Billerud AB (publ)

STO:BILL

Earnings Call Transcript 2023-Q1

[Christoph Michalski, executive]

[Technical Difficulty] So 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 today, there is nothing which stops me to think that we will be up and running again in the beginning of May.Good. Let me move forward to the results then. So we had continued strong net sales growth. It was 6% organic and 55% reported, which from a top line perspective, I think, is a relatively good result.Ladies and gentlemen, apparently, we have a technical problem. So excuse me for a few minutes. Thank you. [Technical Difficulty]I apologize, ladies and gentlemen, I think we had a technical issue that people on the webcast could not hear. So I have to start again and I would like to welcome you from the webcast again. I'm sorry for those on the phone to have to listen to me twice.Before I go into the details of the quarterly results, I would like to give you a brief update on our blastomycosis outbreak at the Escanaba mill. As you probably already know, on April 14, we have idled the mill out of precaution. Blastomycosis is an illness which is transmitted by spores coming from a very rare fungi in North America, limited to few areas. It's a very rare infection and therefore, our knowledge is very limited and we are basically basing all our efforts on the advice of the health authority, be it the CDC, or be it the federal, or state, or local health authorities. We have decided to idle the mill in order to do major cleaning work to exclude all possibilities of fungus presence in our air conditioning and ventilation systems. We have idled the mill or we will idle the mill for three weeks, during which we have a major cleaning effort going on. We have currently about 100 subcontractors specialized in ventilation systems in the mill and currently we are working in line with our program and there is nothing, which tells me today that we would not be able to start up early May. The financial impact for us is between SEK100 million and SEK150 million. And as we continue the work, we are making sure that everything is being done to make the mill safe and to continue to have good operating hygiene at the mill.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 curtailment of about 117,000 tonnes. 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 P&L. 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 liquid 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 have some mix effect when we have this type of soft demand. So in some of the categories like paper, for instance, if we have a lack of demand or curtailment in paper, we would produce more pulp and that's what we have done and that has clearly mix 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 optimal as possible.If you go to 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 US didn't counter-balance the negative effect of the mix 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 SEK628 million EBITDA, but the overall effect is only SEK574 million, which is the negative mix effect from Europe. And then you see the dramatic SEK1.3 billion additional cost of raw materials and logistics, including wood and chemicals, which basically is lowering the results quite significantly. We have also identified all the effects of our profit enhancement program, which was around SEK100 million for the quarter. So we're very pleased by that starting progress and we had in others, it is mainly lack of fixed cost covering and salary increases in corporate projects which add up to about SEK200 million. So, at the end, if you take out the maintenance schedules, quarter one result is at SEK1.484 billion and you see the overall bridge how these results comes to be.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 afraid 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 is clearly 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 slightly different 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 in particular catalogs and direct mail and these type of products and they have been slowed down 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 half of the year. While food and drink is mainly European exposure and we have basically seen a relative slowdown or at least the 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 change 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 basically consumption of 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 for 2024.Having said that, I will now hand over to Ivar. Good morning, Ivar. And if you would like to talk a little bit about the movement of input prices and our expectation to those going forward.

[Ivar Vatne, executive]

