Billerud AB (publ)

STO:BILL

Earnings Call Transcript 2024-Q1

[Operator]

Good day, and welcome to the Billerud Q1 Report 2024 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand you over to your host, Lena Schattauer, Please go ahead.

[Lena Schattauer, executive]

Good morning, and welcome to this webcasted conference call following the publication of Billerud's interim report for the first quarter 2024. Our President and CEO, Ivar Vatne; and our CFO, Andrei Kres, will hold the presentation. And after the presentation, we will open up for Q&A.By that, I would like to hand over to Ivar. Please go ahead.

[Ivar Vatne, executive]

Thank you, Lena, and good morning, everyone. We're excited to provide you with some of the highlights from the first quarter of '24, and it's certainly been an interesting start of the year where the market has started to turn more positive. So let's get into it and next slide, please.So for our Q1, we are down versus year ago on most financial measures. And having said that, at that time, we were at a very different ending phase of a different market sentiment. Hence, our performance now in light of the previous quarter is, in many ways, the more interesting dimension. And then entering into 2024, we did expect to see a somewhat improved market, and that is certainly what we have experienced and even a bit better versus our ingoing expectations.Sequentially, profitability is up more than 50%, where we are again encouraged by the result in North America. One of the biggest drivers of the improved result has been the extra demand, and we grew volume close to 50,000 tonnes versus Q4. We've also had some help from positive pricing and favorable mix, which is certainly welcome. Of other events during the quarter, we divested idled mill assets of Wisconsin Rapids. And I'll come back to that a bit later in the presentation with some more perspective.So next slide, please. And I mentioned a bit around this topic already, but we have seen broad-based improvement of the market conditions during the quarter. And having said that, we are coming from weak levels, and we still have quite a bit left before we would reach fully normalized levels. However, now we can safely say that the inventory destocking we struggle with during '23 is now behind us, and that should continue to fuel our order books into the coming months.We need to keep in mind that the extra demand is also somewhat impacted by unusual events during the quarter, in particular, disruption in the Red Sea and strikes in Finland, which has impacted supply. It's difficult to assess at this stage what this has meant but no doubt, we need to stay close to inventory levels going forward to assess what I would say is true strength and the underlying consumption.A bit more detail on the specific channel. So food & drink is probably the best-performing channel, liquid packaging board is now at normalized levels, and we also see some encouraged recovery signs from containerboard and selected grades of MG paper. Within print & publishing, a graphic paper has improved, although from very weak levels, and we do expect this to continue to strengthen towards the summer, not least linked to the upcoming U.S. Presidential elections.Within consumer luxury, the situation is a bit softer, particularly on cartonboard. And there is no doubt that consumption is impacted by lower disposable income for most households, especially within some of the prestige segments that Billerud operate within. Kraft paper doing a bit better, particularly linked to e-com and reusable carrybags. Industrial is mixed. Brown sack is improving in certain regions, while we see that white sack and interleaving paper are still at pretty weak levels.And with that, I hand it over to Andrei.

[Andrei Kres, executive]

