Billerud AB (publ)

STO:BILL

Earnings Call Transcript 2022-Q3

[Operator]

Good day, and thank you for stopping by. I will now hand over to Lena Schattauer, Director of Investor Relations.

[Lena Schattauer, executive]

Hello, and welcome to Billerud's conference call about our third quarter results 2022.

Today's presenter will be Christoph Michalski and Ivar Vatne, and they will hold the presentation, and after that we will have a Q&A session. So with this, I hand over to you, Christoph.

[Christoph Michalski, executive]

Thank you. Thank you, Lena. Good morning, everyone. So this is the first quarterly results that we're doing under the name of Billerud. And we changed the name in order to align ourselves with the international customer portfolio we have now, and we have very happy for the change of name into simplification that, that brings.

Secondly, before I start the presentation, I wanted to talk to you about the appointment of Ivar Vatne as Deputy CEO, which I'm very happy about this appointment. Now that our business becomes a little bit more geographically diverse, and we have a strong focus for developing that business, plus the internal improvements and long-term profit performance, we decided that it would be good to have a tandem to make this happen. And I think you all will agree with me that Ivar Vatne is an excellent candidate for this role, and I'm looking forward to work with you, Ivar, going forward.

Having said that, let me come to our quarter results. As we said in the title, we had an exceptionally good quarter. I think, if you look at our performance, 82% sales growth was clearly also coming from Verso, but nevertheless, it's still a 20% organic growth, which is clearly Excellent. Adjusted EBITDA at 19% is a very strong performance indeed as well. And I think this is really tribute to the work that the whole team did, by continuously price manage and mix manage as a cost -- input cost was going up. And I think we have -- since we started in quarter 3, 2021, we have basically achieved this improvement slightly in front of the wave. And I think -- as Ivar will talk to you about cost development, we think that we are still in a very good position going forward. But clearly, times are a little bit normalizing in quarter 4, and then probably in 2023.

If you look at our earnings per share, a record high at SEK 5.42, and excellent cash delivery with the -- more than 80% of EBITDA transformed into cash. Ivar will talk –-

[Audio Gap]

Let me go to the bridge on the next slide where you can see we had a bit of a currency rate effect of 7%, which is only the European and rest of world effect. It doesn't include the U.S. Pricing was 20% of the growth, 57% was North America, and there we don't have currency comparisons, so it's basically our business in North America as it stands to date. And then we have a little bit minus which comes from the Beetham divestment, which is marginal. But generally speaking, a very good performance, trying to mitigate all the cost.

And that you can also see then on the next slide with all-time high profit, quarter 3 2021, with a bit of currency effect and pricing, excluding pulp, North America. And then you see a big red block, which is basically our net of raw materials and logistics, and that also includes the balance of our pulp sales and buying activities.

Cost efficiency, it looks small. But generally speaking, I'm very happy how the company has continued to become more efficient and more cost conscious. And I just want to remind you, this program stops at the end of this year. And one of Ivar's key responsibility is to be -- set up a new program starting in 2023, which will not look just at cost savings, but which will look particularly at efficiency improvements in our European business going forward.

And then finally, you can see in this profit bridge, the maintenance schedule basically had an effect as well, and that brings you to 19% EBITDA for the quarter so far.

Good. I think all of you are very interested how we see the outlook. And I saw in some of your initial comments, you have already commented, excellent quarter, but what's happening next. And I think I just want to remind everyone that, I think we are in a very particular situation which is due to, a, the acquisition of Verso, which gives us a dual [ track ], so to say, or a second leg to stand on; and currently Europe and North America in terms of market dynamics and the categories in which we are in, are behaving quite differently. And then secondly, I think Billerud was always known for its strong portfolio, a lot into the food and drink and markets and consumer goods, which basically are far more stable segments than, say, the industrial or the consumer luxury areas.

So let me walk you through to the next slide and see how we felt this quarter and how do we see the future on those. So Food & Drink, I think we are all realizing that European is going into an economic downturn. Generally speaking, that means that consumers are not reducing consumption per se, but they're down trading. And all the products we sell in Food & Drink are generally speaking, the same market, and it's more a question, does it go more to brand owners, does it go more to retail brands, all these kind of things, but the materials they're using are basically similar or the same. And therefore, we see the Food & Drinks market relatively stable going forward, and it has already been stable.