Thank you, Christoph, and good morning, everyone.So couple of words on the input costs, always a topic of high interest. We have seen another quarter where incremental cost inflation has hit our P&L, 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 bit of decline last couple of months or net-net flat for North America. For Europe, the situation is a bit different. We've added roughly SEK65 million of incremental cost and again, that is quarter-over-quarter, so Q1 over Q4. Clearly, most of this is coming from higher fiber costs, roughly SEK130 million. We also had another smaller hurt on chemicals which is minus SEK10 million. And then going the other way and helping us, we've had SEK60 million help from energy and roughly SEK15 million coming from logistics.Going into Q2, we do expect to start seeing some help from input cost, first and foremost in Europe. So if you start with Europe, we expect in the area of SEK125 million of help coming into Q2 and that means it's Q2 versus Q1. Most of this is expected to come from chemicals, estimated to be SEK100 million, followed by energy SEK50 million due to spot prices are now on lower level versus what we've seen in the past. We do expect a small hurt from fiber costs while logistics should stay roughly flat. Just couple more words on the logistic. 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 going to help us into Q3. And that contract is worth SEK350 million, so it's a pretty big deal. But again, it will start to help us from Q3 and onwards.For US, let me comment quickly on that. For Q2, we do expect some hurt on fiber, around SEK30 million. Again, we should be fully offset by estimated lower energy US also in Q2 should be flat versus Q1.Right. So let's move on over two product areas and we start with the paper. 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. And excluding pulp, some comments on pricing, it added SEK40 million of incremental pricing. So that is versus Q4, as speciality helped, partly then offset the other way by declining pricing on both sack and kraft paper. Okay. Graphic is holding up pretty stable. Pulp is clearly moving these days which shouldn't be a big surprise and the pulp pricing impact was more than SEK110 million. So net-net, for paper, including pulp, we look at minus 17 pricing versus than Q4. However, the big event for paper this quarter has been the very slow demand and we have seen continued customer destocking, in general order books coming down as market uncertainty is high. Christoph mentioned this, but this has caused most of our paper machines to taking downtime during the quarter, in total 78,000 tons, that level of curtailment we've never seen before.We were able to hold up the paper profitability in a good manner as input cost inflation in North America has 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 sack profitability and in particular, the brown sack 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 area and that is product area board, net sales growth close to double digit. Clearly, that's also helped by currencies, organically we recorded 5% versus 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 help as revised pricing position has come into play from January and onwards. While we have hold-up pretty well for cartonboard, the big change in terms of the negative pricing for board has been on containerboard, where we've seen quite heavy price pressure, but again, 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 are trying also to keep a close eyes on our inventory levels. 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. So we move on and some words about cash flow. Cash flow performance has been a challenge this quarter. In essence, the working capital movement is significant and causes us to land on a negative cash conversion. 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 had slightly higher maybe than you would expect on inventory levels, but it 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 versus what it 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-off 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 we are happy with and it's a clear priority for us for the rest of the year, so from Q2 to Q4 to move back into solid conversion figures and land 2023 in an acceptable manner.Balance sheet is still strong and way below the target. Couple of words on the last bullet points there on the CapEx guidance. We do lower the CapEx guidance for 2023 by SEK200 million, so new estimate is SEK2.9 billion. SEK2 billion of that coming from base CapEx across the regions. SEK900 million related to our ongoing project of the new recovery boilers in [Technical Difficulty].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 is 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 streams. I'm happy really to see the enormous engagement energy that we have now behind the program, throughout the full organization. A multiple initiative is now in motion making detailed descriptions, all the different initiatives and what we're trying to achieve linking them to specific KPIs.Q1, we recorded SEK95 million of program impact. And with that, we are well on track to deliver the SEK400 million net target we've set to be delivered in 2023. As well, we are looking more and more into more program pipeline for the coming years as it certainly is a three years 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 illustrated these initiatives are different from our previous cost and efficiency program, where this program in particular focus more 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.

[Christoph Michalski, executive]

