BillerudKorsnäs AB (publ)

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

Thank you, Lena, and good morning, everyone. 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 ongoing 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 ton 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 the idle mill assets of Wisconsin Rapids. 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 struggled with during 2023 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. bit more detailed on the specific channel. So food and drink is probably the best performing channel. Liquid packaging board is now at normalized levels. And we also see some encourage recovery signs from container board and selected grades of MG paper. Within print and 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 carton board. And there is no doubt that consumption is impacted by lower disposable income for most households, especially within some of the prestige segments that builders operate within. Craft paper doing a bit better, particularly linked to econ and reusable carry bags. 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 André.

Thank you, Ivar, and good morning, everyone. Thank you. Let's start with net sales development. 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 one 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 have only minor mix effect. had a positive impact on top line and more or less offset the negative impact from volume. Sequentially versus quarter four, the sales were up by 9% on the back of stronger sales volumes. Next slide, please. Moving over to EBTA 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 pulpwoods in region Europe were down versus a year ago. Now, negative impact of almost 50 million within other is mainly related to unfavorable effect from stock revaluation between quarter one this year and quarter one last year. But that was offset by lower fixed costs we had in quarter one this year. Now, heading forward, just a reminder, as we head into quarter two, we have our annual salary adjustments, which will be slightly above three percent and that will have a negative impact in quarter two versus quarter one of 60 to 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 also six percent higher sales volumes the result was also positively impacted by less maintenance in quarter one 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 one that i will get back to profitability declined versus previous year to 11 percent in EBITDA margin terms. And although we saw significant cost relief and efficiency improvements, the broadband-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 one this year. Now, looking into the cost development for the region. Next slide, please. As we expected, we saw broad-based input cost increase for the region during the quarter. Total input costs increased with approximately 200 million sequentially versus quarter four. which was about 100 million higher than we expected. Pulpwood prices, which I will talk more about when in short, had a negative quarter-on-quarter impact of 70 million, energy also 70 million, and logistics 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 large contract that is expected to decrease our costs by 160 million on annual basis. And we expect full impact of that contract in quarter three this year. Heading into the second quarter, we expect further input cost increases of approximately 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 mean the plant 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's 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 two. 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 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 percent 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 four as we saw our new contracts to roll in but that effect was entirely offset by lower input costs 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 for Input costs in North America had a positive impact of 40 million with marginal decline called in costs across all segments and And heading into quarter two, 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 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 sizeable working capital build up 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 two. Leverage increased to 1.9 times EBITDA, and that's driven by lower rolling 12-month profitability. And finally, for a reminder of 2024, we have unchanged CapEx guidance of 2.3 billion. And with that, I would like to hand it back to Ivar.

Thank you, André. And on to our efficiency program. now being in the second year since the launch, and we maintain our momentum we gathered during 2023 and added 200 million versus same period last year. And we are on track to deliver our target of 700 million additional profit for 24, although there's still a lot of hard work needed over the coming quarters to deliver our plans with excellence. 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, we have from this quarter starting to see the first meaningful saving impact from the FTE reduction program announced in the 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 idle Wisconsin Rapids mail. This deal should be completed any day now, and we would receive approximately 60 million SEC 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 6 million was the amount that hit our result, and we recorded this already in Q1. Although the mill assets will be divested, we maintain committed to continue our sheeting operations at Rapids with approximately 120 billiard employees. And we do expect to continue sheeting operations for both graphic paper and carton board 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 number one is the continued work of our strategic investment project. And US transformation is here the undisputed lead project. And we are continuing our efforts to explore the option. And yes, we are still in tight 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 Andre alluded to, We continue to be positively surprised by the North American region and how good performance our two upper Michigan mills are able to produce. The BCTMP project in Fulham 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 and to improve profitability. In particular, two items that will be of critical importance, better execution to strengthen the mill performance and securing cost-competitive wood 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 encouraging start of the year with market sentiment clearly improved during Q1. I expect this to continue into Q2. A 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 four planned stops estimated to north of 500 million sec. And with that, I hand it back to operator for Q&A.

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you'll need to press star 11 on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the queue. Thank you, and we're now going to take our first call. Our first question comes from the line of Linus Larsson from SEB. Your line is open. Please go ahead.

Thank you very much, and good morning to everyone. You talk 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 impact the price increases that you may be expecting.

Yeah. Good morning, Linus. Let me give you some color on the pricing environment. So I will split 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 crop 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 paper board, 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 two. 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.

We're taking the next call now from Cole Hathorn from Jefferies. Your line is open. Please go ahead.

Morning. Thanks for taking the question. I've got three on 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 would cost structurally higher, you call it out appropriately in your report, but you know, how are you managing, you know, the price versus that cost? You know, how are the negotiations going with your customers to ultimately say, you know, we need to price up for a certain margin for these products to manage profitability? And, you know, 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, you know, multiple increases that the industry as a whole needs to price? Thank you.

Hey, good morning, Cole. Good questions. Listen, if I start with the first one, I mean, I can openly say that, listen, this is a challenge. It's difficult. I think, you know, we all agree that 23 has been a year where we just had to wait out the de-stocking. And I think we now feel broad-based from all of our sales leads and the category teams that we bought them out and, you know, customers are starting to order again. And I can only say that, yes, have we 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 we had in Finland? Yeah, 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 this stage. And the reason I can say this is that, you know, from the overseas that we get over to the Asia, that some exposure we have that are still a main operation series 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 striking in the in Finland clearly has impacted a little bit. There's some categories that are overlapping from us and I think there's even some maybe extra volume going in on things like speciality to US. 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 this going forward. We are in tight 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, don't assess it to be significant, but more to follow. Listen, I think on the other question, which is also 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 we already know that, hey, the market in Norway is pretty tight. And you can say that this has probably been cushioned a bit for quite some quarters 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 supplies starting to tighten and more maybe capacity coming in with the openings of big mills, there is no doubt that this is pointing towards that the 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, you cannot fully save yourself the glory and 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 regions of the world, and you do not necessarily see the same situation as we do right now in Nordic. Depending a bit on where our categories sit and where we have the exposure to, we are pretty well placed, I can say, that our portfolio, that this is something that will be an absolute instrumental priority going forward and for the coming quarters.