When you then look at Printing & Publishing Papers, which is our graphic and specialty paper in the U.S., we actually saw a very positive quarter 3, and we do not see any significantly changes towards our positive outlook. So we called it stable in the future. And the reason -- there's a number of reasons for that. In specialty paper, we have a change in the supply side with the closure of [ Beetham ] mill. We see still strong demand in specialty paper and this market generally is growing at a positive rate, also historically, and there's no reason that this will not change.

When you look at the graphic paper markets, here we see actually a revival a little bit, and the revival comes mainly from the premium catalogs in which we are involved in. And there's a continuous downwards trend in the -- I would say, the mass market segments of this market. As we are focusing much more on the premium area, we actually saw a very positive trend this year, and we believe that this will also stay stable into 2023.

Clearly, with the contraction of the economy, we will see some effects on Consumer luxury, but in particular, also on the industrial segment. And here it's -- mainly the containerboard, as you can imagine, will probably be hit, and also the cartonboard side on the luxury side might also be subdued for a while. This is entirely normal, and we see both of these segments, Consumer luxury and Industrial, less positive than we saw previously. But it is -- as I said, I think overall, we're entering in a much more normalized situation.

Okay. I think with that, I would like to hand over to Ivar who will take you a little bit through cost in our different segments and this performance in North America, before coming back at the end with our key conclusions. Thank you. Ivar?

[Ivar Vatne, executive]

Thank you, Christoph, and good morning, everyone. A couple of words about the cost inflation. It's still very much a hot topic for '22. Definitely, situation starting to be a bit different, Europe versus U.S. We expect the cost inflation to accelerate going into Q3, and this is certainly also what we have experienced. In fact, the cost picture for the quarter is a bit higher versus what we estimated some months ago.

In total, we've seen around SEK 750 million of additional cost inflation in the quarter, and that is compared versus the previous quarter or Q2. The vast majority of that, or roughly 85% is coming in Europe. If you do a rough split of that SEK 750 million, we'll find it as follows: fiber or pulpwood, SEK 200 million, chemicals, SEK 100 million, energy cost, SEK 250 million, and logistics, SEK 200 million. Now, I did mention, this is a bit higher than what we expected to hit us in Q3. Good news is that we have been able to offset all of that through pricing and mix management.

When we look forward and some comments on what we expect in Q4 -- and I'll just do them box-by-box, starting with the fiber cost, we still see movement in the market, with several of our biggest suppliers announcing new price increases, and that's also what we've seen during the quarter. Clearly, this is still linked to the imbalance that was created kind of post the Russia import stop that Christoph mentioned some minutes ago. Pressure is still highest on hardwood, and we've seen that also over the last quarters. Availability on hardwood is still tight, but it's actually a bit better versus what we experienced during the summer months and in Q2. For softwood, availability is better, and we don't see necessarily the same price pressure. In U.S. though, the situation is different. We honestly see a slight increase in the fiber cost for the quarter, mainly linked to fuel cost in particular. We would expect in Q4 to add another SEK 150 million of additional fiber costs, pretty much all of that coming from Europe, and that should be considered Q4 over Q3.

For chemicals, maybe no surprise. Prices are heavily linked to what we see in the energy side. I think a lot of you know this already, the spot prices went extremely high on the part of the Q3 months. With the chemical contracts that we do have in place, we typically see kind of a 2 to 3 months lag. Until it hits our P&L, we would expect to see a SEK 180 million of additional cost. And again, most of this is linked to Europe, and that is again, Q4 versus Q3.

For energy, spot prices have also started to kind of come down, and we expect a much more neutral position for Q4. Still, we are very well covered with our strong energy hedges here in Europe. Also, natural gas in U.S. have come down after pretty heavy volatility over the summer months. And to sum it all up, we expect the flat energy cost situation in Q4 versus Q3.

For logistics, we also expect kind of flat price in Q4 versus Q3, and that is combined for Europe and for U.S. A lot of things happening on that side at the moment. The freight rates for container shipment is coming down, and we are trying to achieve these benefits by renegotiating and looking into different options, including the spot market capacity. But you can say that in general, we don't count on too much of that yet, given we did sign a lot of new overseas contracts, at least for Europe back in May. So pretty flat logistical situation.

