Billerud Ab (Sweden)

Thank you very much for joining us today. I would like to start by saying thank you to all of you who participated in this webinar. I would like to start by saying thank you to all of you who participated in this webinar. It's 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 the rest of the world. The situation has also improved slightly during the quarter. and food and beverages and that means for us mostly liquid packaging board that has performed surprisingly well during the first six months of 26 and has reached normal conditions. And also within the industrial channel where our exposure mostly found within the sack 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 American 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 EBTA 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 EBTA increased with 4 percentage points versus Q1. 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 Thank you very much. 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 Quinnisec 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 B-annual maintenance shutdown at Quinnisec was slightly more expensive and had approximately 50 million higher cost impact, which was related to some startup 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 three. And we expect a positive pricing impact of two 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 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 40 million for the region. For North America, we expect input costs to increase somewhat into quarter three. But here we are talking about quite small increases with a total negative impact of around 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, Arving Q2, was another solid performance with close to 100% conversion. Our balance sheet remains healthy and leverage ended at 2.2 after the dividend payout was executed during the quarter. Our CAPEX guidance remains unchanged for 26 and we are planning to invest 2.6 billion SEK. 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 selective 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.

Thank you. To ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. We will now go to our first question. One moment, please. And your first question today comes from the line of Johannes Grunzelius from SB1 Markets. Please go ahead.

Yes, hi everyone, 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 would be very helpful if you could sort of give us some indication on the magnitude there, please.

Yes, good morning, 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 1-2% compared to the second quarter. And for region North America, a pricing impact of 2-3% compared to the second quarter.

Okay, very helpful, thank you. 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, you know, 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?

Good morning, 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 we expect to continue now in Q3. We had some maintenance shots in Q2 in Quinnisec and we will have Escanaba now in Q3. So in that sense, you know, still going strong. The mixed 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 air 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 we might see some offsets 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.

Okay, that's great. Thank you.

Thank you. We will now go to the next question. And the next question today comes from the line of Linus Larsen from SEB. Please go ahead.

Thank you very much and good morning everyone. You talk 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?

Good morning, Linus. I can start with this. It's a good question, first and foremost. I think the honest answer here is that we continuously 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're pretty confident that we'll keep up at least into Q3. For container board, 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 billiard flute. Liner is a bit weaker but still it's holding up better than maybe we thought three months ago. So luxury and for us that means a lot of the exposure to carton board is still the weakest part that has been big 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 orbital capacity. We're doing better than others on brown. But on white carton and FDB, it's still a pretty muted and weak situation. And I think for paper, SAC now is clicking in quite nicely into gear, and we have more pull now on brown SAC than probably had for many quarters. And we certainly also sold out on that piece. And yeah, maybe somehow a bit of a surprise. We see that industrial channel has picked up. That's not only in Europe, but a lot of the regional exposure we have on brown sac is found in Middle East, North Africa, and also into Asia. That has been better than what we've seen for some time. White sac is a bit muted, but still better than maybe it was. Craft paper in this case, MG and MF, is still a little bit softer than we see on sac, but also a bit of an optic versus what we saw for the last two quarters. So I think, you know, if you sum it up, it's still not fully back to maybe the old, let's say sentiment that we had two to 3% category growth consistently, but it's certainly now a step in the right direction. And we are seeing, you know, for some time now 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. 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 shots 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 in the previous question, would be a bit more reduced, given the impact that we expect a bit bigger impact on the fixed cost of solutions as we would expect to Andrei Kres, Tor Lundqvist

And with regards to trade barriers, etc., 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, From here, do you see how is this Paris dynamic working out in your market segments in the US?

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 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 you know we have a great position you know we are one of the few remaining locally produced suppliers and I think our value proposition of you know 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 you do know and I'm repeating myself it is in secular decline And 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 a scale up or startup 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. You know, 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.

Great. Many thanks.

Thank you. Your next question today comes from the line of Cole Harthorn from Jefferies. Please go ahead.

Good morning. Thanks for taking my question. 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. And 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.

Hi, good morning, Colin. 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. 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 report 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, it 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. Maybe just following up on the volume commentary, I mean, the deliveries of 610,000, it is quite low compared to history. And I get it that the market's 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 right-size 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? Thank you.

No, I mean, I think it goes straight into the first point where, yeah, us and, you know, 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 recession to make solid financials. Yeah, we share the view that it is too much. You know capacity versus now what the market looks like and you know 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 yeah I can only say that although we see a bit of a you know step up into the right direction the fundamental challenge that we see now in sector is not going away anytime soon.

Just a follow-up to end it on more of a positive one, which is the order books better into Europe, into Q3. 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 container board, but I hadn't really seen anything in sack or speciality craft or folding cotton, so I'm just wondering if there is any restock or 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 we know, you know, going back to COVID, what happened and, you know, when the Middle East crisis happened, then, of course, the natural reaction is that we now see something similar. I think what we've seen, though, is, you know, 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 tend to be a good indication is we're coming with pricing that is starting to hit from the 1st of July. Thank you. Thank you.

As a reminder, if you would like to ask a question, please press star 1 and 1 on your telephone keypad. That is star 1 and 1 to ask a question. We will now go to our next question. And the next question comes from the line of, one moment, Martin Melway from ABG Sundal Collier. Please go ahead.

Yes, good morning. A question on pulp wood. At the start of the year, you gave a number of 900 million in cost benefits to you from a price decline. How much of wood costs dropped since then, and how much are you expecting now?

Yes, good morning, Martin. So I think if we look for the full year, and the 900 million was really based Andrei Vatne, Doug Schwartz

And that is still what you see? There's no further decline from the 100?