Thank you. And then maybe just to follow up on, André mentioned the logistics contract being renegotiated and the savings there. 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?

No, 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 freight.

Thank you.

Okay. Thank you for your question. We're now going to move on to the next person in the queue. And the next question is coming from Martin Melby from ABG. Your line is open. Please go ahead.

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

So if we look at summarize all the pricing pricing impact that I talked about and I went through the categories just to 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 a price increases in the region of 4% but not entire effect will hit us or impact us positively in quarter two. We expect for quarter two a 3% increase. For paper board, 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. 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 two and a half percent for region europe including pulp excellent and when you say

This is offsetting the input cost. Are you then also including the salary, or is that on top of this calculation?

No, that's on top.

Thank you.

Okay, thank you very much for your question. We're now going to move on to the next question in the queue. And the next question is coming from Oscar Lindstrom from Danske Bank. Your line is open. Please go ahead.

Good morning. A couple of different questions for me. The first one is coming back to this wood pricing issue, and you've touched on it briefly, but perhaps you can 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, you know, 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.

Yeah. Hey, good morning. Oscar, 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 is 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 software we are sourcing from a different long-term relationship in Sweden. But clearly we are using now technically other neighboring countries as good as it can. And you probably also wear 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 hay 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 number one enemy to secure a close 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 of being the biggest Nordic player of purchasing output. 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 different gear from the beginning of 2014.

All right, thank you. My second question is, what type of impact do you expect from the recently announced M&A in the continental European packaging sector?

Yeah, it's a good question. I mean, I can say that It's not something that causes us 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 the US, we have a very different footprint right now. Clearly, we see that there's still a trend now of mergers happening in the industry. And I'm not sure it's been the last we've seen. But I think from our side, when we assess what exposure we have of the selling to these customers and also our overlap, we are not particularly worried from what we've seen so far.

All right, thanks. 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. You know, what factors, if it's possible to break down, are you mainly sort of looking to revise? Is it sort of only the cost or also the scope and sort of orientation of the project? You know, how much of an open, you know, are you open to change in this project?

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. think all options are there I think you know we said at the time that you know we look for alternatives and alternatives in this case typically means scope it also means facing and and time and and that's what we've been in many ways focusing over the of the last couple of quarters and I think it's only creativity that is the limit then of what what we you know we'll be looking at but you know having said that I We are continuously impressed. I think we mentioned this already a couple of times during the call of the regions, the competitiveness of these two mills and what results they've been able to produce. So you can certainly say that this is a region that we have been growing very fond of and we see the region as a very strong part of the DNA and also the future of billiards. You know, I know this is in many ways not exactly all of the answers you hope for, but hey, we are continuing to explore. Creativity is just, you know, the limiting factor. It takes time because, you know, if you want to go quite deep into this, you know, it will involve a bit of, you know, 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.

All right. Thank you. It was worth a try. All right. Those were my questions.

Thank you very much for your question. Now, we would just like to apologize for the technical issue we had earlier on, which meant that Linus Larsson was cut short. And as a reminder, I just want to remind everybody, if you want to ask a question, please press star 11 on your telephone keypad. At this point, there's, in fact, we've just got a question coming in here from Cole. Let me just have a look. Yes. Okay, standing by. We've got a question now from Cole Heffern from Jefferies. Please go ahead. Your line is open.

Thanks for taking a follow-up. Just two clarifications. You mentioned board prices rising in Europe. I just wanted to clarify that is container board rather than any of the box board grades, or are you out with kind of a carton board or box board price hike? And then I don't know how to kind of rephrase this question, but managing the wood costs going forward, I just want to make sure that I've got the the actions that you're taking in place. One is, you know, 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 saw mills 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 saw mill industry improving? And Then the last one is on the operational mill performance, which you call 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. Thank you.

Thank you, Carl. Let me start by just clarifying on pricing. And I can confirm, so the increases within the paperboard segment are primarily within the container board grades and not within the carton board. And then I hand it over to Ivar for...

Yeah, let me just start with the third one on this operational meal performance. I think everything you say is on the table. I mean, I think the short answer is that we have different meals 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, just kind of de-bottlenecking where we see that this is where we struggle to get a full output of the mill. And rarely will that sit necessarily just in the board machine or the paper machine. It could be on the recovery side, or it can be in the wood yard, or it could be even on other places, for instance, like the warehouse. just continue to assess and push ourselves onto this but no doubt and i think this this is one you know uh lever that we we will definitely play uh you know if you find that this can meaningfully improve our performance and that is what offering would we have on the table A mix can be offered. But I think also more importantly, from the board meal, and we've 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 split the board portfolio where the machines are best equipped to run? And, you know, we've taken big steps since we, you know, started CAM7 back in the summer of 2019. And, you know, 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. Now, and the second question. Just remind me again, Carl, exactly on the wood supply. Okay.

On the wood supply, I mean, I know you're kind of working with suppliers. You're looking to reduce it because 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, 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.

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 a wonderful line of sight, but there's also some seasonality in here. And I can tell you, wood chips from the swan mills is a very welcome supply. in this situation we 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. Thank you.

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, Lina Schatzauer.

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.