BillerudKorsnäs AB (publ)

Good morning and welcome to this presentation of Billerud Korsnäs second quarter 2022. As usual, our president and CEO, Kristoff Michalski, and our CFO, Ivar Vatne, will hold a presentation. And thereafter, we will open up for questions from the telephone conference. And to participate in the telephone conference, please dial any of the numbers from the invitation that can be found on our website and ask the operator to be connected to Billerud Korsnäs. Now, we will get started. Please.

Thank you, Elena. Good morning, everyone. I'm very pleased. It's a beautiful day in Stockholm, and I think our results are very good as well. It's the first quarter with the results from North America being included, our acquisition Verso. Further in the presentation, I will call it Billerud, North America, which is the official name from now on. I must say we had a very good performance both in Europe and North America. So both markets really delivered very good results. And I will take you through those results together with Eva now and give you a little bit of more color to it. But if we start with net sales, net sales have now increased by 75% to 11.4 billion crowns. Strong organic growth in Europe and North America. 17% and 19% respectively, which is I think close to a record for both geographies. All-time high EBITDA and operating cash flow and EPS is up more than four times versus last year. I think you see definitely the effect that we were able to change prices, mix, cost savings, et cetera, and that very much in front of the inflation, cost inflation we're getting through raw material, energy, wood cost, et cetera. So this offset improves further our margins. We would have had a record margin if it wasn't for the maintenance stop, which were different timings. So if you normalize this quarter by maintenance stop, you would have had an absolute record margin as well. And then excellent cash delivery and strong balance sheet position to allow us to continue with the expansion and the profitable growth that we are aiming for both in Europe but also in North America. If you look at the sales growth in terms of, you can see here, clearly we had some favorable currency rates, a good amount, 15% of pricing. And then in the volume and mix, you see really that is where the whole of North America has been included. Out of these 59%, 57% comes from North America. And these numbers are hiding a little bit the very good performance that we had on mix. Actually, our volume is down by 5%, which is a mixture of having significantly much more goods in transit, 30,000 tons approximately. We had the strike in Piatasari and the maintenance stop, which is about 19,000 tons. And then you remember last year we sold BESIM, and the numbers are still in the comparative, plus the different schedule in the maintenance stop. So volume down 5%, but mix is up 7%. And as we all know, mix is what is driving the business also when market growth and pricing slows down. So we are very happy about that. When you go to EBITDA, here you can see pricing, which is basically driving the growth, plus North America, 700. million crowns out of 960 and again the net of raw materials and logistic brought us down by 505 and these cost increases we expect to continue as we go forward I also want to highlight a very good job which was done by everyone internally and we have a further 60 million savings which is part of our millions programs which expires at the end of this year. I would like to hand over to Ivar, and Ivar, if you would like to take us to some of the details of the business, please.