Thank you, Ivar. So let me talk a little bit about the priorities for the rest of 2023.What Ivar already mentioned is clearly we have to work on our enhancement program, that is basically the only thing which is in our control compared to the sales and market dynamics. We will continue to have selective curtailment in order to manage our stock levels in a good way. This will lead again unfortunately to under-recovered fixed cost, but it's a far better way of managing our cash flow going forward than to continue production for stock. We will continue tight control on cash flow. And I think an important point here is, we will continue to scrutinize base CapEx in the sense that we have already taken the decision now to lower the CapEx by about SEK200 million and we basically turn every stone to see if there are further savings, which can be done this year. What we will not do is to basically impact the CapEx on our strategic project, in particular Frovi, which is delivering incredibly well. We will probably be online a few months earlier than we originally planned and the project is well managed in budget and on time, despite all the challenges we had during the COVID period and logistics issue and cement issues that have touched us.Norway is continuing in the feasibility phase and we expect late quarter three, beginning quarter four as the final CapEx decision. Just for you to mind you, this is about our BCTMP pulp mills that we are developing together with Viken Skog. And finally, the biggest project in our stable, the US transformation is also going through all the different project phases in order of preparation. Just as a reminder, it's basically project which looks at converting a paper machine into cartonboard machine to install BCTMP pulp mill and basically upgrades the mill to make it future proof when it comes to all the sustainability performance in North America.Very good. When we look at the outlook, quarter two, I wish I could give you a more positive view, but I think today we are very realistic that we will have continued weak market conditions and that basically is slowing the destocking of our customer and brand owners, but we hope then in certain segments, we will see a little bit better performance in the second half of the year. We will have lower volumes on the back of production curtailments, probably in line of what we had in quarter one. And the cost inflation is expected to ease, but it will ease slowly because all the cost reductions that we're seeing, which we are negotiating as we go forward will only go into our P&L a few months later.And then finally, I think with that weak demand, for the moment, prices have been under pressure, but still have held up reasonably well. I think in quarter two, we will see some more pressures and in certain categories some decreases in prices, which again will put pressure on our profitability as we go forward. I think none of this is particularly structural, it's more market issue. And therefore, I think with improving market conditions, our profitability will recover fast. And in the meanwhile, we basically will focus our efforts on our enhancement program when it comes to efficiencies and profitability and we will continue to focus on cash flow.Good. With that, I finish the presentation for this quarter one and I'm looking forward to your questions. In order to make it simple for us as well, I would like to ask you to ask only one or two questions at a time, so that we can give you a proper response. And Ivar and I are ready to go.Operator, could you please take over?

[Operator]

Of course. Thank you. This is the conference operator and we will now begin the question-and-answer session. [Operator Instructions] The first question is from Linus Larsson with SEB.

[Linus Larsson, analyst]

Starting with North America, which has become a pretty significant part of your profit pool, it's actually bigger than the board division currently, and I think EBITDA margin was something like 19% in the quarter. And you talk generally about potentially lower prices in the second quarter. Does that hold for the US as well?

[Christoph Michalski, executive]

Why don't I try to give a little bit perspective on pricing going into next quarter, maybe actually to both Europe and the US at the same time. I think it's absolutely a bit sketchy at the moment in terms of what we see on pricing. For the time being, we are pretty, let's call it, confident that we are able to hold pricing in US, Q2 over Q1. So we do not expect to see a significant item there. There might be some smaller mix impact, but in general, for now, we are pretty neutral of what we expect to see. I think, for Europe, it's certainly starting to look more challenging and we do expect to see further price drops now, both on containerboard, cartonboard, and sack and kraft. So we have a rough estimate between 3% and 3.5% of material sales important for the company. So you can use that SEK10 billion of net sales as a good proxy for what material net sales is and that 3.5% is then solely estimated to come from Europe in the quarter two over Q1.

[Linus Larsson, analyst]

And just continuing on North America, you're saying this that this start in the second quarter at Escanaba may have an impact of approximately SEK100 million to SEK150 million. I just would like to get this right, because you did take -- presumably, this is mainly production related and you did take downtime already in the first quarter. So just to get this like-for-like, what's the incremental burden that you're expecting at Escanaba Q2 on Q1?

[Christoph Michalski, executive]

So if you look at the Escanaba mill, what we have done is, we have pushed as much as we could production into Quinnesec. We also had planned some downtime in Escanaba. And basically both factors in itself will make the stock of three weeks have a relatively little impact, as we said SEK100 million to SEK150 million, of which I think half is more or less the market effect of things that we cannot deliver, there's certain products we can only produce in Escanaba. And the second half is basically cost of subcontractors and third parties and whatever you have in order to do this massive cleaning operation in the mill.

[Ivar Vatne, executive]

And maybe I can just add Linus. I can confirm that number is incremental number that you should use Q2 over Q1. As Christoph said, it's a mix between the incremental downtime and it's the estimated third-party cost that we expect to see.