So if you sum it all up, we expect around SEK 330 million of additional costs, pretty much all of that coming in Europe. And for this coming quarter, we do not expect to offset all of that through pricing. We estimate at this stage to add roughly 1 percentage point of additional pricing, and most of that is actually coming in North America.

So, next slide, please, and we go into some highlights for the different product areas, and we start with the product area Paper. Product area Paper had a great Q3, excellent performance across all of the measures. We see high double-digit growth in terms of net sales, pretty much across all categories and in both regions. This was also a very heavy maintenance quarter for product area paper, with stops at both of our North American mills. Maybe just a couple of words. We'll talk more about it in a second, about the Quinnesec mail. That was the biggest upgrade and investment upgrade that we did on that mill since it was started in mid-1980s. Happy to confirm that upgrade has been successfully completed.

Again, despite unusually high maintenance costs in the quarter, profitability is more than tripled, and margin is up versus a year ago. A combination of adding, obviously, the North American business, but very much linked to strong focus -- and continued strong focus on price and mix management, and delivery of our cost and efficiency program.

So next slide, please. And going into some highlights of product area Board. In many ways, you can say, it's similarities between the product areas. Definitely pleased also with the results that we've seen on board, double-digit net sales growth for most of the categories, and plus 18% when adjusting for currency. I just want to highlight, in particular, the great progress we've had on cartonboard. We doubled that business over less than 2 years, and this is extremely pleasing as it's very much in line with our strategy to accelerate growth here.

Profitability on a good level, reaching 20% margin. Very much the same argument, as I just mentioned, for paper progress down to a strong focus on price and mix management. And also here, we see some help from our cost and efficiency program.

If you move to the next slide, some comments on cash flow. It has been another outstanding cash flow delivery, which is extremely pleasing to see. Again, ability to convert our EBITDA to operating cash flow is on extremely strong ratio, and this will remain one of our top priorities for the coming quarters. Our net debt keeps coming down and is now just above SEK 5 billion. That's almost at last year's level, which is quite extraordinary given the big transactions we've been through over the last 12 months. Net debt ratio of 0.7x, and that is at all-time low in this company's history. And obviously, it's another milestone to be very proud of. And again, I just wanted to highlight the strong performance we've seen now on return on capital employed. You find that bottom of the chart. Made a massive leap over the last years and we're now to 17% in Q3.

In terms of the CapEx outlook, make a small adjustment for the outlook for '22. It's a slight increase in -- for the further recovery boiler. So taking the total position up to 3.4% for '22. Just want to highlight that increase in Frovi. That is only a timing impact. It's not an increase of the overall investment scope. And in fact, I can proudly say that we are well on track for that project, both in terms of completion on time and for budget. Added some coordinates now for 2023, where we -- at least for this time, we estimate SEK 3 billion. 800 million of that is for Frovi, and then we have SEK 2.2 million as a combined base CapEx for both regions.

If you want to move to the next slide, this is actually one of the most pleasing slides that I can present this time and say a couple of words about how extremely proud and pleased we are with the performance we've seen in North America since the start of the takeover. Both categories are performing strong, delivered excellent profitability. But I think, last but not least here, both are net cash flow positive to the group. No doubt, when we look at the current pace and performance, this acquisition payback will be much shorter than we expected.

I think just linked also to what Christoph was alluding to, that the business we have now over there in North America is a clear geographical diversification, offers a more balanced position for the company where we've been historically almost fully relying on what's going on in Europe and Asia.

We successfully completed the mill operating Quinnesec, which I mentioned. This will enable a higher pulp output. It should also improve the machines with the [ Q-41 ] renewability on heavier grades and improve the formation output. This has a profit upside tied to it, and we expect to see this coming in from the beginning of 2023. SEK 70 million to SEK 100 million is the estimate we expect on an annualized basis.

Just for the last point, we have several streams of integration efforts underway, pretty much across all of other company's functions. The progress has been good, well on track and where we wanted to be 2 quarters into the integration.

So with that, I'm handing it back to Christoph.

[Christoph Michalski, executive]

Thank you, Ivar. So prior to this quarter 4 and throughout 2023, no surprises here. We will continue to work on our strategic objectives, sales growth through continuous focus on sustainable packaging opportunities and innovation, and that includes clearly working on the transformation project in the U.S.A. That includes things like how can we improve our sustainability footprint, both in the U.S.A., but also with the project in Norway. And I think there's a number of activities that we are doing which will deliver a significant improvement in our operations, but also in our sustainability footprint going forward.

