Billerud Ab (Sweden)

Good morning, everyone, and thank you for your interest in Billerud, and welcome to our first quarter 2023 earnings call. So with us today, we have Kristof Michalski, President and CEO, and Ivar Vastne, CFO. They will hold the presentation, and after that, they will take questions from the participants on the call. So by that, let me hand over to our CEO, Kristof.

Yes, thank you, Lena. Good morning, everyone, and welcome to update for the quarter one, 2023. Before I go into the core of the result, I would like to give you a short update on our Escanaba mill. As you probably know, on the 14th of April, we have idled the mill in due precaution of basically a fungus outbreak we had at the mill. It is a very rare infection that you find in selected areas in North America. And we have been in very close contact with the CDC of the United States, plus all the different health departments, be it federal, be it state, or be it local. We have decided to idle the mild out of precaution. We have not been able to find any traces of the fungus in the mill or in its clothing. And because this is such a rare infection, we have relatively little prior knowledge to this fungus infection. What we are doing today is basically cleaning the whole mill, in particular all the air conditionings, et cetera. We have about 100 contractor, outside contractor on site. doing this job. And for the moment, everything is in line with our restart up. As we said, we would be idle for three weeks. Clearly, this will impact a little bit the quarter two results. This is not a quarter one issue. It's a quarter two issue. And currently, we foresee a financial impact around 100 to 150 million Swedish pounds. 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, there's nothing which stops me to think that we will be up and running again in the beginning of May. 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 containment of about 117,000 tons. 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. 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 look at 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 effects when we have these type of soft demand. So in some of the categories like paper, for instance, we would, if we have a lack of demand or containment in paper, we would produce more pulp. And that's what we have done. And that has clearly mixed 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 possible. If you go to our first slide, First, 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 U.S. didn't counterbalance the negative effect of the mixed 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 $628 million. But the overall effect is only 574, which is a mixed effect from Europe. And then you see the dramatic 1.3 billion additional cost of raw materials and logistics, including pulp and wood, sorry, including wood and chemicals, which basically is lowering the result quite significantly. identified all the effect of our profit enhancement program, which was around 100 mil a quarter. So very pleased by that starting progress. And we had in others, it is mainly lack of fixed costs covering and salary increases in corporate projects, which add up to about 200. So at the end, if we take out the maintenance schedules Quarter one result is at 1.484 and you see the overall bridge how these results comes to. 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, in order 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 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 slight 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 and particular catalogs. and direct mail and these type of products. And there have been a slowdown 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 year. While food and drink is mainly a European exposure, and we have basically seen a relative slowdown or at least a 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 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 the basically consumption of the 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 2024. Having said that, I will now hand over to Eva. Good morning, Eva. if you would like to talk a little bit about the movement of input prices and our expectation to those going forward.

