Billerud Ab (Sweden)

Good morning, everyone, and thank you for your interest in Billerud, and welcome to our first quarter 2023 earnings call. So with us today, we have Kristof Michalski, President and CEO, and Ivar Vastne, CFO. They will hold the presentation, and after that, they will take questions from the participants on the call. So by that, let me hand over to our CEO, Kristof.

Yes, thank you, Lena. Good morning, everyone, and welcome to update for the quarter one, 2023. Before I go into the core of the result, I would like to give you a short update on our Escanaba mill. As you probably know, on the 14th of April, we have idled the mill in due precaution of basically a fungus outbreak we had at the mill. It is a very rare infection that you find in selected areas in North America. And we have been in very close contact with the CDC of the United States, plus all the different health departments, be it federal, be it state, or be it local. We have decided to idle the mild out of precaution. We have not been able to find any traces of the fungus in the mill or in its clothing. And because this is such a rare infection, we have relatively little prior knowledge to this fungus infection. What we are doing today is basically cleaning the whole mill, in particular all the air conditionings, et cetera. We have about 100 contractor, outside contractor on site. doing this job. And for the moment, everything is in line with our restart up. As we said, we would be idle for three weeks. Clearly, this will impact a little bit the quarter two results. This is not a quarter one issue. It's a quarter two issue. And currently, we foresee a financial impact around 100 to 150 million Swedish pounds. That is basically the update I can give you today. The situation is moving quite fast as we go through the cleaning and discussion with the expert. But from our perspective, there's nothing which stops me to think that we will be up and running again in the beginning of May. Good, let me move into the quarterly results. Clearly, we had relatively good top line growth, as you can see, 6% organic, 55% reported with the acquisition of Verso in the United States. But demand has been exceedingly slow, I would argue, very soft. We had containment of about 117,000 tons. At the same time, We are reaching the peak or are still in a very high input cost regime. In particular, wood cost is up dramatically about close to 50% from last year, and chemicals is also a very significant cost driver in our. Price pressure in some categories. We have clearly carried over some price effect from last year into this year. And as I mentioned before, we had some increases in look at packaging board in particular. But I think what we have seen is that the cost increases have been significantly higher than the price effect of quarter one. We also effects when we have these type of soft demand. So in some of the categories like paper, for instance, we would, if we have a lack of demand or containment in paper, we would produce more pulp. And that's what we have done. And that has clearly mixed effect. And also within the categories, there might have been some more selling of lower added value products in order to run the mills as possible. If you go to our first slide, First, the next slide, which shows you the sales growth, you can see that we had a reasonable currency and pricing effect. And, however, when it comes in volume and mix, the addition of the U.S. didn't counterbalance the negative effect of the mixed effect in Europe. But, nevertheless, we had, as I said, a good 6% organic growth in the quarter. When we go and look at EBITDA, the situation is clearly much more dramatic. And here you can see the waterfall of our EBITDA, positive currency effect, positive pricing effect, excluding pulp. Then you have a very good volume effect from North America of $628 million. But the overall effect is only 574, which is a mixed effect from Europe. And then you see the dramatic 1.3 billion additional cost of raw materials and logistics, including pulp and wood, sorry, including wood and chemicals, which basically is lowering the result quite significantly. identified all the effect of our profit enhancement program, which was around 100 mil a quarter. So very pleased by that starting progress. And we had in others, it is mainly lack of fixed costs covering and salary increases in corporate projects, which add up to about 200. So at the end, if we take out the maintenance schedules Quarter one result is at 1.484 and you see the overall bridge how these results comes to. If I move to the next slide, which is more about our market condition, clearly that is what is currently driving the results. So I think it has been commented many, many times now before in the whole industry. We have basically a double effect of very high stocks. which were created at the end of the pandemic with the logistic challenges and things like that, where people, in order not to get material, basically ordered a little bit too much. This stock is now in our customers and their customers, brand owners, et cetera. And with the economic situation present, the consumption of these materials in stock is somehow slower as what we expected even still in quarter four or in January when we had our discussion then. So basically the strongest effect in industrial where our exposure to the cement industry and in particular sack paper has slowed down dramatically. And this probably will last on. You all know the situation that the building industry is facing now. But I think overall, we can argue also in the consumer luxury food and drinks and the printing and publishing, we have the same situation with slight drivers. When it comes to printing and publishing, we are clearly exposed to a lot of the marketing spend in North America when it comes to graphic paper and particular catalogs. and direct mail and these type of products. And there have been a slowdown a little bit in this consumption. But there is, I would say, a relatively good hope and perspective that this could recover a little bit more in the second year. While food and drink is mainly a European exposure, and we have basically seen a relative slowdown or at least a consumer downtrading, which also resulted in lower consumption of our type of premium packaging materials. I think what we see going forward is still not much in quarter two when it comes to the market dynamics. And we expect things to recover slowly in the second half. And the initial recovering is the basically consumption of the stocks that are currently in our customers and brand owners. And then when it comes to the economic development, we have to see what is happening in the second half of the year and what is the outlook also 2024. Having said that, I will now hand over to Eva. Good morning, Eva. if you would like to talk a little bit about the movement of input prices and our expectation to those going forward.