Yes, thank you, Christoph, and good morning, everyone. So we will start with paper. That is, for the time being, the biggest product area in the company. Net sales is tripled versus a year ago, but clearly the inclusion of Billion North America is the biggest event. And we report now the full billion North America business on the product area paper. For Q2, we added $3.7 billion of what was previously referred to as Verso. And the good news also for the North America business, as Christophe alluded to, both segments, graphical and speciality paper, performed really, really strong with high double-digit growth for the quarter versus year ago. Profitability was strong for the North American business as well, coming in at $704 million, or that's 90% EBITDA margin. Keep in mind that includes $170 million SEC, what we refer to as the inventory step-up impact now in Q2. And that is something we will not see going forward, so you should consider that as a one-off. The margin in North America would have been 23% in Q2 when you exclude the step-up impact. Now it's not only the paper North America business that's performing well. We also had outstanding results for paper in Europe and Asia business. Organically, meaning when we exclude BTEM and North America, we recorded 18% top line growth. And that is, again, strong growth across all segments. But in particular, I want to highlight the strong growth that we had for SAC paper. Europe-Asia had also a great quarter in terms of profitability. We also got hit by some of the effects this quarter, as Christoph was alluded to. We had the Peter Cyrus strike and also a bit of a different facing of annual shots. The main positive effect, though, to improve the region profitability, linked to price management, a continuation to drive positive mix and benefits from a cost and efficiency program. The Europe EBITDA margin for the quarter was 27%, and obviously a number we are extremely pleased with. And if you continue into product area board, they also had an outstanding quarter, sales up more than 20% versus a year ago. Growth is coming pretty much as we explained also on paper, broad-based from all categories. Carton board is leading the growth in presently 70% increase versus a year ago. We've seen that double-digit growth in carton board now for several quarters. We also see strong growth for container board. where floating has been the front runner. The liquid packaging business also delivered well. Keep in mind that this number here you see on the chart also includes cop stock that we deliberately have taken down versus a year ago in our journey to drive profitable mix. Hence, excluding cop stock, our liquid packaging growth is actually up 8% versus a year ago. Profitability close to double versus a year ago, and we find very similar drivers to explain the profit increase, as we talked about in paper, as price management driving deliberately the profitable segment, and our continuation to focus on a cost and efficiency program. Moving forward, a bit about the cost inflation. I mean, this is certainly a very hot topic still for 2022. As you already communicated in a Q1 report, we expected cost inflation to accelerate for Q2. And this is also what we've seen. In total, we've seen roughly 350 million set cost inflation versus a year ago. That obviously includes for both of the regions. And you can use a rough split of 65-35 to get that number split between Europe versus North America. The 350 million is split roughly as follows. Fiber, 210. Chemicals, 105. Energy 20, logistics 15. The good news, as also Kristoff alluded to in the beginning, is that we've been able to offset all of this in Q3 price management and driving profitable mix. Looking forward and some comments on what we expect for Q3, starting with fiber cost. In Europe, we've seen several list price increases during Q2, and we expect to get the full quarter impact of this going into Q3. Tough to say further list price increases will be announced, but it's certainly not out of the question. Most of the price pressure is in hardwood. We also talked about that in Q1, given the shortage we now face in Nordic due to the imports from Russia. In the US, the situation is more stable. We expect some increases, but that is solely related to the diesel prices. And we expect in total 140 million Q3 over Q2. For chemicals, prices went up sharply during Q2 on most items. Latex and caustic soda remain in high inflation. We will see another cost hurt in Q3, mostly related to the time lag of our contracts. And we estimate around 90 million quarter over quarter. Having said that, we do start to see that the prices on chemicals are now starting to flatten out on a high level. which could indicate that we would start to see a more flat cost development towards the end of the year, in particular when you start to think about Q3 versus Q3. Keep in mind, though, that there's a very strong correlation between chemicals and energy prices, so the situation remains pretty volatile. Energy has been relatively flat with hedging, helping us positively for Europe, while we've seen some inflation in the US due to natural gas price movements. And going into Q3, We would expect to see a cost hurt for Europe, mainly related to our hedging probably being a little bit less favorable in Q3, while we would expect to see a small help coming from the U.S. as we've seen some natural gas prices coming down over the last couple of weeks. In total for energy, we estimate 60 million quarter-over-quarter. The logistic situation remains with the global challenges in terms of availability and reliability. We had new contracts negotiated in Europe now during Q2. And both for road and overseas, prices are up. And US, the main challenge is linked to diesel inflation. And we would expect for both regions a combined number of 70 million Q2 over Q2. So in total, we would expect to see something around 360 million cost inflation Q2 versus Q2. But the aim is certainly, as we also talked for Q2, we aim to offset all of this. through very strong focus on price management and driving profitable mix. And we expect to land somewhere between 3.5% to 4% of incremental pricing quarter over quarter and going into Q3. That is obviously a measure of our material net sales. So next slide, please. Some comments about our cash flow and balance sheet. We obviously have very good news to show this quarter. We had an excellent cash flow conversion. Corrected part of some of the challenges reported around in Q1 in working capital. 2.5 billion operating cash flow compared to an EBITDA of 2.3 is a number we will take any day of the week. Our help in working capital is mainly coming now from payables. Receivable is growing in line with what we see in the net sales growth while inventory is relatively stable. So the strong cash flow delivery combined with the rights issue that was successfully completed during Q2 takes our net debt leverage down to 1.1. That even includes the dividend payment we had as part of Q2. So our balance sheet is very strong, and this is obviously months only after the acquisition of Warsaw was executed. The capex guidance for 2022 remains, and that is unchanged in 3.3 billion, where 1.1 of that is related to the three-way recovery boiler. And 2.2 billion is split between what we call Europe and North America-based CAPEX. So with that, I hand it back to Christoph. Christoph Gräber Yes.