Thank you, Christoph. And good morning, everyone. So a couple of words on the input cost, always a topic of high interest. We have seen another quarter where incremental cost inflation , 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 a bit of decline last couple of months, so net-net-flat for North America. The situation is a bit different. We've added roughly 65 million sec of incremental costs, and again, that is then quarter over quarter, so Q1 over Q4. Clearly, most of this is coming from higher fiber cost, that's roughly 130 million. We also had another smaller hurt on chemicals, which is minus 10. And then going the other way and helping us, we've had 60 million help from energy, and roughly 50 million coming from leaks. Going into Q2, we do expect to start seeing some help from input cost, first and foremost, in Europe. So if we start with Europe, we expect in the area of 125 million of help coming into Q2, and that means it's Q2 versus Q1. Most of this expected to come from chemicals, estimated to be 100 million. followed by energy 50 million due prices are now on lower level versus what we've seen in the past. We do expect a small hurt from fiber cost while logistics should stay roughly flat. Just a couple more words on the logistics. 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 gonna help us before we enter Q3. And that contract is worth 300 yen, so it's a pretty big deal. But again, it will start to help us from Q3 onwards. For US, let me comment quickly on that. For Q2, we do expect some hurt on fiber in the area on 30 million. Again, we should be fully offset by estimated lower energy. So US also in Q2 should be flat versus Q1. Right, so let's move on over to product areas. 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. I'm excluding pulp, some comments on pricing. It added 40 million sec of incremental pricing. So that is versus... Q4, as speciality helped, partly then offset the other way by declining pricing on both SAC and CRAV paper. Okay, the graphic is holding off, pretty stable. Pulp is really moving these days, which shouldn't be a big surprise, and the pulp pricing impact was more than 110 million SEC. So net-net for paper, including pulp, we look at minus 17 pricing versus then Q4. However, the big event for paper, this has been the very slow demand, and we have seen that continued customer destocking in general or the books coming down as market uncertainty is high. Christophe mentioned this, but this has caused some of most of our paper machines to take in downtime during the quarter in total 78,000 ton. That level of curtailment we've never seen before. We were able to hold off the paper profitability in a good manner. I think put cost inflation in North have 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 SAC profitability, and particularly the Brown SAC 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 and that is product area. Board, net sales goes to double digit. Clearly that's also helped by currencies organically. We recorded 5% versus a 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 health as revised pricing position today from January and onwards, while we have hold of it pretty well for cardboard. The big change in terms of the negative pricing for board has been on container board, where we've seen quite heavy price pressure. But again, total-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 try also to keep a close eye on our inventory level. 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. We move on and some words about cash flow. The cash flow performance has been a challenge this quarter. In essence, the working capital movement is significant. This is also to land on a negative cash conversion. A 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 are slightly higher maybe than you would expect on the inventory levels, but we 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, what 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 of 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 with, and it's a clear priority for us for the rest of the year. So for Q2 to Q4 to move back into solid conversion figures and land 2023 in an acceptable manner. Balance sheet still strong and way below the target. Couple of words on the last bullet points there on the CapEx guidance. So we do lower the CapEx guidance for 2023 by 200 million. So new estimate is 2.9 billion set, 2 billion of that coming from base CapEx . 900 million related to our ongoing project of the new recovery . Right, 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's 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 screens. I'm happy really to see the enormous engagement energy that we have now behind the program throughout the full organization. The multiple initiative owners now in motion making detailed descriptions of all the different initiatives and what we're trying to achieve, linking them to specific KPIs. Q1, we recorded 95 million of program impact that we're well on track to deliver the 400 million net target. It's set to be delivered in 2023. As well, we're looking more and more into more program pipeline for the coming years, as this certainly is a three-year 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 illustrate that these initiatives are different from our previous cost and efficiency program, where this program in particular focused 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. Thank you, Ivo.

So let me talk a little bit about the priorities for the rest of 2023. What Ivo 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, say, the market dynamics. We work with selective containment 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 will, we have already taken the decision now to lower the CAPEX by about 200 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 process, strategic project, in particular , 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 is a final CapEx decision. For you to remind you, this is about our BCTMP pulp mill that we are developing together with . And so finally, the biggest project in our stable, the U.S. transformation is also going through all the different project phases in order of preparation. Just as a reminder, it's basically a project that looks at converting a paper machine into a carton board machine. to install the BCTMP pulp mill and basically upgrade 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 stocking of our customer and brand owners. But we hope that 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 containment, probably in line of what we had in quarter one. And the cost inflation is expected to ease. but it will only because all the cost reduction that we are 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 and 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 and we will continue to focus on cash flow. Good, with that, I finished 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 question at a time so that we can give you a proper response. And Eva and I are ready to go. Operator, could you please?

Of course. Thank you. This is the conference operator, and we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who wishes to ask a question may press star and 1 at this. We will pause for a moment as callers join the queue. The first question is from Linus Larsson with SEB. Please go ahead.

Thank you very much and good morning Starting with North America, which has become pretty significant of your profit tool. It's actually bigger than the board division currently. And I think EBT 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 U.S. as well.