Thank you, Ivar, and good morning, everyone. Thank you. Let's start with net sales development. And versus a year ago, the sales declined by 9%. The deteriorating pricing was the main factor behind the decline and prices were down for all segments, except for liquid packaging board, where prices increased in quarter 1 this year, as we already mentioned in our previous quarterly call. The deteriorating pricing was mainly related to negative sentiment and also destocking that we saw in 2023. We are confident now that we have bottomed out and are entering a new environment with stronger pricing momentum across most segments. Volume was marginally down versus previous year, and we had only minor mix effect. FX had a positive impact on top-line and more or less offset the negative impact from volume. Sequentially versus quarter 4, the sales were up by 9% on the back of stronger sales volumes.Next slide, please. Moving over to EBITDA development. The profitability declined by approximately 20% versus a year ago, with pricing also here being the main driver. But as I mentioned, we certainly see that we have bottomed out on pricing. Input cost relief, together with solid positive impact from efficiency enhancement program, we're able to offset more than 50% of the negative pricing impact. All input costs, except for pulpwood in region Europe were down versus a year ago.A negative impact of almost SEK 50 million within other is mainly related to unfavorable effect from stock revaluation between quarter 1 this year and quarter 1 last year, but that was offset by lower fixed costs we had in quarter 1 this year. Now heading forward, just a reminder, as we head into quarter 2, we have our annual salary adjustments, which will be slightly above 3%, and that will have a negative impact in quarter 2 versus quarter 1 of SEK 60 million to SEK 70 million.Looking further into development for the regions and starting with Europe. Next slide, please. Region Europe had a solid sequential improvement in sales, driven by price increases within liquid packaging board and also 6% higher sales volumes. The result was also positively impacted by less maintenance in quarter 1 this year compared to the previous quarter. The pricing help from liquid packaging board and also, to some extent, increased market pulp prices more than offset the input cost increase in quarter 1 that I will get back to.Profitability declined versus previous year to 11% in EBITDA margin terms. And although we saw significant cost relief and efficiency improvements, the broad-based pricing deterioration was a clear driver for lower profit. All in all, we're pleased with volume improvement for the region and a more positive sentiment within all segments. We are also particularly happy about strong demand within liquid packaging board and all-time high quarterly deliveries we had during quarter 1 this year.Now looking into the cost development for the region. Next slide, please. As we expected, we saw a broad-based input cost increase for the region during the quarter. Total input costs increased with approximately SEK 200 million sequentially versus quarter 4, which was about SEK 100 million higher than we expected. Pulpwood prices, which I will talk more about in short, had a negative quarter-on-quarter impact of SEK 70 million; energy, also SEK 70 million and logistics SEK 60 million. Logistics costs were impacted by surcharges for overseas shipments and rerouting of transport that we needed to undertake during the first quarter.Now during the quarter, we also finalized a new overseas contract, which will be valid from May this year. And this is quite a large contract that is expected to decrease our cost by SEK 160 million on an annual basis, and we expect full impact of that contract in quarter 3 this year. Heading into the second quarter, we expect further input cost increases of approximately SEK 180 million, and that is primarily from pulpwood costs.And looking at the pulpwood cost development in the Nordics. Next slide, please. We start to see clear evidence that pulpwood supply within the region is not sufficient to meet the planned production, and that is unprecedented for Nordic pulp and paper sector. With increasing operating rates in Nordics, we also expect continued pressure on pulpwood prices, and we expect to reach all-time high levels in the coming quarter. Now tackling this challenge is at the core of Europe strategy, but the only credible mitigating action to this development is pricing. We have announced price increases during the first quarter, which will start to have a positive impact in quarter 2. But on the back of further cost surges, we will need to do more.And now let's move to region North America. Next slide, please. In the region, we continue to be impressed by performance of the region with EBITDA margin of 16% despite significantly lower volumes versus a year ago. And we saw clear evidence of destocking being completed and similar positive shift in market sentiment. Sequentially, we saw a 4% volume increase with improved volumes, both within graphic and specialty paper.Now on the back of stronger demand, our operating rates improved throughout the quarter to approximately 70%, and we expect further improvements as we head further into 2024. As we expected, the pricing within graphic and specialty segments was slightly down sequentially versus quarter 4 as we saw our new contracts to roll in, but that effect was entirely offset by lower input costs. And heading into the second quarter, we expect pricing to remain stable and looking into the cost region for the Europe.Next slide, please. We have another reminder of stark contrast between the regions. Sequentially versus quarter 4, input costs in North America had a positive impact of SEK 40 million, with marginal decline in costs across all segments. And heading into quarter 2, we expect the situation to remain unchanged with only minor changes. And in total, we expect a cost base for the region to be up approximately SEK 20 million. So all in all, very expected movements both in input costs and also pricing in North America and another proof of solid business environment for this region.Now moving over to financial position and cash flow for the quarter. We had a sizable working capital buildup in the quarter and the increase in working capital was primarily driven by higher sales, resulting in higher accounts receivables position, but also inventory build ahead of our maintenance shutdowns that we will carry out in quarter 2. Leverage increased to 1.9x EBITDA, and that's driven by lower rolling 12-month profitability. And finally, for a reminder of 2024, we have unchanged CapEx guidance of SEK 2.3 billion.And with that, I would like to hand it back to Ivar.