Thank you, Ivar. So I will cover now maybe two subjects, which I think has a lot of interest from your side. One is on the transformation program status on North America. And the second one is a little bit going through our different segments and how do we see the market opportunities going forward. So if you look at the transformation, we have started as soon as we had closer with a concept study. And basically, the concept study, which finished in June, has confirmed most of the assumptions we have made in our business case. And as always, some were significantly better, some were little bit the same and I think overall we're very comfortable with with the concept going forward so we have decided to enter now into pre feasibility and this is expected to be completed by the first half of of 23 I know that all of you are very interested to see whether or not our capex assumptions are correct and the timing assumptions and things like that and Clearly from the concepts there were kind of verified of what we have said before, but clearly it's the pre-feasibility study which will give us the total transparency on what CAPEX to expect and the exact timing of the startup of the machine in North America. So we will come back to that in first half of 23 as soon as we had a proper discussion and decision by our board. We have taken clearly another concern you have expressed in the past is basically our track record on big projects, which I think is driven by the experience on KM7. We have taken all the learnings on board. I think we have already proven with our project that we can run big projects in a very professional and timely way. And I've decided to let the program manager for this whole program of the transformation directly report to me. And we are in the process of establishing a very good team with internal and external resources, both Europe and North American, to have basically a business in the business in this project. There are basically four big things we need to establish here in the pre-feasibility. The first one is to decide on the right technology. I think here in the concept we have focused on the similar technologies in KM7, clearly then upgraded to 2024 technology standard, so a continuation of the development of that platform. and basically also looking at the different infrastructure in the mill, be it pulp balances, energy balances, et cetera. And this is a big part of the pre-feasibility study. Another project which is ongoing and will be established relatively quickly, and I think that's probably ready earlier, is to really fine-tune what is the type of product range we would like to have for the U.S., and where should be the sweet spot for our machine, and that's what we call product readiness, so that where we define currently with customers, markets, and such, how should that look like. You are aware we have currently a market which is dominated by SPS, and we will launch in FBB, and therefore some more work is necessary to really define that, But I'm very confident that we will have finished that by close by quarter four, so that basically the pre-feasibility can then really focus on that particular sweet spot on the machine. Mill readiness is really everything to do in the environment of the mill. I think there are three big subjects here. One is pulp, pulp supply. including a BCTMP addition to the mill, but it's also to do with sustainability in order to bring the mills back to where we want to have them, like in European standards. This will be done in big steps during the conversion, but then it will be a continuous process as we have in Europe with our science-based targets. And then finally, business readiness. We would like to start up the machine in the U.S. with already significant volumes being sold in the U.S. And as you know, we are selling, I think, about this year will be about 100,000 tons already carton board today, which we export towards the U.S. And we expect this to be at least in the 200,000 ton range by 2025. so that the machine can start up with an existing customer base in a good way. Project milestone, just to remind you, so CAPEX approval I expect by end of first half 23. The expected machine downtime is at this stage probably in 2025, and this will be everything between six and nine months, and we will know exact timings at the CAPEX stage. And the expected machine startup is end of 25, early 2026, and then hopefully a fast ramp up like we had on KM7. I think one advantage we have with the U.S. projects, we currently are not planning to have liquid packaging board produced in the U.S., but mainly carton board grades. And these grades don't need the same testing time with customers. So the ramp up for for production should be much faster than when it comes to liquid packaging. So I leave you with that. Very good progress. And I keep you up to date as we go along in the quarterly updates. Good. Then clearly lots of interest about how our segments faring especially in this current context of uncertainty of inflation. war in Ukraine, et cetera. And we have spent a lot of time looking at our portfolio and also you have seen that in the mix changes to make sure that we have the maximum of our portfolio, which I would call a very resistant segment of the market of essential products or products which generally speaking are less sensitive to recessionary circumstances. If you look at food and drink markets, basically here you find liquid packaging board, which tends to be a very stable market, but also other application and food. We do not expect big volume swings independently of the economic situation, and therefore are pretty confident that this segment will continue to provide good growth and profit opportunities going forward. We added now area of printing and publishing paper because this is clearly a significant business in the US and here again there are different definition we call it in the US commercial printing and this is also we are in the segments which are quite resilient we have seen a significant revival of catalog sales or catalog distribution in the US which has to do with with a changing landscape of digital marketing. We see very, very good resilience in the book printing market and in the small commercial printing, which is, you know, local advertising campaigns or menus for restaurants and things like that. And we are actually very little exposed to the big magazine paper and these type of, you know, mass market publication papers. And therefore, we believe that definitely for quarter three, but probably for much longer to come, that this segment will stay very resilient. When you look at the statistics, the graphic market is expected to decline by 2 percent, 3 percent year on year. And this, I have to say, is probably more an average of all the different segments, those segments in which we are operating do not seem to follow that trend in average at all. Consumer and luxury, 10% of our business, mainly carton board, container board, and craft and speciality paper. Clearly, this is our key focus by converting packaging from plastic into carton board. High-quality products, we are on the premium segments. we do not see any kind of demand reduction at all. And therefore, we are pretty confident that this segment will continue to be good for us. And I think the only segment which is far more susceptible to GDP changes is probably the industrial segments. And in particular, we see already some softening of the sack paper, especially when it comes, for example, to the cement industry, where currently the outlook doesn't look particularly good. Nevertheless, overall, we believe that our segments are very, very solid and will be for the rest of the year and the years to come. Good. Having said that, positive outlook for quarter three across the whole business. As I said, demand is strong and we expect it to remain that way. We have put a lot of focus in price management, driving profitable mix and cost management to set off cost inflation. And I think, as Eva alluded, we will basically cover inflation in the quarter to come. We have a number of maintenance and upgrade stops planned for quarter three. in for the big mills that busy is Yavla and Escanaba Escanaba and to some extent Carlsborg and then we have a very significant stop which we Discussed already with you last last report in Quinn a sec, which is a mixture between some maintenance But it's really focused on a major upgrade and there's two areas where the upgrade is happening the first one is to the upgrade on our paper machine and which will allow us to make much heavier products, which are also good for the packaging industry, and it allows us basically to have much more flexibility on the machine in view of the conversion of Escanaba or other opportunities for conversion in the U.S. The second part we are doing is to focus on the pulp side. So we have basically changed the top of the digester, which will allow us to produce about 20,000 to 25,000 tons more of pulp. And we expect the additional yearly benefits to be between 70 and 100 million which is a very good return for the capex that we're investing into this particular stop. Clearly, the war in the Ukraine is really bad, and we hope to stop as soon as possible. However, we do not expect any additional negative impacts on our business. I think the key effects that we have seen, which indirectly touches us, is the increased wood price in the Scandinavian market. And we do not expect, even if the war were to stop, that wood would immediately come back from Russia. So I think this is a new normal or the new reality when it comes to the wood market in Scandinavia. And we do not expect any further changes and the price of wood will adapt as we see in the coming quarters. Good. When it comes to priorities for the second half of 22 and also for 23, clearly number one is to deliver on our strategic objectives and sales growth and profitability and cost savings. So that is a big focus on both sides of the Atlantic. We have also made it very clear to our employees that the integration should happen in a pragmatic way, but the key focus has to stay on the business. And as you have seen in our excellent results, the business is performing well. Market outlook remains positive for our segment in which we are operating. And I think also the business opportunities are very attractive in the long term in these segments. Strategic projects and programs, I think, are well on track. As I mentioned before, we expect the startup N23, despite all the upheaval in logistics and availability of material. For the moment, we have managed all these things in a good way. We are in the Norway BCTMP pre-feasibility phase. Just as a reminder, this is a joint venture we are setting up with the VEACAN group, and We're looking forward to come in a good conclusion by the end of the year, beginning of next year, to then basically bring the CapEx to our board. Integration, as I mentioned, very pragmatic approach, focuses on running the business, but still we want to align the two companies when it comes to process policy and wherever it makes sense. And that is well underway. And then, as I said, transformation is entering the pre-feasibility and more news in 2023 to come. Good. I think that concludes the presentation of this morning. And I think I'm handing back to you, operator, for questions.