Clearly, in the more immediate term, we will continue to focus on mix and price management, and that will increase basically all segments and all type of contracts. As you know, we have long-term contracts with some of our customers. But in view of the pricing increase that we are coming, we will actually start to talk to these customers as well, as well as renewing more short-term contracts with relevant price increases, which balance the needs of our customers, but also the need of covering cost.

And then, as I said before, one of the key things that will happen this year is a real comprehensive and a holistic program to work through our value change and develop a new efficiency program in 2023, which will then follow up over a few years to make sure that our -- that we are world-class in the activities we are doing, and the operation -- both in efficiency from that perspective, capital management but also cost. I think I don't need to mention Frovi anymore. You said it already all Ivar. We will be ready for the start-up in '23. And with -- the project for now is totally in line with timing and costs.

And maybe one thing to add is -- or a point -- an additional point I want to make about the transformation is that, I think we have progressed very fast and very well in most of the key themes. We will audit that program -- that integration program in the first quarter of next year, and we'll try then, depending on the progress, which we think is very good, close it down as soon as we can. There will always be things that need to be managed in the longer term, but we will manage them as a day-to-day business as usual type projects as we do it with all the things we do in Europe as well.

Good. What's the outlook for quarter 4. As I said, I think still solid demand for all our key products, but the sentiment is clearly changing, as you can read everywhere in the press, in particular in Europe. While we foresee for the moment, at least in our market segments, a relative stability in the United States. Cost inflation in Europe clearly will continue a bit on wood and chemicals. Basically, a direct relation, both on energy prices. And the cost in the U.S. is much more flattish going forward. And then, focus, as I said, on price and mix management across all customers in order to balance these cost increases with prices.

Good. That concludes our presentation of the quarter 3 results. And I'm happy to hand over for questions.

[Operator]

[Operator Instructions] And your first question comes from the line of Christian Kopfer from Handelsbanken.

[Christian Kopfer, analyst]

Just I think maybe first one for Ivar. Thank you very much for the transparency here on the outlook for the fourth quarter. Can you also perhaps comment a little bit, what do you expect in the short term on volumes/mix?

[Ivar Vatne, executive]

Yes, I can try at least. I think we had clearly a bit of a lower volume into the quarter due to the extremely heavy maintenance stops. So in that sense, we certainly expect the volume to come back up into Q4, and you can say much more in line with what we saw in kind of the Q2 area. Obviously, that is, as you know, sitting already into the total maintenance cost that we offer.

I think on the mix side, you can say that we continue to look at mix on different dimensions. From a sales mix, clearly, we know that there are mix category opportunities when we drive the above-average profitability items and we look at that kind of channel-by-channel, we look at that by customer and customer. I think also on the mix on the input cost, we definitely look now given the hardwood situation extremely strained and high, that we continue to look into the recipes. We continue to look into how we can, in a smart manner, balance the mix between soft and hardwood to manage cost. I think those are some of the corners I can offer on that.

[Christian Kopfer, analyst]

And then, I guess, Christoph, you mentioned that you -- mentioned the transformation that -- in the U.S., but I'm a little bit surprised that I don't see any CapEx budget for the transformation in the U.S. for 2023. So is it fair to say that you are pushing it forward a little bit because today -- and you also mentioned the graphic paper markets to surprise you on the upside. So the strength is better there? So you maybe can push the transformation forward a bit or not?

[Christoph Michalski, executive]

No. I think as you know -- when you do these big industrial projects, you have to go through a couple of phases of analysis. I think when we did the acquisition case, we had a good concept which we costed out based on the experience we had on previous industrial projects in BillerudKorsnas at the time. I think now we are doing basically the hard work on the ground in the U.S. with the prefeasibility. Once we achieve the prefeasibility results, then we will go to our Board, and then we will decide what is the CapEx program necessary to perform on this project. And because we haven't done that yet, we haven't had the conclusion yet, we cannot enter any CapEx numbers, because at this stage, it's too early to tell. And as soon as we -- I think it's in -- plan is, around quarter 2, we will have much more visibility on that, and then we will brief you on that again.

