Billerud kicks off the Nordic forestry earnings season with a sluggish performance as expected

Translation: Original comment published in Finnish on 1/25/2024 at 9:09 am EET.

Billerud, the Swedish competitor of Stora Enso and Metsä Board, published its Q4 report this morning. Overall, we think that Billerud's Q4 report was bearable given the difficult market conditions, and the report indicates that the bottom of the earnings cycle seems to be behind us, as expected. However, market conditions in the forest sector are not showing any rapid and drastic signs of normalization, which keeps uncertainty high about the major earnings improvement expectations that we believe are loaded into forest stocks in the Nordic packaging sector.

End-year figures below consensus forecasts

In Q4, Billerud's revenue decreased by 20% to 9,566 MSEK and adjusted EBITDA fell by 63% to 774 MSEK in a difficult market environment (excl. the stable liquid packaging board segment) affected by weak demand (incl. sluggish consumption and falling inventories) and price pressure. Billerud, which reports by geography, saw similar figures in both Europe and North America, despite some differences in the product mix. The Bloomberg consensus was missed by 3% on revenue and 6% on adjusted EBITDA, while the consensus on the company's own website was beaten by about 5% on adjusted EBITDA. Given the somewhat mixed consensus expectations, we interpret the operational performance in Q4 as being broadly in line with market expectations. On the bottom line, the forecast miss was accentuated due to small one-off expenses and the impairment of biological assets (i.e. forest) of 164 MSEK recorded in an associated company. Billerud will cut its dividend by 73% to SEK 2 per share after a weak performance in 2023.

The worst seems to be over, but drivers for a big and fast earnings improvement are missing

As per usual, Billerud did not provide clear guidance for the full year 2024 or for Q1. However, Billerud said it expects the demand environment to recover from a slightly weak level in Q1. Based on the comments, demand is supported by the end of the inventory overhaul and Q1 is generally better than the rest of the year, also seasonally in the packaging businesses. On the other hand, the company said that the underlying demand (i.e. consumption) for its products is likely to come under pressure in certain product segments due to the weak economic situation. Overall, we believe that Billerud's comments on demand were well expected from Stora Enso's and Metsä Board's perspective. On the pricing front, Billerud said that prices for liquid packaging board will increase, which will at least cover the continuing price pressure on all other products. This comment was also somewhat in line with expectations. Contract cycles for liquid packaging board are typically long, so Billerud's price increase may not directly affect Stora Enso's liquid packaging board prices in the short term (Metsä Board does not produce liquid packaging board). On the cost front, Billerud reported a somewhat surprising cost increase in Q1, and also pointed to structurally higher cost levels in Europe.

As far as Finnish peers are concerned, we found Billerud's comments to be largely neutral in relation to our own expectations. As expected, the worst seems to be over for the forest sector, but at least for the first part of the year the market situation is far from good. Thus, the pace of the significant earnings improvement expected for Stora Enso and Metsä Board this year remains very unclear and the forecast risks remain high. Furthermore, we do not believe that the start of the sector's Q4 earnings season will have a significant upward impact on the near-term consensus forecasts for Stora Enso and Metsä Board. Billerud's negative comments on cost development also need to be chewed over, although we have already tried to prepare for rising unit cost levels in our forecasts for Stora Enso and Metsä Board (incl. the structurally tightened timber market, especially in Finland, but also in other Nordic countries).