Linus, why don't I try to give a little bit perspective on pricing going into next quarter? Maybe I actually do both Europe and U.S. at the same time. I think it's absolutely a bit sketchy at the moment in terms of obviously on pricing. For the time being, We are pretty, let's call it, confident that we are able to hold pricing in U.S. Q2 over Q1. So we expect to see a significant item there. There might be some smaller mix impact, but in general, for now, we appear pretty neutral on what we expect to see. I think for Europe, it's certainly starting to look more challenging. And we do expect to see, you know, further price drops now, both on container board, carbon board, and second craft. So we have a rough estimate between three and three and a half percent material sales in total for the company. So you can use that 10 billion of net sales as a good proxy for what material net sales is. And that three and two, three and a half percent is then solely estimated to come from Europe in the quarter two over Q1.

Great. That's very helpful. Thank you very much. And just continuing on North America, you're saying that this stop in the second quarter at Escanaba may have approximately 100 to 150 million krona. I just would like to get this straight because you did take presumably this is mainly production related and you did take down time already in the first quarter. So just to to get this like for like, what's the incremental burden that you're expecting at Escanaba Q2 on Q1?

So if you look at the what we have done is we have pushed as much as we could production into . We also had planned some downtime in Escanaba. And basically both factors in itself will make the stop of three weeks have a relatively little impact, as we said, 100 to 150 million, of which I think half is more or less the market effect of things that we cannot deliver. There are certain products we can produce in Escanaba. And the second half is basically costs. of subcontractors and third parties and whatever you have in order to do this massive cleaning operation in the mill.

And maybe I can just add, Linus, so I can confirm that number is the 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 .

Okay, okay. That wasn't clear when I read it, but that's very helpful. Thank you. 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?

Both of them haven't received any claims, but as we are talking the North American environment, I think we would probably expect some to come. I think this is an illness which basically 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.

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?

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 and they 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 that we started in the middle of March, end of March, already some cleaning operations in the mill. then we realized in order to do a proper all-mill cleanup, we needed to get 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 where, 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 really 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 three weeks that will be done. And also we have already today, you know, 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.

Okay, great. Thank you very much.

The next question is from Robin Santavita with Carnegie. Please go ahead.

Thank you very much, and good morning, everybody. I have a question related to the pulpwood cost and availability situation in Sweden. How do you expect pulpwood cost and availability to develop now going forward in Sweden and the Baltics? It seems you guide for a small increase in pulpwood cost in Q2, Q1Q. How does that stack up with Sweden and Baltics? Any difference there? And do you expect sort of further increases on the road? I saw now increasing. Again, will that impact you?

Okay, I think there are two aspects to this question. The first is the 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 the Baltics there was a huge peak, and we see already prices coming down from that peak. So that's the market situation. For us, clearly, the situation is specific to our buying structure. So we still buy hardwood from Balticum, and prices are coming down. And we are shifting within different sources of wood, Balticum, Sweden, et cetera, but then also the 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.

All right. Thank you very much. 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 Iva was commenting that a 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 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 it something we should expect for the latter half of the year?

Okay, I think let me split a 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 U.S. economy that things are what they are but are not getting worse and potentially might even get better. will definitely then have an impact on advertisers in the U.S. to continue to basically restart their 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 in 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 these things will not go away, et cetera. So we see basically once the stock level is through in our customers, then we basically see demand basically normalizing again because we have through flow. I think what we maybe underestimated earlier on is the speed at which that stock would disappear. So initially we hoped in quarter two we would have already some positives, 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 U.S. 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 U.S.

I understand very much.

The next question is from Johannes Grunzelius with DNB. Please go ahead.

Good morning, everyone. It's Johannes here. Thanks for your comment about pricing in the Q2. That's very helpful. Just to clarify, Ivar, did you mention it was 125 million in total tailwind from mainly chemicals? Was that right? Yes.

No, it was a little bit more balanced than that, but the number is right, 125. That's kind of what we expected, where the big chunk should be chemicals, 100 million. We expect in the area of 50 million coming from energy, and then we will have at least an estimated hurt of 25 million for the fiber.

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

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 that if you think about, it was also Robin alluding to, there's still a little bit movement on the negative side of 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 we see now the spot rates, let's call it during Q1 continuing forward, we would expect chemicals and energy to help us. And we also 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. Okay, got you.

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 the activity of markets year over year here because of the sort of intense restocking, peace-talking behavior?