[Ivar Vatne, executive]

Thank you, Andrei. And on to our efficiency program now being in the second year since the launch, and we maintain our momentum we gather during 2023 and added SEK 200 million versus same period last year. And we are on track to deliver our target of SEK 700 million additional profit for '24, although there is still a lot of hard work needed over the coming quarters to deliver our plans with accidents.As usual, we have listed some examples of initiatives that made a good impact during the quarter at the bottom of the chart. As an example, here from this quarter, starting to see the first meaningful savings impact from the FTE reduction program we announced end of last year.Next slide, please. And as I mentioned a bit about in the beginning, we have reached an agreement to divest the assets of the idled Wisconsin Rapids mill. This deal should be completed any day now, and we would receive approximately SEK 60 million as a positive cash in, and that should happen during Q2. As we already have communicated, the P&L impact of this deal has been insignificant, minus SEK 6 million was the amount that [ was the result ] and recorded this already in Q1.Although the mill assets will be divested, we maintain committed to continue our sheeting operations at Rapids at approximately 120 Billerud employees, and we do expect to continue sheeting operations for both graphic paper and cartonboard for the foreseeable future.Next slide, please. Now our main priorities for 2024 remain intact. It's few and selective items we mobilize around. Still a clear #1 is the continued work of our strategic investment projects. And U.S. transformation is here on this beauty lead project. And we are continuing our efforts to explore the option. And yes, we are still in high dialogue with our suppliers on this. We're getting closer to sharing some information here, but that will not be today.In the meantime, as also Andrei alluded to, we continue to be positively surprised by the North American region and how good performance our 2 upper Michigan mills are able to produce. The BCTMP project in Poland together with Viken is proceeding. We're still awaiting the environmental permit from the Norwegian authorities. Second part here is around our updated European strategy where we simply have to adapt to persisting high cost situation and to improve profitability. In particular, 2 items that will be of critical importance, better execution to strengthen the mill performance and securing cost competitive both supply in the Nordic through partnerships, expanding our field wood purchases and increasing fiber efficiency through optimization of recipe and optimization of mix. And lastly, as I already touched a bit upon delivering the target for efficiency enhancement program.So next slide, please. So to round it up, it's been an encouraging start of the year with market sentiment clearly improved during Q1 and expect this to continue into Q2. Our recent round of pricing activities should help us to offset input costs, which first and foremost, looks to be centered in Nordic in the fiber market situation. And lastly, we will have a DC maintenance quarter with 4 planned stops estimated to north of SEK 500 million.And with that, I hand it back to operator for Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Linus Larsson from SEB.

[Linus Larsson, analyst]

You talked about the new pricing environment and now looking into the second quarter, I wonder if you could maybe give a bit more detail on the price impact that you're expecting compared to the first quarter? And maybe if you could segment by segment go through the price increases that you may be expecting?

[Ivar Vatne, executive]

Yes, Linus. Let me give you some color on the pricing environment. So I was flatted it up by regions and then also talk a bit about the segments. But if we look at the North America, so we have -- we expect flat pricing for both graphic and specialty categories. And the market pulp prices are expected to increase with roughly 12% heading into the second quarter. So all in all, for the region, North America, we would expect pricing increases of 1% to 2%.Now for Region Europe. If we start by second craft segment. We have announced price increases during the quarter starting from 1st of April. And we expect to achieve a total pricing increase of 4%. Now this will gradually roll in during the second quarter. So for the second quarter, we would expect in the region of 3% increases. For paperboard, we've also announced price increases starting from 1st of April. We see that we will achieve price increases in the region of 6% and approximately half of that effect in quarter 2.Also on the European side, if we look at the sales pricing, we see that the pulp pricing is coming up, and we would expect a similar increase as in North America in the region of 12% to 13% on our pulp sales.

[Operator]

We're taking the next call now from Cole Hathorn from Jefferies.