Thank you. This is the conference operator. 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 has a question may press star and one at this time. The first question is from Robin Santavirta with Carnegie. Please go ahead.

Thank you very much and good morning to everybody.

Good morning.

For quite some time you have experienced very strong demand, as I understand, and your machines have basically been fully booked. I was wondering if you could share some light on what are the most recent indications when it comes to trading conditions and order intake. Is it still in all segments as strong as it has been in H1, or do you see some changes in any segments? And number two question, if I just may, that comes to pulpwood and natural gas. I was wondering if I understand and appreciate that pulpwood costs are moving higher at the moment. What about availability? Do you see any kind of problems with availability, or is it just the higher price? And in terms of natural gas, I understand you have limited exposure yourself. What about your customers? Do they use natural gas as energy form? So those questions. Thanks.

Okay. Good morning, Robin. Okay, let me start with order intake. So basically, every time we can produce more, we could sell in all segments. So if I go through them, if you look at the packaging board, very stable market. Even our customer would like to buy a little bit more, and we are basically producing as best as we can. When you look at carton board, strong demand. continues both in Europe and North America. When you look at our paper products, there's absolutely no change at this moment in time. There's a couple of drivers behind that. First of all, as I said, most of our segments are quite resilient in these uncertain times. The second part is we still have big logistic disruptions in the market. And therefore, there are customers who maintain their safety stocks, which they have built up as best as they could over the last few quarters. And we do not see any kind of softening in demand as we speak. Clearly, going into 23, That will be the big question mark. How well will our segments continue? But for the moment, the order books are full at the point we don't take additional order. And this is a kind of a four or five month type limitation. So for us, we know what prices we will get. We know what orders we have for quarter three, even into quarter four for some. and therefore there is no significant, we don't see any softening at this moment in time. Pulp wood clearly is a different story. You remember it's about 15 metric tons come from Russia. Out of that one-third is hardwood, and that is really the part where the wood prices are going up the most, and where also we have to look to make sure that we have availability. For the moment, that has not been a major issue, but we're working hard to overcome that. The lack of hardwood has also created very strong price effect on softwood. As you know, we have certain possibilities of substitution between the two woods, staying within the limits of the quality window, and that we have maximized for the moment. But basically, the effect is on both hard and softwood, but availability is only an issue on hardwood as we speak. We have put lots of mitigation programs in place, so I hope we will cope with that in a good way. over the quarters to come. Natural gas, you're right, we're not, have not a heavy exposure to natural gas, as you know. I think the biggest exposure indirect we have is actually when it comes to the chemicals, okay? We are buying caustic soda and latex, et cetera, big energy for most of the supply also using natural gas. and therefore that is where we see basically the price increases coming and our exposure to natural gas. When it comes to our customers, they're converters that basically most of the time use mainly electricity and not directly big industrial quantities of natural gas.