[Linus Larsson, analyst]

Okay. That wasn't clear when I read it, but that's very helpful. And then continuing on North America, I mean, at this stage, are you, as management, aware of any claims directed towards Billerud in light of this blastomycosis outbreak that we've seen?

[Christoph Michalski, executive]

For the moment, we haven't received any claims, but as we are talking to the North American environment, I think we would probably expect some to come. I think this is an illness, which basically you recover -- in the best case scenario, recover very quickly without any side effects of what we understand today and therefore, we expect the claims to be relatively limited.

[Linus Larsson, analyst]

Okay. And just finally, with regards to these health concerns, what makes you confident that you will be able to start-up the mill in the beginning of May?

[Christoph Michalski, executive]

Look, it's very simple. When we got to know about the first cases, we had a very, very significant search with all the health authorities and industrial hygienists about the causality. In the beginning, we didn't even know that there would be a concentration at the mill. We couldn't find any source of this particular fungus in the mill and basically all the analysis are ongoing. We are following basically the recommendations. So we started in the middle of March, end of March already some cleaning operations in the mill. And basically then we realized, in order to do a proper old mill cleanup, we need to get people out of the mill during the cleaning operations. And as soon as this was clear, we basically took the decision to idle the mill out of precaution to do the cleaning job, but we don't know how people got infected. We just know that all those cases of proven or suspicious cases, that these people have been at the mill. So that is why we are pretty confident that with the help of all these experts that we have engaged, we will do the cleaning process. That is very well planned now. And in three weeks that will be done. And also, we have already today -- basically, the case numbers were very, very high in the middle of March. They already have come down. So our expectation is that we will start-up the mill and we will maybe not even ever know where the fungus came from.

[Operator]

The next question is from Robin Santavirta with Carnegie.

[Robin Santavirta, analyst]

I have a question related to the pulpwood cost and availability situation in Sweden and in the Nordics. How do you expect pulpwood cost and availability to develop now going forward in Sweden and the Baltics? It seems you guide for a smaller increase in pulpwood cost in Q2 Q-on-Q. How does that stack-up with Sweden and Baltics? Any difference there? And do you expect sort of further increases down the road? I saw [indiscernible] increasing again. Will that impact you.

[Christoph Michalski, executive]

I think there are two aspects to this question. The first is market dynamics. So clearly after the closure of the Russian border, the market took some time and there were even some availability issues in order to rebalance between Finland, Sweden, Norway, and the Baltics. What we see today is that we do not have any specific availability issues, but overall the prices of pulpwood have gone up in Sweden on a very progressive way and in Baltics, there was a huge peak and we see already prices coming down from the peak. Okay. So that's the market situation.For us, clearly, the situation is specific to our buying structure. So we still buy pulpwood from Baltics and prices are coming down and we are shifting within our different sources of wood, Baltic and Sweden, et cetera, but then also channels like forest owners, private forest owners, and forest companies and therefore, we expect hardwood to basically be more or less at the peak and for us basically stable and then probably coming down a little bit in the second half, but to marginal extent.

[Robin Santavirta, analyst]

Then the second question I have is related to your North American business. It seems demand is actually quite weak at the moment, but still profitability holding up surprisingly well. I guess, Ivar was commenting that Q2 performance when it comes to pricing would be essentially unchanged at very high levels. How do you see sort of the second half of the year related to pricing? What are the dynamics? I mean, if demand is weak, input costs are probably not coming up, rather down. Why are prices not coming down? Is this something we should expect for the latter half of the year?