[Cole Hathorn, analyst]

Only 3 in my side. The first is on the volume and demand benefits. I mean, you make a good point that whilst we've seen the improvement, how do you make sure that your sales team are not getting too carried away and you're kind of getting misled by kind of a restocking effect in the supply chain? So I'm just wondering how you're kind of managing that restocking versus kind of the underlying demand? And then the second question is around the biggest question I've got for you, which is wood cost structurally higher. You called it out appropriately in your report, but how are you managing the price versus that cost? How are the negotiations going with your customers to ultimately say, we need to price up for a certain margin for these products to manage profitability. And how is that going to develop from here? I mean, are we saying that wood costs might continue to drift higher into the third and fourth quarter, and this will be kind of the first of multiple increases that the industry as a whole needs to price?

[Ivar Vatne, executive]

Good questions. Let me start with the first one. I mean, I can open the anomaly say that, listen, this is a challenge. It's difficult. I think we all agree that '23 has been a year where we just had to wait out the destocking. And I think we now feel broad-based from all of our sales leads and the category teams that we bottom out and customers are starting to order again. And I can only say that, yes, have you been a bit extra helped or put a bit into overdrive this quarter for what's happening in the Red Sea and also from the strike out in Finland. Yes, probably.And as I already mentioned a bit and then wrote in the comments of the CEO report, it's difficult at this stage to really quantify this. We don't believe it's significant at this stage. And the reason I can say this is that from the overseas that we get over to the Asia, that's some exposure we have. There are still our main operations from the region Europe is within Europe. And obviously, the U.S. at this stage should not be impacted too much on the Red Sea. The strike in Finland clearly has impacted a little bit. There are some categories that are overlapping from us, and I think there's even some maybe extra volume going in on things like specialty to U.S. But our view is that this is not a significant part now.And clearly, the strike in Finland is starting to be a closed chapter while the Red Sea is still there. So we just need to keep an eye on, on this going forward. We are in high dialogue with the customers of checking out also how their order stock is flowing through. And I do expect to come with a bit more qualified comments when we go into next quarter. But I think I can only say at this stage that we are aware, we know it, assess it to be significant, but more to follow.Listen, I think on the other question, which is also, I think it's a very good one. I mean, it's really hard to say. I think our analysis of this, if you draw the big brush on this is that when we had a couple of years ago, the event with the war in Ukraine and the border from Russia was closed overnight and a lot of export into Finland was taken out. We've seen that coming. We know that the different players take some time to reposition themselves. You already know that, hey, the market in Nordic is pretty tight. And you can say that this has probably been cushioned a bit for quite some quarters since the demand has been slow, and the destocking effect has been there. And now we start to see the true, you can call it, picture, which has now been caused by this big event a couple of years ago. Coupling this with other supply starting to tighten and more maybe capacity coming in with openings of big mills. There is no doubt that this is pointing towards that price is going up, and they might continue to do so even a bit further.The only thing we can do in this stage is that we need to focus very hard on the items we control. We have to do extremely well on our cost curves and drive our efficiency program as good and as hard as we can. But having said that, there is -- I mean, you cannot fully save yourself -- this pricing will be key. And that is something we have done and we will need to continue to do more. It's not easy, I can tell you because part of our competitive set is surely in Europe, you can say where a lot of the same players will experience the same cost pressure as we see. But of course, we have also big players in other region of the world, and you do not necessarily see the same situation as we do right now in Nordic.So depending a bit on where our categories sit and where we have the exposure to, we are pretty well placed, I can say, with our portfolio, but this is something that will be an absolute instrumental priority going forward and for the coming quarters.

[Cole Hathorn, analyst]

And then maybe just a follow-up on Andrei mentioned the logistics contract being renegotiated in the savings. Is that part of your kind of annual efficiency program? Or is that something kind of over and above that, that we should think about?

[Ivar Vatne, executive]

No, that's Cole -- that's above that. So this is just a renegotiation of a contract and I mean, that is largely tied to the market prices we see for the price.

[Operator]

And the next question is coming from Martin Melbye from ABG.

[Martin Melbye, analyst]

Can we just finish off on the pricing impact in Q2, please? I think it dropped off before you concluded. What was the net price increase in Europe quarter-over-quarter?