Timing-wise, I don't think that we are working towards the delay. I think they wouldn't matter, but that's not our intention. But clearly, we also see that our suppliers might not be able to deliver projects at the same time horizon than they did historically. And therefore, we have to wait for the overall feasibility results in order to give you a much more specific view on that project. We are super excited by it, as you can imagine, because the opportunity in the U.S. is huge. And in the short term, the good performance of graphic paper and specialty paper is clearly making us not unhappy that basically we have very good business while we are preparing for this transformation.

[Operator]

And your next question comes from Johannes Grunselius from DNB.

[Johannes Grunselius, analyst]

I have -- my first question is on the Q4 outlook statement, and thank you very much for the transparency. Just to be clear, Ivar, you said, was it SEK 330 million as a headwind for cost, and then you were talking about 1% additional pricing. Should one look at sort of this to be applied on a SEK 10 billion quarterly basis? Or could you help me a bit there on how to look at the revenue side, please?

[Ivar Vatne, executive]

Yes. I think that's a good estimate. It's pretty much in the area of SEK 10 billion, so you can use that.

[Johannes Grunselius, analyst]

And is -- I suppose you are also forcing some tailwinds from mix here. Am I right? Or can you comment on that? I know this was partly discussed in the earlier question, but anyway.

[Ivar Vatne, executive]

You can say that we definitely try to do mix, as I mentioned to Christian, from different dimension, both on category from customer and probably also from the input. So that's why, in that sense, it's a bit more difficult to put the price tag on it. You can say that when we look over the last quarters what we have been able to do, we've had some tens of millions of profit held from mix every quarter, and I would certainly expect to also see that going into Q4.

[Johannes Grunselius, analyst]

Then my final question is on your second transformational growth projects, or strategic projects, the pulp in Norway. When do you think you can be more explicit about this project on what you have indicated so far in terms of size and some indicative CapEx. Is that still valid?

[Christoph Michalski, executive]

Well, I think it's significantly on the same levels on the transformation in the U.S. when it comes to timing. So we are working on the pre-feasibility as we speak. As you know, this will be a joint venture with Viken Skog. And here, clearly, we need to follow a very, very disciplined way of doing it. We have also decided that this will be an opportunity to create -- or at least our ambition is to create the first carbon-free pulp mill. And therefore, we are now looking in all these different aspects. And my expectation is that the project will be -- project information will be available quarter 2 and quarter 3, and then we'll brief you in more detail.

We are very, very excited by the fact that we have an opportunity to work with Norwegian industry and players around the project to actually making our carbon footprint very, very -- basically creating a carbon 0 mill. And I think, if that would mean that we have to lay the project by a quarter or 2, I would definitely go for that. This is not an issue of CapEx, but an issue of finding the right partners for carbon storage and carbon usage.

[Operator]

And your next question comes from the line of Oskar Lindstrom from Danske Bank.

[Oskar Lindström, analyst]

A couple of questions from my side. I wanted to start off on the -- what you mentioned there, or what I think you mentioned, Christoph, about revisiting prices in your Board segment. I mean we saw that the underlying profit here in the Board segment declined sequentially, or at least as far as I could determine. I mean, what in more detail are you hoping to do here? I mean, is it to apply some sort of temporary price increases or on the liquid packaging board side? That's my first question.

[Christoph Michalski, executive]

Yes, you're correct. So we have all these different lengths in contracts, and they go from everything from 3 years to 3 months, so to say, across the board. And we have decided in view on the very difficult cost situation, as you know about -- to basically have discussion with all our customers. Clearly, I cannot enter in the commercial strategy of which player, if it's liquid packaging board or other segments and how we will do that, but I think the only thing which is important to know here is that we do not let too many stones unturned in order to try to mitigate some of these headwinds. As Ivar said already, we will not mitigate anymore the whole cost increases. And I think that is not the purpose either because our price management was so successful since quarter 3 last year that we have always been slightly in front of the cost wave. And now the wave is here. And I think, as I said, our business will normalize a little bit. But you're correct. We will look at all customers, all contracts, and see what we can do to mitigate some of these cost increases.

[Oskar Lindström, analyst]

Would those cost increases be similar to what we've seen with sort of market prices for folding boxboard? Is that the magnitude that you're looking for?