[Christoph Michalski, executive]

Okay. I think, let me split few of those dynamics. I think the number one dynamic in the US is that probably you cannot compare price movements five, six, seven years ago to today. There are far less players in the market. You have much less mills and therefore, I think there is a much better price discipline in the market, because basically there is only a limited availability once basically demand starts again. And therefore, I think prices are holding even with basically lower demand.When it comes to the demand, I think we see some clearly signs in the US economy that things are what they are, but are not getting worse and potentially might even get better and that will definitely then have an impact on advertisers in the US to continue to basically restart the communication. As you know, the general effect that printed advertising with digital advertising together has proven a winning concept for most advertisers. And therefore, I think we see some positive structural sign and the usage of paper, be it direct mail or catalogs and things like that. And last but not least, we are also in categories which are basically printing of school books and things like that. These things will not go away et cetera.So we see basically once the stock levels is through in our customers, then we basically see demand basically normalizing again, because we have true flow. I think what we may be underestimated earlier on is the speed at which that stock would disappear. So initially we hoped in quarter two, we would have already some positive effects and I think now we are seeing this probably moving more into the end of the summer. But generally speaking, I think we are confident that the US business will motor well and this was more like in Europe a bump in the overall track. And I think overall, we are very, very well placed to exploit the opportunities, both in Europe and in the US.

[Operator]

The next question is from Johannes Grunselius with DNB.

[Johannes Grunselius, analyst]

Thanks for your comment about pricing in the Q2. That's very helpful. Just to clarify, Ivar, did you mention it was SEK125 million in total tailwind from mainly chemicals? Was that right?

[Ivar Vatne, executive]

No, it was a little bit more balanced than that. But the number is right, the SEK125 million, that's kind of what we expected, where the big chunk should be chemicals SEK100 million. We expect in the area of SEK50 million coming from energy and then we will have at least an estimated hurt of SEK25 million for the fiber.

[Johannes Grunselius, analyst]

Then, my question is that, it sounded that the easing of the cost inflation or the lower cost, it's only partly impacting Q2 because of delays in the P&L. I mean, how should one think about cost easing in Q3 versus Q2 here? Is it like a similar tailwind in the third quarter would you say, what you see now?

[Ivar Vatne, executive]

Yeah. I mean, we are a little bit more careful of guiding that far since the visibility starts to be lower, but I can certainly say that if you think about, it was also Robin alluding to, there is still a little bit movement on the negative side on the fiber. So we probably have a little bit further tail of some of the latest price announcement on the pulpwood here in Nordic, but everything else equal, at least when they see now the spot rates, let's call it, during Q1 continuing forward, we would expect chemicals and energy to help us. And we, as also mentioned, have another significant logistics help kicking in from Q3. So everything else equal, we at least should have the same level Q3 versus Q2. But again, this is where it starts to be a little bit more difficult to give good guidance.

[Johannes Grunselius, analyst]

And I was also curious if you could sort of share your thoughts on where the market is right now for the board division. I mean, the food and beverages markets in Europe, where do you see sort of markets year-over-year because of the sort of in terms of destocking behavior.

[Christoph Michalski, executive]

So on the cartonboard business, clearly there are many, many categories, so to say. So let's start. Liquid packaging board, it's very stable. I think there's overseas growth, but in the developed market it's stable. So that's very good. When you look at things like fluting, our focus has generally been in the production of citrus fruits and things like that in the south of Europe. And you have probably heard that we had a relatively dry harvest and therefore under-production on products like lemons and avocados and whatever you have. Therefore, we expect that people still have quite some stock and that will carry over the whole year. So we think that this business will not recover very fast.When it comes to other containerboard products, we see some weakness there and that will basically only significantly recover once the economy in Europe is recovering in a good way. And cartonboard, it's really accounts by accounts, we see shifts here and there. And it depends a little bit on our customers and their exposure to different food types and product types in the market. But as we always said, very much the economic activity is the key driver for consumption here. And as long as people are struggling with inflation and higher energy costs and mortgage costs and whatever you have, I think that is the key driver for the slowdown of consumption and that we hope will ease-up a little bit later in the year.

[Johannes Grunselius, analyst]

Yeah. I have also a final question and that is, if you can help me about your sort of where you are in terms of your nominal capacity or so. I mean, your shipments in the board division is slightly less than 500. Where would you say your capacity is at, because there has been quite a lot of changes, obviously in the company over the past year?

[Christoph Michalski, executive]

You want to take that, Ivar.