[Ivar Vatne, executive]

So if we look at and summarize all the pricing impact that I talked about and I went through the categories. Just to remind and ensure that we have it properly communicated. So within second craft, we have announced price increases from 1st of April. We find that we will manage to get through price increases in the region of 4%, but not entire effect will hit us or impact us positively in quarter 2. We expect for quarter 2 a 3% increase. For paperboard, we expect to increase prices with 6% on average. And there, we expect the Q2 impact to be in the region of 3%. Liquid packaging board is unchanged, and we expect pulp prices to increase also in Region Europe in the region of 12%, 13%.So all in all, if we summarize everything, we would expect the price increase in the region of 2.5% for Region Europe, including pulp.

[Martin Melbye, analyst]

And when you say this is offsetting the input costs, are you then also including the salary? Or is that on top of this calculation?

[Ivar Vatne, executive]

No, that's on top.

[Operator]

And the next question is coming from Oskar Lindstrom from Danske Bank.

[Oskar Lindström, analyst]

A couple of different questions from me. The first one is coming back to this wood pricing issue. And you've touched on it briefly, but perhaps you could say a little bit more on how are your wood costs developing relative to those of your competitors? I mean essentially, is your cash cost position or your position on the cost curve, is that changing? And what does it look like in the various segments? So again, not necessarily sort of exactly now, but more on a structural basis. You mentioned a little bit about some competitors being more impacted than others. So where are you on this on balance? That's my first question.

[Ivar Vatne, executive]

And I mean, I think it's difficult to give a very credible answer on how the other peers are doing here. But I can say that in general, no, our structural situation has not changed in any way. As you know, I think in Europe, we have just north of 10 million cubic that we consume every year where in the area of 80% of that is soft and 20% is hard. Most of the softwood, we are sourcing from a different long-term relationship in Sweden. But clearly, we are using now tactically other neighboring countries as good as it can. And you're probably also aware that on the hardwood, it's a combination of what we can find here in Sweden and also in the Baltics.I think just the situation though is another thing that goes for pretty much all of the players is that hey, supply is really, really tight. And then production is starting to come back now, it just puts pressure to securing this in a pretty good manner. I think it's also fair to say that distance and long freight is always the #1 enemy to secure a cost competitive fiber and that's what we're always trying to do. So it's a little bit of a war. Of course, it is at this stage. It's tight and people scrambling to get to the volume. We have a long and good history by being the biggest Nordic player of purchasing pulpwood. So of course, we have a long list of contacts and partners to rely on. But no doubt that we see now the whole market has gone into a different gear from the beginning of '24.

[Oskar Lindström, analyst]

My second question is what type of impact do you expect from the recently announced M&A in the Continental European packaging sector?

[Ivar Vatne, executive]

Yes, it's a good question. I mean, I can say that -- it's not something that causes also a tremendous amount of headache from our point of view. I think we have usually, you can say, a non-overlapping portfolio and also in the region of U.S., we have a very different footprint right now. Clearly, we see that there is still a trend now of, call it, mergers happening in the industry. And I'm not sure if it's been the last we've seen. But I think from our side, when we assess what exposure we have other selling to these customers and also are overlap. We are not, in particular, worried from what we've seen so far.

[Oskar Lindström, analyst]

And then my final question, I'm going to try it, though I know you might not answer here. But that's on the U.S. transformation project. I understood you recently visited the U.S., and you mentioned sort of speaking to your suppliers. What factors, if it's possible to break down, are you mainly sort of looking to revise it? Is it sort of only the cost or also the scope and sort of orientation of the project? How much of an open -- are you open to change in this project?

[Ivar Vatne, executive]

No, but I don't think I can say much new, but I can repeat in many ways what we said from Q2 onwards. Listen, everything is on the table. I think all options are there. I think we said at the time that we look for alternatives and alternatives in this case, typically means scope. It also means phasing and time. And that's what we've been, in many ways, focusing over the last couple of quarters. And I think it's only creativity that is the limit then of what we would be looking at. But having said that, we are continuously impressed. I think we mentioned this already a couple of times during the call of the regions, the competitiveness of those 2 mills and what results they've been able to produce. So you can certainly say that this is a region that we have been going very fond of, and we see the region as a very strong part of the DNA and also the future Billerud.So I know that this is, in many ways, not exactly all of the answers you hope for. But hey, we are continuing to explore creativity just the limiting factor. It takes time because if you want to go quite deep into this, it will involve a bit of heavy lifting together with the suppliers to get to the level of details you're comfortable with. But having said all of this, we are getting quite close to be able to share something. And trust me, we will be doing so as soon as we have something to say, but that's not today.