[Ivar Vatne, executive]

No, I don't think so. I mean, look, when we look at costs, I think you're all fully aware of the energy costs and the impact of -- on chemicals and all these kind of things. The thing which is probably a little bit newer than what we talked in quarter 1 and quarter 2, is now also a significant increase of the wood cost. And that is mainly driven, in my view, by the war in the Ukraine and the consequent closure of the Russian border, okay, which created some stress in particular on hardwood, but also then resulted in some cost increases of softwood, because, I think all players then try to substitute a bit more hardwood with softwood. But these are the type of costs that we did not predict at the beginning of the year. We were always very much focused on the general inflation, and we have to work with these things.

There is no wood shortage. Let me be very clear about that. I think we had, in hardwood, probably a more tense situation even in the summer than we have now, and softwood availability is good. But clearly, the war in the Ukraine had a secondary price effect on the Scandinavian wood market.

[Oskar Lindström, analyst]

Just a follow-up question here. You say that the availability is quite good and has, in fact, even perhaps improved slightly from this summer. Have you -- or are you aware of others who've brought in volumes of hardwood from outside of the Nordic region to supply this -- the Russian shortfall?

[Christoph Michalski, executive]

I cannot talk for others. What concerns us, we are clearly looking at all sources. And for the moment, I would say, importing wood from other areas of the world into Scandinavia would be, from a price level as bad as wood from the Baltic states, and as you know, that is kind of an equalizer in the market equation.

So for the moment, this is not a significant part. We looked at it, but we are working very hard with all our sources in Scandinavia to optimize our wood mix, both in terms of where we source from, and what type of would be hard or soft wood. And we're basically adopting our recipe as best as we can, without undermining quality or specs for customers.

[Oskar Lindström, analyst]

Just a final question on the Norwegian project together with Viken Skog. As I recall, this is a -- sort of a mechanical pulp mill, or at least partly mechanical. Would that not be very sensitive to energy prices in Southern Norway and which have been very high? I mean, how does that factor into the equation?

[Christoph Michalski, executive]

Yes, you're correct with the BCTMP mill, which has higher energy needs than a normal chemical mill. So it's on the site. We have bark boiler, we have electricity, bioelectricity available. We also look at the green electricity available in Norway. And basically, all these kind of cost -- input cost discussion enters this pre-feasibility project that we have with Viken in Norway. And the only thing I can say, for the moment, we don't see any red flags that this project will be under threat based on the new energy cost structure that you find in Europe.

[Operator]

And your next question comes from the line of Linus Larsson from SEB.

[Linus Larsson, analyst]

A follow-up then on you reviewing, as you say, all contracts. Is it fair to say that such potential adjustments would occur from the start of 2023? And also, are you then not only looking at Board, but also maybe into the paper segment?

[Christoph Michalski, executive]

Yes, with all contract discussion, you know there's always a delay. So I think you're spot on saying that the effect of this revision will be in 2023 onwards. Look, yes, we look at all segments. And as you know, we still have a lot of disruption in Europe in terms of demand when it comes to paper. We're looking also at different markets. As you know, we have a big sack business towards the concrete industry or -- and that industry clearly will be slowing down. So there are many different aspects, and it's impossible for me to take you through all of them. But I think my key point is, we do not take price as given in an inflationary market situation. And what we will try to do is always to balance the need of our customers, the volumes we have to provide, and the prices we can charge for that. And we will do our best to find a good compromise here between our profit targets versus our customers' needs.

[Linus Larsson, analyst]

And if you look specifically at your liquid packaging board business, how much of that business is up for regular -- if I may call it, regular contract renegotiation at the start of the year?

[Christoph Michalski, executive]

Linus, as you know well, we don't comment on…

[Audio Gap]

specific customer contract negotiation or timing. So I have no comment on that particular question.

[Linus Larsson, analyst]

And then just finally on the U.S. market, it seems -- I mean, prices are high. It seems that there are even capacity shuts in spite of the high prices. Could you just give an update what's your feel of supply-demand and market dynamics in the U.S. paper market right now?

[Christoph Michalski, executive]

I cannot really comment on the full paper market. We are only operating in 2 segments. One is graphic paper, and here, the kind of exposure we are having is in direct mailing, in premium catalogs and these type of products, and what we call commercial printing. So we sell to merchant, and these merchants then sell to small printers all over the place, and it's a very fragmented market.