Thank you very much. That was very clear. Thank you, Robin.

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

Yes. Good morning, everyone. Johannes here. I have two questions on your U.S. business. And I know, Christoph, that you talked about the relative cost advantage of the U.S. assets because of good availability. Could you just – I mean, are you sticking to your view there? And could you remind us a little bit what you – what you're thinking is about the relative cost position and availability of wood pulp at least.

Okay. Good. So as we said, so the wood pulp, when we did the acquisition, was about a cost advantage of around 30%. I think that gap has stayed. Wood prices went a bit up in the U.S., but not because of the pulp, but because of higher fuel prices and getting the wood out of the forest. And on top of that, because of the outage of the pulp mill in Quinnisec for 30 days, we have also overproduced pulp, which we have in reserve, and therefore we bought a little bit of wood on the spot market. But generally speaking, I think the assumption of 30% cost advantage remains, because clearly also the wood prices in Europe went up quite significantly, and therefore that is still the same. Okay. When it comes to other input costs, I think they're similar, but except one, which is logistics. The mills are incredibly well positioned. We sell about, I think, 70% of the product in pretty near, you know, in the Midwest of the U.S. at this point, and therefore we have very good logistics costs, and the logistics has actually improved since we spoke last time. I think initially there was the same issue of tracking rail and availability in the U.S. and we saw in Europe, but now things are getting back to normal.

Right. Right. Thanks. And I also appreciate your comments about your sort of exposure in the U.S. to different business. But what do you mean with the catalog and the market? What's that?

Okay. So basically in the U.S., you're aware of the digital market. battle which is ongoing where currently some of the big tech companies are much more focused on the privacy law in the US and will not allow people to track advertising as they did before on top of that you have a cost explosion of the digital marketing and basically advertisers today realizes that digital is not the holy grail after all when it reaches less targeted and very high cost. There are a couple of studies having been done in the U.S. which shows that if you have a catalog and you use the Internet as a product fact sheet, so to say, people will buy significantly more online or offline in a combination between a catalog and online pages. And that has changed a little bit the game in the U.S. now. We even see people like Amazon making catalogs, which was totally unthinkable I think maybe 24 months ago. And these are generally high-end. They're not these huge catalogs anymore, but they are basically very significant user of paper. And they are also very high-quality catalogs. And that is the type of grades that we are producing. So we're not talking about, you know, the cheapest variant of paper. We're talking actually of high quality. And you can have the same argument why the big mass market circulation of magazine paper have decreased. The smaller, you know, very niche-oriented small magazines are actually striving and doing quite well. And that, again, is the grades in which we are operating.

Okay, that's helpful comments. A final question is on the volume side. I haven't had the time really to dig in all the details in the report, but you said it's a 5% down on shipments. This is more sort of timing issues, et cetera. I mean, basically my question is will those 5%, you know,

lost volume decline in volumes be reverted in q3 q4 in terms of systems so clearly the strike and peter sorry we cannot revert that so that will not come back and the um divestment of bees and will not come back either what will come back is clearly the the the shipment so we have about 30 000 tons in shipment in transit and goods in transit which we have never had before at that level And that has to do with the availability and, to some extent, slowness of the logistics systems, both in Europe and from Europe to overseas. And clearly, that product is sold, but is not accounted for yet because it hasn't been delivered. So that will come back. Okay, got you. Okay, thank you very much. Thank you, Johannes. Thank you.

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

Yes, good morning. You gave a comment there about Sackcraft paper and cement, and there's also hefty price increases lifted on Recy on Sackcraft paper. So I was wondering how much of that price increase is now captured in your guidance about the Q3 prices and what could happen in Q4?