Yeah. So I think that, so on the carton board business, clearly there are 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 citrus fruits and things like that in the south of Europe. And you've probably heard that we had a relatively dry harvest, and therefore underproduction 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 container board 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 carton board, 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. Okay. But as we always said, we are 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 time, later in the year.

Yeah. I have also a final question, and that is if you can help about your sort of where you are in terms of your nominal capacity or so. I mean, your shipment 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.

Do you want to take that, Ivo?

Yeah, maybe I can actually give a little bit on the total number, and I might not actually have the speak 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, 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 ton higher than that. So that gives you some indication. And if you just do a little bit of a pro-route of that, you will probably come to around two-thirds 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, you know, hopefully we will get to see a little bit utilization rate when we come into the second half of 23. Okay.

Thank you very much.

The next question is from Martin Melbye with ABG. Please go ahead.

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

Yeah, this is a good question, Martin, and let me try to answer this. We know that Q1 was softer. I just explained also to Johannes that they're quite far from what we believe the technical capacity could be. I think we in many ways are quite neutral in the sense of we don't expect much better in Q2 versus Q3. The only thing you probably could add as another negative is the Escanaba event. It's in the area of additional 15, 20,000 ton. that probably we get as an impact of that. You know, as you know, we also have the Charblaka and Grover 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 is 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.

Great. Then what was the key reason for the higher vertical, and what do you see on energy costs in 23 versus 22? I think you've guided on that earlier.

Yeah, let's start with the cash flow item. I think there's quite big movements, but I can try to take them kind of one by one. The receivables, that actually had some help from that. So low receivables related to the electricity hedges came in a bit down, so that's 400 million. Inventory, not a major difference. If I'm honest, it had 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 change at all. And the biggest piece that's, you know, more than a billion is coming from the payables. And I think I mentioned it quickly, but it is a combination of some ones that we had in the quarter We had some bonus payment, for instance, in the U.S. that is a bit of a, you know, new item that we have with a different timing. There is a certain timing impact just, you know, around the New Year's there that played a part. And in general, we just have lower activities now because of managing inventory and lower activities of the, let's call it purchasing of raw material and input factors have come down quite a bit. So those are the big statistics to explain. And as also mentioned, we have a very clear ambition and motivation to improve this from Q10 onwards. And I think, can you just repeat the question, Martin, on the energy again? What was it?

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

Yeah. No, so I think if you start with Europe only, I think the electricity cost we landed on for the 52 euro 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 59 euro per megawatt. And everything else equal if you just, you know, use the roughly two terawatts that we tend to purchase in Europe. That should be in the area of 140, 150 million sec year over year. And the 59 megawatt, sorry, 59 euro per megs combination of the spot rate now around 80 that we, at least for this calculation, assumed will stay flat the rest of the year. And we have hedged 67% of the consumption in Europe. And we've hedged that at pretty good level, 38 euro per megawatt. So hopefully that's some help along the way. Excellent answer.

Thank you. The next question is from Joffrey Bellihamella, Bank of America Securities. Please go ahead.

Good morning, Christoph and Ivar. Thank you very much for your time today. I have two quick questions on cost. 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 benefit of the program in the bridge. And then the second question I have is, in the report, you mentioned that you had a negative effect from sales from inventories on cost position in Q1. Do you expect this to reverse in the second quarter? And will you be able to give us an impact that this could have? Thank you very much.

You take it, please.

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, we're more hopeful. But I think for the first one, or Q2, we don't expect that to . I think the first question is around the efficiency program. And as I said, I think 95 million is now what recorded in Q1 versus a year ago. And, you know, the net effective set for the full year is 400 million. So, you can say that we are good on track for delivering this. Clearly, in the conditions we're in, we will do everything we can to potentially also accelerate, you know, the deliver on that. But for the time being, you know, the target is the 400, and they want to really get solid and good for that. Difficult to say much about the sequence of those quarters. that probably for the prudency for this purpose, I would just assume a flat split between the quarters for that 400 along the year.

Thank you very much, Ivar. 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?

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

Very clear. Thank you very much for your time.

The next question is from Oscar Lindstrom with Danske Bank. Please go ahead.

