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

Good day, and thank you for standing by. Welcome to Billerud's Third Quarter Report 2026 Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Lena Schattauer, Head of Investor Relations. Please go ahead.

Good morning, and welcome to the presentation of Billerud's third quarter results. Our CEO, Ivar Vatne, and our CFO, Andrei Kres, will give you an overview of the results and the highlights of the quarter. After their presentation, conference participants will have the opportunity to ask questions. With that, I hand over to you, Ivar.

Thank you, Lena, and good morning, everyone and thank you all for listening in to our Billerud update this Thursday morning. There are several highlights to talk about, but it's first and foremost been a quarter where we see progress on the profitability recovery, and we continue the positive trend since the beginning of the year. So let's get into it. The next slide, please. And overall, our Q3 result is coming in quite close to our expectations and we do see progress on several fronts. We returned to positive net sales growth, up 3% versus a year ago and up 2% currency neutral. Net sales is also up versus previous quarter. Our sales growth is coming from increased volumes in both regions and we have positive pricing momentum for most of our categories. I want to, in particular, call out our region Europe for strong profitability improvement. And we have been through some tough years in Europe and the EBITDA margin for Europe now in Q3 is the highest since the beginning of 2025. Our saving measures on both variable and fixed costs are working and we have succeeded to increase our competitiveness. Now for North America, it's been a big quarter in taking the next step in a program Evolution. We have installed some new equipment at our Escanaba mill, which will enable further acceleration towards packaging materials, but more about that later. Focusing on converting a high share of our profit into cash remains a clear priority and we had another excellent quarter in terms of cash conversion, coming in at 127%, which makes our year-to-date position very strong. Next slide, please. Our strategic direction to evolve gradually towards packaging materials in North America is a high priority for us and we reached another milestone during the third quarter. And in combination with the annual shutdown in Escanaba, we upgraded some of the assets, specifically with changes on roll handling, roll wrap, winders and sheet dewatering elements. This has been needed to enable further capabilities to produce heavy basis weights versus what they have historically focused on. And with that, we complement the customer offering that I mentioned, which is more in the sweet spot within the packaging materials space. Commercially, we are continuing to pick up speed and recorded another record sales quarter during Q3. We would expect that we exceed that number also for Q4. Now over to some comments around market sentiment on next slide, please. And if I start with North America, the market conditions remain favorable, quite stable. Inflation has been a big topic, particularly fuel prices. But besides that, the consumer sentiment is still quite good and our order books are solid for Q4. In Europe, the market sentiment improved a bit during Q3. Now it's mostly supply-driven and fueled by energy price hikes on continental Europe and that triggers positive pricing momentum across the sector. Consumer demand is still relatively muted, but a bit improved versus how we started the year. There are big differences between categories and channels. Food and beverage and industrial are starting to normalize with pretty good demand, while luxury is still weak. And for Asia and the rest of the world, the situation has also improved a bit. Food and beverage continued strong performance during '26, also within the industrial channel, where our exposure is mostly within sack. The sentiment has strengthened during the quarter and is solid. So with that, I hand it over to Andrei.