I can give it a shot, Martin. No, but absolutely right. It's been very strong last couple of quarters for those segments. We do expect, when we go into Q3, to see further increases. And actually, when I look at the pricing estimates we've done for Q3 versus Q2, most of them will actually come from paper. both of the SACs, but also on the crowd paper, which is pretty stable. So we're looking at roughly, just for the Euro business now, something like a 7% pricing impact quarter over quarter. And I think it's a bit difficult to go much further than that because the market remains a little bit fluent, and then we're obviously starting to see signs that it's tougher to get this through if you kind of rewind six months ago. So we are kind of careful of commenting too much of what we expect for Q4. But for the time being, at least in Q3, we have already had some price increases in Q2 that we'll get the full quarter impact from and some new impacts already now happening from 1st of July. So we feel pretty good about the number and our ability to deliver that in Q3. Okay, good.

And another question, Verso, how is that going to progress now quarter to quarter? Because you gave the group number, but how is the mix between prices and costs for Verso quarter to quarter?

I can also try to comment a bit on that. So what we will see quarter to quarter, clearly you need to keep in mind this 170 million as we talked about this inventory step up. You also need to keep in mind that we are now entering a pretty hefty phase with the Quinnisec and Escanaba maintenance stop, well, maintenance and the meal upgrading in Quinnisec. But roughly, if you use a bit of a broad brush, you could say that we would expect quarter-over-quarter pricing in the U.S. of roughly $260 million, where half of that more or less would be offset by cost inflation.

Great. And say this last question for me, this pulp JV in Norway, it seems pretty small. How, how realistic and how good is that project?

I think it's an amazing project, but let me comment a bit more qualitatively on that. So what is the point here? The point is that clearly in our strategy in Scandinavia, we're looking at different sources of fiber and, uh, By creating a joint venture with Wieken, we basically create a long-term partnership with one of the big, largest forest companies in Norway. And the idea behind is to create a BCTMP pulp mill, state-of-the-art, which has already existing infrastructure in place. And basically, the key target for us is then Gruevon, Jævle, and Frøyvi. And as you know, we are buying currently BCTMP or CTMP pulp in the market. And this will give us basically very significant supply security, but also it gives us a significant cost opportunities as we are co-owner of this industrial site. The idea is that basically we can will will be a large shareholder in this joint venture, will be responsible of the wood supply to that joint venture, and basically we will take over the industrial management of making pulp, which is our core business. So I think it's a very, very exciting opportunity. Maybe we were not specific enough, but The Fulham site where we are looking at is actually about 220 kilometers from Gruvern. So I think it's in a very good proximity. The project has two steps. One is 180,000 tons, which is currently being under feasibility, pre-feasibility study. And it can be expanded for a very little capex in the future for another 100,000 tons or so. So we see that as a great capex from a return perspective. It answers our strategic need of long-term wood supply or fiber supply, and therefore we see this as very strategic, and we're very happy to have it, considering the strain on the current wood market in Scandinavia.

Great. And is there a long-term wood supply agreement regarding price on this one?

Well, we have a wood supply agreement with Wiecken for the mill, and we're also buying a little bit of round wood from Wiecken, and we are currently negotiating the long-term price mechanism on that, and I believe we will come to a very good and profitable solution for both parties. Thank you.

Martin, I'd just like to correct one figure I gave you on the cost side for Q3 for Versa. I told you roughly half of the pricing. That's not really correct. We would actually expect pretty flat cost in the U.S. Q3 versus Q2.

The next question is from Chris Koffer with Handelsbanken. Please go ahead.

Yeah, thanks. Thanks, Operator. Good morning, everyone. Just a short follow-up from my side. I just wanted to bring a little bit more clarity into the guidance here for the third quarter. If I remember correctly, if we go back one quarter, I think you were quite explicit, Christoph, that we definitely shouldn't expect profitability or earnings levels to remain going into the second half. Now, I mean, during the second quarter, it has been a lot of new uncertainties in the market, and it seems that you have gotten more positive. So, you know, if you can comment a little bit about that, what has, you know, developed more positively than what you previously expected?

I think there are two effects why I'm a little bit more positive now than I might have been in quarter one. You remember Russia invaded the Ukraine, I think, in the end of February, and the uncertainty at that moment in time was so high that I didn't want to give any kind of guidance going forward because nobody could really say what would happen in that war. I think today, now we know where the consequences lie with the strain on Europe. We don't know yet how bad it would get. But if I look at the overall market in our segments, In the short term, we do not see any softening on demand and we don't see currently yet any price softening. And now it's a question whether or not we get a big recessionary effect driven by probably the lack of gas in Germany or not. But even then, I'm a little bit more confident that the product segment in which we are operating are actually quite solid. And when you look at it, our competitive advantage sitting in Scandinavian with relatively high energy security and our lack of exposure to natural gas and things like that makes me a bit more confident than I was maybe in quarter one. And that is basically the drive. It has nothing to do with fundamentals. And then Yes, I'm also very proud of the guys in sales and marketing and supply chain that they have managed all these uncertainties that we faced in this quarter, and you have seen the results. The result is very good.