[Ivar Vatne, executive]

Yeah. Maybe I can actually give a little bit on the total number. And I might not actually have the split for you, Johannes. But I can say that, in general, when we were in the area of 950,000 tons for this quarter in terms of sales volume, if we are going full blast for, let's call it, all the mills and you say that the market is strong across both regions, we should be about 100,000 tons higher than that. So that gives you some indication. And if you just do a little bit of a pro rata of that, you will probably come to around two-third of that or 60% so on should be in paper. So that just gives you a bit of an indication that, yeah, it is soft at the moment and hopefully, we will get to see a little bit higher utilization rate when we come into the second half of '23.

[Operator]

The next question is from Martin Melbye with ABG.

[Martin Melbye, analyst]

So we've covered price and cost. Regarding volume, you've given the Escanaba effect, but you also say that lower volumes will be a topic for Q2. Is that a continued negative compared to what we already had in Q1 in terms of EBIT?

[Ivar Vatne, executive]

Yeah. This is a good question, Martin. Let me try to answer this. I think we know that Q1 was softer. I just explained also to Johan this that they are quite far from where we believe the technical capacity could be. I think in many ways a quite neutral in the sense of we don't expect much better in Q2 versus Q1. The only thing you probably could add as another negative is the Escanaba event. It's in the area of additional 15,000 to 20,000 ton that probably we get as an impact of that. As you know, we also have the Skarblacka and Gruvon maintenance stops coming in and that usually also has some implication on the volume. That's anyway -- that volume impact baked into this estimate of 330 that we have provided. But this is where it starts to get a bit challenging this time because now given we have quite lower than 100% utilization, we also have a bit of inventory to lean on. But summing it up, I would say that, hey, Q1 was challenging. We probably don't expect much more and maybe do a correction for the extra downtime in Escanaba, 15,000 to 20,000 tons, probably a reasonable estimate of what Q2 will be.

[Martin Melbye, analyst]

Right. And then, what was the key reason for the higher working capital and what do you see on energy cost in '23 versus '22? I think you've guided on that earlier.

[Ivar Vatne, executive]

Yeah. Let's start with the cash flow item. I think there is quite big improvements, but I can try to take them kind of one by one. The receivables, that actually we had some help from that, so lower receivables related to the electricity hedges came in a bit down, so that's SEK400 million. Inventory, not a major difference. If I'm honest, there's a little bit of hurt. That was mainly due to the inventory revaluation input. But to be honest, the finished goods inventory was actually not much changed at all. And the biggest piece that -- that's more than SEK1 billion is coming from the payables. And I think I mentioned it quickly, but it is a combination of some one-off items that we had in the quarter. We had some bonus payment, for instance, in US that is a bit of a new item that we have with a different timing. There is certain timing impact just around the New Year there, that played a part. And in general, we just have low work activities now because of managing inventory and lower activities, so let's call it purchasing of raw material and input factors have come down quite a bit. So those are the big items that is to explain and as also mentioned, we have a very clear ambition and motivation to improve this from Q3 and onwards.And I think, can you just repeat the question, Martin, on the energy again? What was it?

[Martin Melbye, analyst]

I think you have guided on energy costs earlier because it's -- given hedges, et cetera. What do you see now in '23 versus '22 on energy costs for the full year?

[Ivar Vatne, executive]

Yeah. No, so I think if you start with Europe only, I think the electricity cost we landed on for the year was EUR52 per megawatt and again, that's a combination then of very high spot and some hedges. The latest estimate we have now for '23 is around EUR59 per megawatt. And everything else equal, if you just use the roughly 2 terawatt that we tend to purchase in Europe, that should be in the area of SEK140 million, SEK150 million year-over-year. And EUR59 per megawatt, it's combination of the spot rate now around EUR80 that we at least for this calculation assumed will stay flat rest of the year and we have hedged 67% of the consumption in Europe and we have hedged at pretty good level, EUR38 per megawatt. So hopefully that's some help along the way.

[Operator]

The next question is from Joffrey Bellicha Meller with Bank of America Securities.