So we see 2 trends here. The first trend is that a lot of companies who are -- who were only digitally on the march, so to say, have realized that the complement of paper, be it catalog, a small catalog, specialized premium catalog, or that additional mailings or areas -- small local companies type promotion based on papers and things like that, is far more effective than only the digital presence. So we see a big reversal from these type of catalogs than, say, 2 years ago.

The second is, which is another positive trend if you -- it's a negative trend in itself, but it's a positive impact, which is the awareness of consumers on their issues on privacy. And more and more consumers are actually a little bit more careful, and you have seen the type of things -- like when you use an app now, it ask you -- if it allows -- if you allow the app to track on advertising and usage and things like that. And clearly, lots of people have said, no, we don't want to be tracked. And that brings marketers in the U.S. back into this normal, I would say, the media market, like when I grew up, with paper and television, et cetera, et cetera. So a big change. I think quite a fundamental change we are seeing in the U.S. in that market. And that makes the graphic market in the segments -- we are very attractive.

Secondly, on the specialty paper market, so release liners and stickers and all these type of things. Here, we see 2 things: a, it was a market which was growing 2% to 3% on a general basis. But on top of that, we saw the closures of a number of mills, which changed a little bit of the market balance, and which basically brought prices up quite a bit. We do not see immediate changes in this situation. I mean, you know as well as I do that assets in the U.S. are relatively old. We have the best ones when it comes to cost effectiveness and things like that. And if they are not very significant investment, I see that the market will probably stabilize at a higher level, as it did before.

Where graphic paper continued to grow? No. Overall in the mass market segment. i.e., this huge catalogs that we had before, and groundwood paper, graphic papers, these type of things, I think the decline will continue, but maybe at a slower rate than it has been before.

[Operator]

[Operator Instructions] And your question comes from the line of Cole Hathorn from Jefferies.

[Cole Hathorn, analyst]

I'd just like to understand if you can give any color on -- you talked about the sack and specialty kraft market. I'd just like to hear your comments around how the demand has been developing there? Any particular areas that are big for Billerud that you could call out where you're seeing kind of a slowdown in the order books or kind of a continuation of demand levels? That would just be helpful color.

And then following up on that, just like to understand what you're doing to manage your -- the wood cost environment in Sweden at the moment? You talk about changing kind of the mix between hardwood and softwood. Just trying to understand how you see that market developing from here? Are we starting to hit the peak of wood costs in the fourth quarter, and what you're going to be able to do to kind of manage that -- your total cost from the market?

[Christoph Michalski, executive]

Ivar, do you want to take the first one?

[Ivar Vatne, executive]

Yes, I can. So let me try to just give you some flavor, as you say, on the sack and kraft. I think it's more reasonable here to just talk about the different channel exposures we have, because I think that is, in the end of the day, the denominating factor. You know a lot of our sack business going to industry and construction, and there's no doubt that, that is certainly cooling down. We had a very good, you can say, last 3 quarters and -- actually going back 4 or 5 quarters, we had some strong numbers. Still okay order book. And in many ways, you can see that's holding up. But there's signs definitely that things are cooling down. You see that just in terms of, I can say, the order book length, but also in terms of some input from our customers, et cetera. And it's not a massive surprise, given how construction tends to be a very leading indicator in the economic environment in general. And clearly, that's been on a bit of a shaky ground for some time.

I think another channel I might just want to highlight in our sack and kraft, as more on the kraft business, it's the food and it's the sack business that we will -- typically for just the white sack. It's somehow better. I think also it's linked to some of the channels we exposed to their food service, still is going pretty well. So we probably see that a little bit better, although there are certain, also [ find ] that things are cooling a little bit down on that front. But we don't see that as on the industry side. Small, you can say exposures go into the medical, which is holding up pretty well, but that's, as you know, a much smaller part of a business at the moment.

[Christoph Michalski, executive]

Good. Let me talk about wood then. So as you know, we have -- we had generally speaking, I think, very good wood price level in 2020, 2021. What we see now, I think the shock to the market was really 2 things. First, clearly, the Russia closure of the border, as I mentioned before. Second one, however, not to underestimate, is also the fuel price increases, which increased basically the cost to collect the wood and bring it to our factories. So that is the key 2 cost drivers.