No, not at this point.

Okay. And then the second question, you have announced 68% on Sackcraft and Coated Fine. Have they gone through? And does that mean that there's more price increases for Q4? Or has that happened in Q2?

In terms of the price increase, the announced price increases were communicated both during quarter one and quarter two. They have gone through, so they are being implemented. As you know, there is a variation between how much we get through within the different regions and areas. But those are now fully in the guidance that we provided in terms of price increases of 1-2% for the region into Q3.

Okay, good. And last question on volumes. You give this comment that volumes will be better, that the fixed cost absorption will be lower. Does that mean that you produce more in this quarter?

Yes, we did.

Okay, thank you.

Thank you. We will now take the next question. And the question comes from the line of Oskar Lindström from Danske Bank. Please go ahead.

Good morning. Two questions left from my side. One is on the chemicals cost, which you're now saying is going up, and obviously that's related to the higher energy prices. My question is, you know, how... How quick is that energy impact into chemicals? And if we see energy prices come down sort of now, you know, let's say in the coming months, would that quickly translate into lower chemicals prices as well for let's say Q4 and into next year? So that's the first question. And then the second question is, I mean, you're describing an overall market situation which seems to have fairly quickly improved with good order books also in Europe and fairly good, it seems, demand in export markets. Do you believe there's further room for price increases even without any structural actions in the industry? So those were my two questions.

Yes, good morning, Oskar. I will start with the question on chemicals. So in terms of the inventory turnaround to just start with, it is somewhat faster than we have for our fiber inventory. So it goes quite quickly. So it's mostly really dependent on the contract structure and how often we renegotiate the contracts for the chemicals. But I would say that as a guidance, it would probably be a quarter ahead that we would see the price impact on chemicals to come through the P&L.

Good morning, Oskar. I can take the second. Yes, it's a good question. It's tough to give a very good answer on this, but I'll give it a shot. I mean, we need to come at this from slightly different angles, but one angle is if you think about, at least within Europe, what is driving a lot of the pricing push on the virgin fiber, and it tends to be within the recycled who's starting this, you can call it, circle. And there is also, in some sense, a bit of an unhealthy balance on recycle days, a bit too much capacity that we also see there that tend to be a bit more strained on the ability to price up. But much more for the recycle players than what we see here up in Nordic with integrated pulp mills is that they're very depending on the energy costs The million dollar question is what's going to happen with that going forward? Clearly, you know, it's lower now over the summer, but when you go into the fall, if they will stay and we will see oil prices and gas pricing being elevated and maybe even going a bit further, I think the likelihood is that we will see another wave is high. Not something necessarily that we are counting on and clearly we will obviously seize any opportunity we have, but that could very easily happen. It can also happen the other way if we start to see that there is more stability and those are coming into more historical levels. You might very fast expect to see some mechanism that goes the other way. It's probably the best answer I have for you right now.

Great. I think that's a great answer. Thank you. Those were my questions.

Thank you. Your next question is from Cole Harthorn from Jefferies. Please go ahead.

Good morning. Thanks for taking the follow-up. I'd just like to ask on the European Commission issue. Putting in some protectionist measures from the likes of Sheen and some of the Chinese products that are coming across cheaply on the internet, on the e-commerce platforms. And I'm just wondering, do you have a view? Do you think that this will be supportive to the European packaging industry? And is this supportive to Billerud ultimately? Does this mean that we're going to have a little bit more goods and supply chains using the European packaging papers? Thank you.

So I can take that one. I mean, as a starting point, I think we are in very favor of free trade or a pretty open trade relations. That's what we've seen for a lot of decades, and that's been good for us. I guess what we see now when we're starting to see a trend which is starting to be more regionalized in North America with what they've done over the last Let's call it, you know quarters and years It's starting to be a big issue since a lot of the installed capacity in Europe and Nordic was Calibrated for that and you know when we also then play on the other premise that you know Asian players are ramping up and they have ramped up a lot of the capacity And we will start to meet more intense competition also in Europe I think we just want to make sure that we are meeting that on on fair and Thank you very much. A pretty sizable export into Asia from our Nordic mills and you know clearly we expect that to continue and then you also have to accept that you know there's a window coming the other way around but as long as it does on terms which is fair and comparable and not necessarily subsidies and the support on the line that makes Europe an anti-dumping scene we are okay with this and I trust now that EU starts to wake up to reality and and notice that hey the world has changed and you know we also need to look after our region and make sure that you know we get access to the same competitive fair terms and that will be our position that we will pursue and support.

Maybe just following up there just to understand how Billerud might benefit I mean if we if we take the view that the e-commerce platforms set up let's say European based fulfillment or repackaging hubs you know that should ultimately help Thank you for joining us.

Thank you. And our next question is also a follow-up.

from the line of Lena Slaassen from SEB. Please go ahead.

Thanks for taking my follow-up. Coming back to wood costs, you're guiding in Europe for net cost tailwind of 40 million in the third compared to the second quarter. How much is wood cost tailwind? And also, sometimes we've talked about the inventory impact from revaluation In this context, is any such revaluation included in guidance or is that on top and if so, how much? Thank you.

Hi Lena. Pulpwood stands for most of that sequential cost decline of 40 million that we expect there is. We will have some minor increases on chemicals, as I talked about, but they will be offset by the lower electricity prices. So most of it is actually pulpwood. I think in terms of inventory revaluation, obviously we are coming in a stage where quarter and quarter, Thanks for that clarification. Thank you. There are currently no further questions. I will hand the call back to Lena.

Thank you. That concludes our presentation of the second quarter report and we wish you welcome back in October for our third quarter report. Thanks for joining us today and goodbye.

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