[Joffrey Meller, analyst]

I have two quick questions on costs. The first one is, could you remind us what is the cost of your efficiency program over the year? I'm just trying to understand what will be the net benefits of the program in the bridge.And then the second question I have is, in the report, you mention that you had a negative effect from sales from inventories on your fixed cost position in Q1. Do you expect this to reverse in the second quarter and will you be able to give us an impact this could have?

[Christoph Michalski, executive]

You take it, please.

[Ivar Vatne, executive]

Yeah. Now I just need to maybe actually start with the second one. I think the answer is, no, we probably don't expect that to reverse in Q2. I think maybe more in the second half will be more helpful. But I think for the first one or [Technical Difficulty]I think the first question is around the efficiency program. And as I said, I think SEK95 million is recorded in Q1 versus year ago. And the net effect we said for the full year is SEK400 million. So you can say that we are good on track for delivering this. Clearly in the conditions we are in, we will do everything we can to potentially also accelerate the delivery on that. But for the time being, the target is SEK400 million and we want to really get solid and good building blocks for that. Difficult to say much about the sequence of those quarters, but probably for the prudency for this purpose, I would just assume a flat split between the quarters for that SEK400 million along the year.

[Joffrey Meller, analyst]

Can I just follow up with one quick question on Escanaba. Is there any impact from what is currently going on, on the conversion project?

[Ivar Vatne, executive]

No, not at all. So the conversion project, basically development of the project is continuing and the Escanaba situation right now is only impacting short-term production in the next three weeks.

[Operator]

The next question is from Oskar Lindstrom with Danske Bank.

[Oskar Lindström, analyst]

Couple of questions. First off, are you feeling any -- you talked a little bit earlier about the fiber situation and I wanted to focus a little bit more on Northern Sweden and your Karlsborg mill where we have both [indiscernible] mill starting up later this year across the border in Finland. And we've also heard from [indiscernible] that they will sharply reduce their harvesting levels up in Northern Sweden. Is this something that's putting pressure on sourcing fiber for your cost per mill? That's my first question.

[Christoph Michalski, executive]

Okay. Let me take that and then you can ask your second question. Yes, clearly, I think wood supply on a very micro level in the north of Sweden will be more stressed by the startup of [Kemi] and also by the reduction of harvesting. So we have our mitigating program in place and that basically is looking for additional private forest holders' harvest and purchases, but also we realize this is -- I mean, the challenge is for all players in the north. And then it's a question how far the wood has to be transported in order to fill that gap. As you know Karlsborg is a very profitable mill for us and I think we are in a very good position to mitigate the increased cost, because I do not think it will result into an availability issue.

[Oskar Lindström, analyst]

Right. And my second question is on CapEx. I mean, you say the CapEx reduction of SEK200 million for this year is not going to impact your strategic projects, which I understand most likely wouldn't have CapEx expenses until next year really. However, could the weaker market outlook that we're seeing now have any impact on your strategic investment decisions?

[Christoph Michalski, executive]

Not really, because we are currently working on the projects basically, as you rightly said, there is only limited CapEx in 2023 and then significant more CapEx in the years to come, once we have decided on the timing and the size of the conversion and Norway, et cetera. I think like most things in time, you also know that we can move CapEx. We have maintenance CapEx, we can move around a little bit. We can delay projects kind of smaller improvement projects and things like that and we will discuss at the time when we are ready what is the timing of the big strategic CapEx is. But there is no effect on the projects today as you mentioned, because we don't spend too much CapEx on these strategic projects.

[Oskar Lindström, analyst]

Just a quick question to Ivar, I guess. What was the electricity consumption figure you mentioned for Europe specifically? Was it 2 terawatts?

[Ivar Vatne, executive]

Yeah. So you can say the overall consumption is in the area of 3.2 terawatt, we make around 1.2 in our mills and then we purchase or buy in estimate of 2 terawatt on a yearly basis.

[Oskar Lindström, analyst]

And this is in Europe?

[Ivar Vatne, executive]

Yes, correct.

[Christoph Michalski, executive]

So I think we arrive at the end of the time, but we will continue for a little bit as we lost time in the beginning. So I think we have maybe two or more -- we will take one or two more questions I think and then we close the call in about five minutes.