Thank you, Christoph. And good morning, everyone. So a couple of words on the input cost, always a topic of high interest. We have seen another quarter where incremental cost inflation , but also for this quarter, there are big differences between the regions. For North America, We've seen a flat cost picture when comparing versus quarter four, so that will be Q1 over Q4. There has been some hurt on chemicals, but this is offset through lower energy prices, and in particular, natural gas, which has taken a bit of decline last couple of months, so net-net-flat for North America. The situation is a bit different. We've added roughly 65 million sec of incremental costs, and again, that is then quarter over quarter, so Q1 over Q4. Clearly, most of this is coming from higher fiber cost, that's roughly 130 million. We also had another smaller hurt on chemicals, which is minus 10. And then going the other way and helping us, we've had 60 million help from energy, and roughly 50 million coming from leaks. Going into Q2, we do expect to start seeing some help from input cost, first and foremost, in Europe. So if we start with Europe, we expect in the area of 125 million of help coming into Q2, and that means it's Q2 versus Q1. Most of this expected to come from chemicals, estimated to be 100 million. followed by energy 50 million due prices are now on lower level versus what we've seen in the past. We do expect a small hurt from fiber cost while logistics should stay roughly flat. Just a couple more words on the logistics. We do have a new logistics on the overseas freight starting to help us from May. That will yield significant savings going forward, but that actually is not gonna help us before we enter Q3. And that contract is worth 300 yen, so it's a pretty big deal. But again, it will start to help us from Q3 onwards. For US, let me comment quickly on that. For Q2, we do expect some hurt on fiber in the area on 30 million. Again, we should be fully offset by estimated lower energy. So US also in Q2 should be flat versus Q1. Right, so let's move on over to product areas. And the product area paper had a pretty decent quarter given the tough market conditions we have been facing. Organic net sales of 13% when the North America and currency is excluded. I'm excluding pulp, some comments on pricing. It added 40 million sec of incremental pricing. So that is versus... Q4, as speciality helped, partly then offset the other way by declining pricing on both SAC and CRAV paper. Okay, the graphic is holding off, pretty stable. Pulp is really moving these days, which shouldn't be a big surprise, and the pulp pricing impact was more than 110 million SEC. So net-net for paper, including pulp, we look at minus 17 pricing versus then Q4. However, the big event for paper, this has been the very slow demand, and we have seen that continued customer destocking in general or the books coming down as market uncertainty is high. Christophe mentioned this, but this has caused some of most of our paper machines to take in downtime during the quarter in total 78,000 ton. That level of curtailment we've never seen before. We were able to hold off the paper profitability in a good manner. I think put cost inflation in North have been much more modest versus what we see in Europe. Having said that, our paper margin in Europe is still impressive and holding up really well, spearheaded by the SAC profitability, and particularly the Brown SAC has been doing well. But we were hit in the quarter then by this curtailment and the fixed cost on the recovery. If you move into the next and that is product area. Board, net sales goes to double digit. Clearly that's also helped by currencies organically. We recorded 5% versus a year ago. Most of that is coming through the pricing carryover positions. And also for this quarter, we see top line growth coming across pretty much all the categories. In terms of pricing, overall board came in flat when compared to previous quarter. As Christoph also mentioned, for liquid packaging, we've had health as revised pricing position today from January and onwards, while we have hold of it pretty well for cardboard. The big change in terms of the negative pricing for board has been on container board, where we've seen quite heavy price pressure. But again, total-total for board, flat versus Q4. In terms of the production volume, it's pretty much the same story as we explained for paper. Demand is soft for most categories, and we try also to keep a close eye on our inventory level. So we've taken significant downtime in several machines. So 39,000 ton is the number that we've had for product area board. And again, this is also some kind of unprecedented level that we have seen this quarter. Profitability is a challenge for product area board, clearly linked to also board being exposed to Europe's quite unique and extreme cost inflation level. If there is also some piece of good news, we had some production challenges in Q4, as I think some of you remember, we have had none of those in Q1. So at least from the stability point of view, it's been very, very solid. Good. We move on and some words about cash flow. The cash flow performance has been a challenge this quarter. In essence, the working capital movement is significant. This is also to land on a negative cash conversion. A couple of factors playing in on the working capital. I mean, the receivables is actually doing very well. We don't have any big movements to talk about. We are slightly higher maybe than you would expect on the inventory levels, but we also came actually down quite a bit on the inventory level in Q1. So we don't think we have a massive issue on overall finished goods inventory, what will be. The big drop has also been on the payables and comparing that to the balance end of 2022. Part of that is due to one of items. Part of that is due to some timing. And there's also been in general a much lower purchasing pattern with lower than expected production schedule and no maintenance shutdowns in the quarter, et cetera. But I'm the first to admit that the Q1 cash flow conversions is not something with, and it's a clear priority for us for the rest of the year. So for Q2 to Q4 to move back into solid conversion figures and land 2023 in an acceptable manner. Balance sheet still strong and way below the target. Couple of words on the last bullet points there on the CapEx guidance. So we do lower the CapEx guidance for 2023 by 200 million. So new estimate is 2.9 billion set, 2 billion of that coming from base CapEx . 900 million related to our ongoing project of the new recovery . Right, so next slide, please. I want to talk a little bit about our profit enhancement program that we launched some months ago. And I think we have now a good quarter under our belt with some highlights to talk about. I mean, there's no doubt that this is one of the most important company priorities for 2023. And we used the last couple of months now to really mobilize and organize the relative project screens. I'm happy really to see the enormous engagement energy that we have now behind the program throughout the full organization. The multiple initiative owners now in motion making detailed descriptions of all the different initiatives and what we're trying to achieve, linking them to specific KPIs. Q1, we recorded 95 million of program impact that we're well on track to deliver the 400 million net target. It's set to be delivered in 2023. As well, we're looking more and more into more program pipeline for the coming years, as this certainly is a three-year program, and we aim to see steady progress for the next quarters. Yeah, just at the bottom of the slide, you can see some of the highlights and examples for Q1 and how they illustrate that these initiatives are different from our previous cost and efficiency program, where this program in particular focused on functional collaboration to fulfill more of the potential that we know we can find in this company. So with that, I hand it back to Christoph. Thank you, Ivo.