Thank you, Ivar, and good morning, everyone. So as Ivar mentioned, we are back to top line growth, which is driven by positive volume development in both regions. Europe was standing for the majority of the increase with 5% volume growth, while North America recorded 2% volume increase. The total pricing remains negative, but it's quite a mixed bag here, with all categories in North America up versus a year ago while Europe is still behind. Next slide, please. EBITDA was more or less flat versus a year ago as most of the headwinds were offset by our cost-saving initiatives and volume recovery. Raw material cost development is positive versus last year, largely driven by Nordic pulpwood costs, while we do see higher costs for logistics compared to same period last year. And that's, of course, driven by the higher fuel prices that we see now. Margin of 10% is another solid improvement versus weak start we had in 2026. Sequentially, EBITDA is up more than 50%. And right now, it's our region Europe that is driving the sequential improvement. Our successful cost-saving program is, of course, an important building block and is continuing on track to deliver SEK 550 million in cost savings this year and further activities and impact also into 2027. Next slide, please. And some more words on region Europe. Continued positive momentum on pricing and our cost-savings program were the main drivers to recover profitability in the quarter. Volumes were up 7% sequentially and the improvement was particularly strong in containerboard and sack categories. Pulpwood costs continued to decline sequentially and we now expect current level to persist into the fourth quarter. Quarter three was quite maintenance-heavy with annual shuts at three mills. And for the fourth quarter, we will only finish off the Frovi shutdown, which will be the last one for this year. So maintenance-related costs will come down in Q4, but we will have, as usual, seasonally higher fixed costs compared to the third quarter. And heading into the fourth quarter, we see continued pricing opportunities within some categories where we see a bit better demand. And we also expect to selectively implement price increases during the quarter. Now moving over to region North America. Next slide, please. North America had a solid quarter with a 15% EBITDA margin. Now we did encounter some operational challenges in connection with the Escanaba shutdown and also ramp-up of our packaging materials. But despite that, we managed to maintain stable deliveries to our customers sequentially. Order books remain strong across all paper grades and this clearly also supports our operating rates, which have now been above 90% for a second quarter in a row. Cost inflation is a key theme for the region, primarily through higher fuel prices and we are offsetting that with both price increases and surcharges to our customers. And for the fourth quarter, we expect the market conditions to remain solid and also, in North America, we are now out of the maintenance shutdown period. Next slide, please. Some words on cost development in the third quarter. In Europe, we had a sequential cost relief of about SEK 20 million. That was driven by lower pulpwood and logistics costs, which were offset by higher chemical prices. In North America, we saw some headwinds from energy, chemicals and logistics, with an overall negative impact of around SEK 20 million. So all in all, for the group, flat input cost development in Q3 compared to Q2. Next slide, please. For the fourth quarter, we expect input cost headwinds of approximately SEK 60 million. And that is primarily driven by seasonally higher energy costs, that is electricity in the Nordics and natural gas in U.S. Elevated fuel prices will also be a factor, in particular in region North America, where we see impact on both fiber through higher harvesting costs and also logistics. Now as I mentioned earlier, Nordic pulpwood costs have come down as we expected. And from here, we see quite flat development into the fourth quarter. Now finally, energy prices are dominating a lot of the headlines these days. And I would just like to remind you that we are well-positioned with integrated assets in both of our regions and thus high self-sufficiency. And we also hedge majority of our energy price exposure quite far out in time. With that, I hand it back to you, Ivar.

Thank you, Andrei. And some comments on cash flow and the balance sheet. As mentioned earlier, our cash conversion in Q3 was excellent and 127% is certainly a number of strength. It also puts our year-to-date cash conversion in a good place. Our balance sheet remains healthy and leverage drops to 2 now at quarter-end. Our CapEx estimate for 2026 is a bit reduced versus early guidance, with some project costs in the U.S. rolled over into 2027. So this is first and foremost, a timing effect. It means that our current CapEx guidance for '27 is SEK 2.6 billion, base CapEx, SEK 2.1 billion and SEK 0.5 billion related to the last section, the Project Evolution in North America. And right now, we don't have any further significant strategic CapEx projects planned. So to round it up, and next slide, please, and closing remarks on the outlook for Q4. We do expect relatively stable and unchanged market conditions for both of our regions. We have pricing actions in both our regions and we would expect this impact to offset cost inflation. After a period of heavy maintenance activity, we will have now less annual shuts in Q4. So with that, I hand it back to operator for Q&A.

[Operator Instructions] And our first question comes from the line of Ashish Khetan from Citigroup.

I just wanted to ask about the profitability in Europe region. So how much of the margin improvement in this quarter is sustainable going into 2027? And what would be the margin level achievable given the current, today's demand environment?

Ashish, I think if you look at the improvement we have seen in Europe, it's obviously, as I mentioned, it's our cost-out initiatives, which is sticky, if I can express it like that. So that's underlying profitability improvement we have in Europe. And then, it's of course, the price increases that we have implemented throughout the year. Looking at the development into the fourth quarter, I mentioned, we probably will have price increases. And for 2027, based on the positive momentum on pricing we have today, we will probably see additional impact also going into 2027.

Yes, and if I can just maybe add one point from my side, just to keep in mind that Q3 in Europe is always impacted by some vacation accruals and a bit lower activity. And that amount is estimated at SEK 160 million, which will come back in Q4. I just want to add that on top of the comments of Andrei.

We will now take our next question. And our next question comes from Linus Larsson from SEB.

On a sequential basis, did I hear you right, guiding for input cost headwinds of SEK 60 million Q4 on Q3 on a sequential basis? I just want to clarify whether I got that right. And also, on the compensation front, what are you guiding for in terms of price improvement Q4 on Q3?

