cole, I can try to add some comments on this. I think what we're trying to say with this statement is that although now we are seeing a bit improved sentiment, at least also in Europe, it doesn't take away the fact that it's still a pretty unbalanced situation, and we are not very optimistic on the long-term view of the competitiveness of the region unless we see some structural change. I think I would have a pretty broad-based support, I think, from my sector colleagues on that statement. And you can do many things to try to make some interventions here. You can do it alone. You can also do it in a bigger context. And I think what you mentioned on M&A, I think everything is on the table. And as far as I can go today says that we are allocating quite a bit of time on that, both within the management, but also in terms of our dialogue with the Board to see what really is going to be positioned going forward. And that's pretty much, I guess, as long as I would like to go on that statement.

Sure. And then maybe just following up on the volume commentary. I mean, the deliveries of 610,000, it's it is quite low compared to history. And I get it that the market is challenged, but you've got really good operating rates in North America, whereas the operating rates in Europe are more challenged. Do you think that this is an element of you need to rightsize your asset base to kind of address the volume gap? I mean if we look at 2025 volumes of 2.5 million tons versus going back to 2020, 2021, 2019, there's a 200,000 to 300,000 ton gap, which is an entire paper machine. And I'm just wondering, is the asset base still fit for purpose? Or are you going to need to take some actions there?

No. I mean I think it goes straight into the first point where, yes, us and the whole sector is running below where they would need to run. It is a very capital-intensive sector where you are almost, in some sense, dependent on having a very high utilization to make solid financials. Yes, we share the view that it is too much capacity versus now what the market looks like and with some of the X factors we met over the last years, and that applies to us and it applies to pretty much the whole sector. So yes, I can only say that although we see a bit of a step up into the right direction, the fundamental challenge that we see now in the sector is not going away anytime soon.

And then just a follow-up to end it on more of a positive one, which is the kind of the order books better into Europe into Q3. Has it -- do you think there's been any kind of increase in or restocking or supply chain pull forward? My channel checks indicated there was some in containerboard, but I hadn't really seen anything in sack or specialty kraft or folding carton. So I'm just wondering if there is any restock or kind of customers wanting a little bit more inventory for safety. Anything to explain the better order books from your side or restocking would be helpful.

Yes. So that's another question that we try to stay very close to our customers to get the best intelligence out there. I would have had some of the same fear during second quarter, in particular when the -- going back to COVID, what happened and when the Middle East crisis happened. And of course, the natural reaction is that we now see something similar. I think what we've seen though is in Europe, there hasn't been much, you can call it disruption at all. And I certainly don't expect that to have been in any way impacted with some extra safety stock. Intuitively, you can say that everything that goes to Asia might have had some impact given supply chain in that passing by the region is a bit sketchy. But what we have seen is that not much is coming our way of a need to do safety stock. Another piece that tends to be a good indication is we're coming with pricing that is starting to hit from the 1st of July that can lead in some cases to customers stocking a bit up before. But our order books are strong. They're very solid also going into Q3. So that's also not what we're saying. So at least to best knowledge [indiscernible], the stocking impact that we should have seen over the last months should have been very limited.