[Operator]

Now we would just like to apologize for the technical issue we had earlier on, which meant that Linus Larsson was cut short [Operator Instructions] We've got a question now from Cole Hathorn from Jefferies.

[Cole Hathorn, analyst]

Just 2 clarifications. You mentioned board prices rising in Europe. I just wanted to clarify that is containerboard rather than any of the boxboard grades or are you out with kind of a cartonboard or boxboard price hike? And then I don't know if I had to kind of rephrase this question, but managing the wood costs going forward. I just want to make sure that I've got the actions that you're taking in place. One is pricing actions and mix. The other is kind of supply of the wood and making sure the best performance there.On the supply of the wood, I'm wondering if as we go into summer and sawmills start to increase, will we get kind of lower cost to you from kind of wood chips, et cetera? Will there be any benefit from kind of the sawmill industry improving? And then the last one is on the operational mill performance, which you called out as very important. How are you managing that? Are you thinking about any changes in how you operate your mills, cutting products, running more products so that you've got less changeovers or potentially thinking about reducing some volumes that you're running on certain mills or certain machines to manage utilization to keep the profitability higher? I'm just wondering how you're thinking that on the mill side.

[Andrei Kres, executive]

Cole, let me start by just clarifying on pricing. And I can confirm, so the increases within the paperboard segment are primarily within the containerboard grades and not within the cartonboard. And then I hand it over to Ivar for the other two question.

[Ivar Vatne, executive]

Yes. Let me just start with the third one on this operational mill performance. I think everything you say is on the table. I mean, I think the short answer is that is we have different mills in Nordic, and we've taken steps over the years to improve the performance and particularly looking at OE, what kind of efficiency we can get out. [ But we ] want to do more. And I think our ambition is still that we have more room to grow. And I think it's a combination. It's a little bit different by mill, but we just need to continue to work this. It's kind of debottlenecking where we see that this is where we struggle to get a full output of the mill. And really, will that fit necessarily just in the board machine or the paper machine, it could be on the recovery side or can be in a [ yard ] or it could be even on other places, for instance, like the warehouse.So we just continue to assess and push ourselves onto this. But no doubt, and I think this is one lever that we will definitely play if you find that this can meaningfully improve our performance. And that is what offering will we have on the table, what kind of mix can be offered. But I think also more importantly, from the board mill, and we said this for some time, but that still is one of the biggest priorities we have. How can we use the board cluster better and the split those, the board portfolio where the machines are best equipped to run? And we've taken big steps since we started KM7 back in the summer of 2019 and we continue to trim this more and more. But that is just a continuous evaluation we need to do, and we've done pretty well, and we want to do great and that's why we believe still that there's a good opportunity here.And the second question, just remind me again, Cole exactly on the wood supply.

[Cole Hathorn, analyst]

On the wood supply, I mean, I know you're kind of working with suppliers, you're looking to reduce the cost. I'm just wondering if thinking about wood chips from sawmills, you might get a bit of cost relief offsetting the higher pulpwood prices just because as the industry kind of ramps up production in sawmills, do you get more wood chips and your kind of total wood costs to Billerud come down a bit. I'm just wondering if that might be a theme over the time or?

[Ivar Vatne, executive]

And I think the question is it can, and hopefully, it is. We know that construction, in particular, in this region is still suffering to put it mildly. It's not wonderful line of sight. But there's also some seasonality in here. And I can tell you, wood chips from the sawmills is at a very welcome supply in this situation are. I wouldn't expect short-term at least that to completely tip this in a very different direction. But yes, it might start to help us a bit as overall industry going towards the summer.

[Operator]

Thank you very much for your question. At this stage, there's no more questions in the queue. So I would like to hand you over to your host, Lena Schattauer.

[Lena Schattauer, executive]

Chata. Yes, we will thereby conclude this conference. So thank you all for participating, and welcome back the 19th of July when we report the second quarter results. Bye-bye.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.