And clearly, I think -- if you ask me today, I think the wood market is about to stabilize. I don't know if it will go up or down or stable as it is. I think the big shock of the lack of the Russian wood in Finland is now basically understood, and the market players have adopted. As I said before, with a 2-way how we manage that, the first one is as an input. so where we basically ask ourselves the question, can we change the recipe, can we change our product portfolio in a way to actually consume less hardwood, which is the more -- the impact on hardwood was clearly bigger than on softwood. So that's one.

And the second one, as you know, previously, we had, I think, very much a spot price approach to wood purchase. And we have -- as I said already on the Capital Market Day, we're now looking at wood more like a sourcing activity, as you would do in professional sourcing. And then we take calls, should we have longer-term contracts, how should we structure them, where should we source for, how much should we buy from forest owner companies versus from small holders or forestland, et cetera, et cetera, et cetera. And this is basically what we're doing, optimizing as we get around our input cost.

But again, I think, it's like with pulp prices, we can only speculate whether or not we reach the peak of the wood market or not and what happens next. So we try to influence really working on the things we can influence. But at the end of the day, this is a big market, and the market will find its price level.

[Operator]

And your next question comes from the line of Johannes Grunselius from DNB.

[Johannes Grunselius, analyst]

I can't stop myself for asking you a few more questions. But my first one is on how one should look at the maintenance cost for a year in this sort of new company here, including the U.S. business. Can you help me with that, please?

[Ivar Vatne, executive]

Yes, I can do that, Johannes. It's a good question. I think the Europe maintenance schedule shouldn't be a massive surprise. I think that you should just consider pretty similar to what we've had over the last years. I think you can say as a summary in the U.S. that we tend to do a bit of a longer stop kind of every second year, and then a shorter stop every year. It is also true that -- historically that [ Beetham ] has been not always 100% clean, in the sense that it's also a discussion we typically have with insurance company on what the need is, et cetera. But to just give you some examples of this, for next year, given the very big maintenance shutdown we had in Quinnesec, we do not expect to have any shutdown on Quinnesec next year, while we would expect to have a smaller -- or something similar like we did this year on Escanaba.

[Johannes Grunselius, analyst]

So I haven't looked at the numbers or I don't have them in front of me, but it sounds to me that is SEK 300 million, SEK 400 million less maintenance cost than it's for next year?

[Ivar Vatne, executive]

Yes, at least. I don't have actually that number in front of me, but it's at least that. If you give me a minute, I can give you some estimate. I think we said Escanaba, it's SEK 180 million, and that's probably a good estimate for next year. We had a bit more than SEK 400 million, I believe, for this year in Quinnesec, and that should not appear next year.

[Johannes Grunselius, analyst]

And then I also saw in the report that you did some improvement on Quinnesec, leading to sustainable results improvement of SEK 70 million to SEK 100 million. It's actually quite significant, if one assumes that is sticking every year. But is that a combination of more pulp volumes and better qualities as you said? Or could you perhaps give some color on that? And what kind of assumptions are you using on the pulp price, I'm thinking?

[Ivar Vatne, executive]

Okay. So on the pulp price, I cannot give you any assumption because that moves up and down, but it's about...

[Johannes Grunselius, analyst]

It's not the spot rate, I suppose?

[Ivar Vatne, executive]

No.

[Christoph Michalski, executive]

No.

[Ivar Vatne, executive]

Let's say it's a long-term average we typically used in that estimate.

[Christoph Michalski, executive]

Yes. Right. So the big improvement is actually, we can produce significantly more pulp. I think it's around 30,000.

[Ivar Vatne, executive]

30,000. Yes.

[Christoph Michalski, executive]

And that was done by basically just changing the head of the digester which created a far better flow. And then the second improvement, which is really important, is the head box of the Q-41 machine, and that allows us to basically widen the operating window of the machine, and will allow us to play between graphic paper, and also now grades of specialty paper. As you know, the graphic paper, we are in the premium segment. So that's very good, but the overall market is less stable than the specialty paper which is growing strongly.

[Operator]

Thank you. There are currently no further questions. I will hand the call back to you.

[Lena Schattauer, executive]

Okay. So any final words, Christoph, before we conclude this call?

[Christoph Michalski, executive]

I think we are done. So thank you for your attention. Thank you for joining the conference this morning. And I'm looking forward to hear from you and to talk to you to -- talk [Audio Gap] in January where we will have the full year. Thank you very much, and bye-bye.

[Lena Schattauer, executive]

Goodbye.