Good morning. Oscar from Danske here. Questions. First off, are you feeling any – we talked a little bit earlier, you talked a little bit earlier about the fiber situation, and I wanted to focus a little bit more on northern Sweden and your Carlsborg mill, where we have both Metz's Kemi mill starting up later this year across the border in Finland, and we've also heard from Sveaskog that they will sharply reduce harvesting levels up in northern Sweden. Is this something that's putting pressure on sourcing fiber for your Kalsborg mill? That's my first question.

Okay. Let me take that, and then you can ask your second question. Good morning, Oskar. Good morning. Yes, clearly, I think wood supply on a very micro level in the north of Sweden will be more stressed by the startup of Chemie. and also by the re-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, Carlsberg is a very profitable mill for us, and I think we're in a very good position to mitigate the increased cost, because I do not think it will result into an availability issue.

Right. And my second question is on CapEx. I mean, you say the capex reduction of $200 million for this year is not going to impact your projects, which I understand most likely wouldn't have capex expenses until next year, really. However, I mean, could the weaker market outlook that we're seeing now have any impact on your strategic investment decisions?

No. Not really, because we are currently working on the projects as basically, as you said, you rightly said, there's only limited capex in 2020 and then significant more capex in the years to come once we have decided on the timing and the size of the conversion in Norway, et cetera. 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, you know, kind of, you know, 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 capexes. But there's no effect on the projects today, as you mentioned, because we don't spend too much capex on these strategic projects.

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

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

And this is in Europe?

Yes, correct.

Okay, wonderful. Thank you very much.

Thank you. 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 take two more questions, I think, and then we close the call in about five minutes.

Okay. The next question is from Cole Heather with Jefferies. Please go ahead.

Thanks for squeezing my question. Just some commentary on the wider SAC market. Just seeing there from, firstly, from a demand perspective and splitting it between your kind of plates where you've got a good strong market position and then the wider SAC market where I believe you sell more into the export space. Thank you.

Yeah. Hey, always good to talk a bit on second craft calls. Good morning to you. No, listen, I think in general, you can say that if you're going to the consumer side of second craft and talking about NG in particular, it has hold up pretty well in Q1, maybe relatively to some of the channels, clearly in the nature of consumer and also going into food services that tend to be a bit more stable, the pattern we see. So you can say that we have had relatively well held up on the different MF and MG grades, in particular in Europe. It starts to be quite more challenging, also Christoph alluded to, on the SAC market. We're very happy still with the generated in Q1, but it's clear sign now that there's increased price pressure and expect actually quite a bit of a net sales per ton drop on both white sac and also then on brown sac 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 applications that we will see including Interleaving paper, et cetera, is also very challenged at the moment. So we are much less positive probably on the SAC market Q2 versus Q1 versus what we saw in our Q1 versus Q4.

Thank you.

The next question is from Jasper Motander with industry. Please go ahead.

Good morning, and thank you for taking my question. 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 the 3rd, I think. that a typical pneumonia cases among workers were suspected 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 on April 13th?

Okay. So let's talk about the due diligence. Blastomycosis is such a rare illness that clearly this came not up as in doing 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 authority, which they do. And we heard about the first case being notified on the 3rd of March. 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 organizations in the U.S., the Center of Disease Control and Prevention. And we have worked very extensively with the health and safety 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 recommendations 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. When basically we then discussed around early February what else needed could be done, we basically decided to idle the mill. We made a cleaning program together with the health authority of what cleaning was required and what kind of specific air conditioning, you know, basically 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 subcontractor in the mill, as I said before, and they're running through a very systematic program. And therefore, I'm pretty confident that we can close the mill after these three weeks, which basically I think we have two weeks left. and the startup timing is basically planned for the 8th of May. 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 a number of people inside, they have all been inside the mill, have been affected by this fungus.

Okay, thank you. I'm sorry for my error. I said February 3rd when I meant March 3rd while asking the question.

Please allow me to correct myself.

No, no way.

Thank you very much. Okay, I think that ends our Q&A for the quarter one presentation. Thank you for your attention, and I look to talk to you all in July for the second quarter. And until then, bye bye.