Great. Thank you very much.

The next question is from Harry Taitonen with Nordea. Please go ahead.

Yeah, hi. Very good morning. Well, the first question is about the contracts. I mean, a bit of kind of sneak preview. I understand that you don't want to talk too much about Q4, but you have a certain proportion of annual contracts as well. And just thinking of the January 2023, like based on the price movements so far this year, what do you see there as the kind of potential outcome for the contracts for the kind of early part next year?

Hey, I don't want to disappoint you, but really talk about our contracts. As you know, some of our business is under contract, some is spot. I think more and more business we have is under contract, and it varies everything between, you know, from zero contract to three months, six months, one year. I think we have a very stable rolling effect in these contracts so that – Very short-term changes are unlikely, but clearly over time, depending how the market is developing, contracts will be adapted accordingly. So there's not much more I can say.

Okay. Fair enough. Well, maybe on the wood availability, you already, of course, discussed it, but given that there is new kind of wood-consuming capacity in the Nordic area, coming up next year and so basically wood market is probably going to remain quite tight. Do you see, I mean, it sounds like for now the wood flows have been sorted out and sort of stabilized, but what can you see sort of for next year? I mean, other new sources or how to develop the wood sort of security in slightly longer term in Scandinavia, given the new sort of pulp capacity coming up?

Yeah. Look, I think you have to make a difference between the long-term trends in Scandinavia and the short-term impact on the war in Ukraine and the basic stoppage of imports. So I think the price effect that you have seen in basically Scandinavia in the second quarter is really driven by Ukraine, okay? and the market needs the time to recreate the new flows within Scandinavia. Then in addition to that, you have a lot of additional flows, be it wood chips, be it eucalyptus pulp from Latin America, be it, I mean, there are many different sources, and I think they will become more cost attractive with the rising prices in Scandinavia, and a new equilibrium will be found. So I think we're not talking about strategic availability issue of wood. We're talking about a re-equilibration of the market price of wood in Scandinavia, especially then in 2023-2024 when the new fiber-consuming activities will start. But then on the other hand, you have also seen this year that on the demand side for fiber, there were also some closures. So the market, I think in 2020, 2021, looked actually worse than it does today where some of the demand side has also softened. So I think we will end up with structurally slightly higher prices, which will then be counterbalanced by other fiber sources, as I mentioned, pulp, eucalyptus pulp, for example, out of Latin America.

Right. That sounds good. Final question, if I may, third one. On the dividend policy, how should we kind of interpret that now? Because you have made like over 11 kroner per share for half the year, and On the other hand, you have large projects ahead and CapEx outlay ahead. You raised equity from investors earlier this year. How should we read the policy to issue a dividend of more than 50% of net profit? As far as you can comment, of course.

That is clearly a board decision, but we have a clear policy in place. My expectation is that the board will follow the policy and not change it. And I think that's the way of looking at it. Okay.

Clear. Thank you.

Thank you.

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

Good morning, gentlemen. A couple of questions from my side. First off, coming back to these price increases, which you've already talked about quite a bit here this morning, but I mean, you got for, in total, as I understand, for the company, 3.5% to 4% in Q3 versus Q2. And then you say $260 million quarter-on-quarter in North America, which I get to about, well, 9% or so with no cost inflation. What kind of situation on price increases and cost inflation are you seeing in Europe? That's my first question on prices. And the second one is, does this guidance include mixed, continued mixed improvements, or are those, you know, potentially on top of this? And then my third question is on the QINISX stop. I mean, it's $400 million this year. What's the normal sort of stop cost excluding, you know, the upgrades that you're doing this year? Yeah. And then just a fourth question is, if I may, on the Russian SAC paper, which is obviously now being excluded from the European market, where are those volumes going? Somewhere else and sort of resulting in increasing competition for you in other markets? Or do you feel that they're not being produced or exported at all?

So four questions. Okay. Thank you, Oscar. I hope I can remember the first one. I'll hand over to Ivo.