Yes, at this point, we look at headwinds of around SEK 60 million on costs. It's roughly a 50-50 split between the two regions. On pricing, at this point, we look at approximately 1% positive pricing development in both regions sequentially. Now of course, if you look at what's happening on the market and also at energy prices, a lot of the price increases that have been announced that are now impacting were announced before the worsened situation we are in now within energy. So we expect also that, that momentum to continue into 2027 and first half, but that we will need to come back to when we have some more, quarter four under us, so to speak.

Great. Super. And then you talked about operational challenges in your North American operations. Anyway you could quantify that for the third quarter? And has that been resolved or does that have any sort of impact in the fourth quarter as well?

Yes, I can take that one. We don't guide really, specifically on those items, I can say that if you look at some of the historical performance in North America and look now at Q3, taking out maintenance, it's a little bit lower than you would normally see. We had two events, you can call it that caused this quarter. And we had a little bit more downtime on the Escanaba mill after our annual shut, which by default should be a one-off. And we had a little lower runnability or you can call it mill efficiency, as part of ramping up of the packaging materials. And that being worked. It's not fully resolved, but we see progress already going into the first weeks of -- in October. I would expect us to take another step now in Q4 towards what we have historically seen as good performance in North America.

Okay, cool. And then just finally, if I may, on the volume side of things in Europe, you did pretty well in the third quarter. Any color on that? What drove that improvement? And is there any reason why Q4 is not going to look as good if you look on a -- like a year-on-year comparison, for instance?

Yes, Linus. So I think if we look at the development in quarter three, I called out during my earlier comments, in particular, strong deliveries within containerboard and sack. I think if we look towards the fourth quarter, we feel that customers are managing or are careful about their inventories. We also see that orders are coming in quite late because there is volume out there. And standing here now in October, we would expect that as we have seen in previous years that, that inventories will be brought down in quarter four to manage the working capital position at our customers. And hence, at this point, our best outlook is that we will see somewhat lower volumes.

Sure. I was more asking, or wondering, like a, on a year-over-year basis, but I don't know if you can add anything.

No, I can take it. I don't think there's anything specific per se. It's been pretty good momentum going into Q3, and we had nice runnability. So there is nothing specific per se that stands out. It's a little bit up versus Q2. And as Andrei said, we have strong order books also into Q4, but everything else equal, maybe slightly down just because of customers trying to manage carefully their year-end position. But there's nothing else really out to be noted Q3 year-over-year.

We will now proceed to take our next question from the line of Ephrem Ravi from Citigroup.

Just a couple of follow-up questions on costs. Firstly, on the logistics side, of the SEK 60 million sequential cost increases that you are talking about, would it be fair to say that most of it is logistics, given, if I heard you correctly, most of your energy is hedged? And could you give us a sense of your total kind of absolute logistics cost base, if you can, on a full-year basis? Secondly, on the qualitative guidance around the different markets in the different regions, obviously Europe is normalizing. What sort of, how far, or how much below normal, would you say Europe is? Is it 10% or 20%, or is it two quarters out in your assessment?

Yes, Ephrem I can start. So in terms of the cost headwinds into the fourth quarter, yes, that is primarily logistics. I would say, of the SEK 60 million in headwind, roughly two-thirds is logistics, but we will see higher, seasonally higher energy costs as well. And as you know, we are not 100% hedged, so the spot share there will impact also quarter four. If you look at the total logistics costs for the group, it's roughly SEK 3.5 billion for both regions per year.

I can take the second one. It's a bit of a tough one to answer. I think the sentiment in Europe has taken some steps up from low levels from the beginning of the year. Consumer sentiment has been muted for quite a bit of time. You have to probably also go into a bit more specific on channels and categories to get a balance. But for us, food and beverage is the biggest channel in Europe and that's performing pretty well with some slight growth in the category. Obviously, we've been benefiting on that. Industrial has also been pretty solid, in the sense of Eastern Europe and what we could export out to Africa and Asia. So that has been in some sense good and we foresee that it will hold certainly into the end of the year. So luxury is still very weak. And cartonboard, in particular, is the category which still I think is a bit stagnant in Europe in the sense of our packaging space. There's just a lot of capacity out there and that's where we clearly see the demand is struggling the most.

[Operator Instructions] Our next question comes from the line of Martin Melbye from [indiscernible].

When you refer to higher prices going to be announced during the quarter, which segments, which products are we talking about there?