[Operator]

Okay. The next question is from Cole Hathorn with Jefferies.

[Cole Hathorn, analyst]

Just some commentary on the wider sack market, what you're seeing there firstly, from a demand perspective and splitting it between your kind of bleach grades where you've got a good strong market position and then the wider sack market where I believe you sell more into the export space?

[Ivar Vatne, executive]

Yeah. Always good to talk a bit on second kraft, Cole. Listen, I think, in general, you can say that if you go into the consumer side of second kraft and talking about MG in particular, it has hold up pretty well in Q1, maybe relatively to some of the other channels. Clearly, in the nature of consumer also going into foodservices, they tend to be a bit more stable there the pattern we see. So you can say that we have had, let's call it, relatively well held up on different MF and MG grades in particular in Europe. It starts to be quite more challenging as Christoph alluded to on the sack market. We're very happy still with the profit that we generated in Q1, but it's clear sign now that there is increased price pressure and we expect actually quite a bit of a net sales per ton drop on both white sack and also then on brown sack in Q2 versus Q1 and we're talking then probably more than 10%. And I think it's a combination of the construction sector is just in general very challenged at the moment, not only in Europe. And again, also some of the industry other applications that we will see, including paper et cetera is also very challenged at the moment. So we have much less positive probably on the sack market Q2 versus Q1 versus what we saw on our Q1 versus Q4.

[Operator]

The next question is from Jesper Mothander with Dagens Industri.

[Jesper Mothander, analyst]

Two quick questions on Escanaba. The first one is, did the fact that blastomycosis exists in the vicinity come up during the due diligence process when you purchased Verso?And the second question is, the fact that you were informed by local healthcare authorities already on February 3, I think, that the typical pneumonia cases among workers were suspected of blastomycosis, cleaning the mill for future operations is one thing, protecting workers is another. So can you please take us through the over a month long process leading up to the decision to idle the mill on April 13?

[Christoph Michalski, executive]

Okay. So let's talk about the due diligence. I mean, blastomycosis is such a rare illness that clearly this came not up as an issue during the due diligence. I think there are very few cases across the United States as far as I know and it happens on a very irregular and sporadic perspective that people actually get hurt from blastomycosis. When it comes to the -- it's an illness as far as I understand that has to be reported by the hospitals to the health authority, which they do. And we heard about the first case being notified on March 3. And basically after that, us not being the expert of this very rare disease, we followed all the recommendation of the public health authorities, be it the CDC, which you probably know as one of the big organization in the US, the Center of Disease Control and Prevention and we have worked very extensively with the health and safety -- health authorities, be it state or be it federal and local in order to understand what we need to put in place. The knowledge on this illness is relatively little. People know a lot about fungus, but not a lot about this particular one, because it's so rare. And we have basically followed all the recommendation leading into basically some cleanups, some analysis of air, et cetera. And after all these activities, we haven't still found anything unusual in the mill.Basically we then discussed around early February what else could be done, we basically decided to idle the mill. We made a cleaning program together with the health authority of what kind of cleaning was required and what kind of specific air conditioning reviews and checks should be done. And because it was so extensive, we needed to close the mill in order to get people out of the different areas where this cleaning took place.Today, we have now 100 and something sub-contractor in the mill, as I said before, and they are running through very systematic program. And therefore, I'm pretty confident that we can start up the mill after these three weeks, which basically, I think we have two weeks left and the startup timing is basically planned for May 8. I think our biggest challenge is that no one knows where the fungus is. We don't know if it was an event, we don't know if people brought it from the outside. The only thing we know is that the number of people inside -- they have all been inside the mill have been affected by this fungi.

[Jesper Mothander, analyst]

I'm sorry for my error. I said February 3 when I meant March 3 while asking the question. Please allow me to correct myself.

[Christoph Michalski, executive]

No worries. Okay. I think that ends our Q&A for the quarter one presentation. Thank you for your attention and I'm looking forward to talk to you all in July for the second quarter. And until then, bye-bye.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.