Yeah, no, thank you. Good morning, Oscar. So how you should think about it for Q2, and if you look at the material net sales, we had somewhere between 4%, 4.5%, actually close to 4.5% in Europe. And we delivered a bit higher than that in North America, so more in the 7% range. And going into Q3, as I did mention, the $260 million-ish is what we see for Q3. And we would see somewhere in the area of 130, 140 million for Europe. That's currently at least what we estimate. And I can confirm that this is pure price impact or pricing impact. Mix would come on top. And then if we move into, why don't I start at least, Christoph, on the QINISEC. So as you say, and it's a good question, you bring it up, Oskar, that this is an unusual amount that we have this year. You should think of 170 million typically as a kind of normalized amount for QINISEC. But maybe just to point out that they do it a little bit differently typically in North America when their maintenance stops. So they tend to stop the machine once per year. And pending a little bit on the situation, also the dialogue with insurance companies, et cetera, then they might stop down the pulp side as well. But that's not always given. So you can use 170 for now. And when we go into 2023, you can expect us to come back with further guidance on both Escanaba and Quinisec. Do you want to take the last question on the Russia sector, Christoph? Yeah.

So clearly the 80,000 tons that came normally over from Russia are basically not in Europe right now. That's clearly one of the reasons why the market price basically is holding up very well, and we still have some further price increases. I must admit, we haven't seen that paper in other markets, or at least I'm not aware of that. So I don't know if it's being produced and shipped to other markets, I expect that actually to be the case, but we haven't seen increased competition from that, at least not yet, I'm aware of that. Thank you.

Just a follow-up, if I may, on the SAC paper side. A lot of your SAC papers are going to the cement industry and related to construction. We've seen sort of saw and timber also related to construction. Those prices are now set to come down as construction activity slows. Is that something that you're potentially seeing in this market as well, that there's some caution given what's happening with real estate and construction markets?

Yeah, exactly. So what we see is exactly as you said, we see a caution in the building market, absolutely. And I think... whatever you read around 2023, that is probably even increasing. But we have not seen that change in the demand for our products as we speak. And I believe that is due to, for example, Russia not exporting stock paper and also still a very, very fragile logistic situation. So basically, from that perspective, prices are holding up. not due to the end users, but due to the circumstances in the market.

Thank you.

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

Good morning. Thanks for taking my question. Just the first one on container board demand. You've given a lot of color around your other end markets, but if you could just give some views on what you're seeing in the container board markets and what you're seeing from your box customers there, that would be very helpful. And then the second question is also around the wood cost and the pulp wood dynamics. Could you give a little bit of color on where you're seeing the greater price increases? Am I right in assuming that the biggest price increases from your sourcing side would be from the Baltics. And I'm just wondering how your wood costs may be impacted. If we do see a slowdown in construction and kind of sawmills, will this potentially further rise wood costs into the second half of the year, given the lower availability of wood chips from the sawmills?

Thank you. Okay. Let me start with the first one, and maybe, Eva, you can take the wood cost question. So when we look at container board, as you know, we have our biggest product, so to say, here is fluting, which is very specific, especially in application of fruit harvest, et cetera. And with the drought in South Europe, I actually think that the driver here is much more the demand side and how will the harvest look like now and basically going forward from September. So we see a little bit of, of challenges there. Um, but generally speaking, our order books are still absolutely full. So we do not, will not have a direct effect on that because we are still operating on a, on a full order book. Uh, but clearly I see some challenges in the market when it comes to, to container board. And that is generally speaking the first market. which will react to changing economic circumstances or specific things like a drought in South Europe or something like that. Do you want to talk about the wood price?

Yeah. No, I mean, I can confirm that the Baltics is certainly the main or one of the clear sourcing destinations for us on hardwood. And the prices there are obviously extremely high. It's all-time high. So that clearly is... much more expensive than it used to be. But it's expensive everywhere. So even some of the hardwood that we're able to source within Nordic has obviously gone up significantly. And it is a bit of a fight to secure the positions. And clearly different players are taking new positions, both in Sweden and in Finland. So it's pretty brutal at the moment on the hardwood side.

Yvonne, and just to follow up, maybe I missed it, but What was the main drive of increasing your cost and efficiency program target to $900 million from the $750 million? Just a little bit of color for that upgrade.

Yeah, good that you picked that up. So I can only say that we had, going into the year of 2022, we had certain building blocks in place and we had certain kind of targets to achieve. So we were able to achieve them a bit faster than expected, which obviously is very good news. And we still do a bit of... a forecast and a mid-year review of where we want to be we still feel that there's ample opportunities to go for more so you can say we've added more building blocks now for second half of the year and yeah we remain pretty confident in our ability to deliver those thank you okay so it's past 10 o'clock and if there are no further questions we will conclude this conference call

Thank you all for participating and welcome back when we report our Q3 results, which will be the 25th of October.

And on that date, we will be called Billerud because we will change our legal name at the beginning of October. So I'm looking forward to speak to you then and I wish you a very, very good summer. Thank you.