BillerudKorsnäs AB (publ)

Good day, and thank you for standing by. Welcome to the Billerud Q2 Report 2023 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a questions and answers session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lena Schattauer. Please go ahead.

Good morning, everyone, and welcome to this conference call about Biller's second quarter result. Here in Solna is our president and CEO, Christoph Michalski, and also our CFO, Iva Batne. They will hold the presentation, and after that, we will open up for questions from the audience. So with that, I hand over to Christoph for an introduction of the quarter.

Thank you, Lena. And good morning, everyone. And I hope you're all spending a good summer. And thank you for attending our call. I think the first slide of our presentation says it all, what happens or happened in quarter two, which is really about navigating a very challenging market condition. And you have seen that in our numbers. It is basically qualified by very low volumes and continued customer inventory stocking in a very soft end market. So I think this is really still the overhang from 2022. We have seen this very strongly in quarter one. It has continued in quarter two. And because of the lower end demand, In general, the destocking was much slower than what we initially anticipated. On a pricing side, we have quite stable prices in North America and some deterioration in Europe. But in Europe, we just have to mind ourselves. We had, I think, record pricing in 2022, and these levels are starting to erode slowly. Clearly, input costs came down. but did not offset the price deterioration, and this resulted in significantly lower margins. You have heard about our blastomycosis outbreak in the U.S. I think we, after resuming operation on May 8th, I think we believe that it's probably behind us, and everything since the startup in May 8th is pointing in the right direction. We had some re-evaluation of inventory, which also impacted our result to some extent. But on the positive side, we had positive cash flow for the quarter and very tight control in inventory. I want to remind you we had a little bit of too high stock coming out of 22. And over quarter one and quarter two, we were able to bring down the inventory level to a reasonable level, or I would say the normal level. Eva will later on talk a little bit more about the enhancement, the efficiency enhancement programs that we have accelerated to aim for 600 million for this year. And he will give you some example of what are these type of activities. But overall, you can see net sales have been declined by 13%. Adjusted EBITDA is 188 million, so in line with our previous profit warning in June. And unfortunately, EBIT is basically now minus five of net sales and earnings per share were negative at minus two kroners. If you look at the bridge for net sales, you can see that basically the key impact has been volume and mix, and this resulted in a 19% decline. The pricing was basically stable, no change, and currency rates had a positive effect of 5%. I think the whole story of the quarter is even better described in our EBITDA bridge, and here you can really see the difference. If you take Volume and mix, you see a decline of 1.175 billion Swedish crowns. And this is basically a mix of soft demand, which is the majority. Then we have some mixed changes. For example, when we could not produce paper, we actually produced pulp. And clearly there are different price implications on that. And then also we have a slight mixed effect on customers. Us, with the soft demand, we are also chasing some non-core customers and non-core region, which results in slightly lower pricing. When you look at the net of raw material and logistics, minus 611, clearly a very significant impact still compared to quarter two last year. And the efficiency enhancement program shows 430 positive. And this is basically, as you know, we started this in January, February last year. Sorry, this year. And basically, you will see an acceleration of this program in the bridge as time goes by. Here, a little bit of inventory revaluation, clearly 400 million, nearly 400 million. And then in others, you also have the effect of Escanaba. So others actually normally a little bit lower. And then adjusted for maintenance schedule, et cetera, we arrive at 188 million crowns. Good. Probably most of you are interested in what we think the market will do and what the market is doing. So let me spend a little bit more time on this slide. We do not, I think it's important message to understand that What happened in quarter two is very likely to continue into quarter three. So we do not expect significant changes in the market condition in quarter three. Liquid packaging board, one of our largest segments, is basically probably the segment which is the most stable. Demand is relatively stable, even a bit softer than usual, but nothing really to be worried about. Liquid packaging board, We see no change in Europe, a little bit of ups and downs in the D&E world. And we do not expect that this market will have either significant down or upturns in the following quarters as time goes on. Carton board, clearly very different story. I think there's still a lot of stock in the system. Being out between our converters and brand owners We see relatively low consumption at the stage. So this situation will probably continue for a while And in this market environment, however, we do not see many dynamic price effects so relative stability Container board is actually better. I think we have now reached up approximately the level of of these stockings that would be normal. And the demand and consumption in the market is relatively good. You also understand we have some exposure to the harvesting in southern Europe, so basically demand is picking up. But there is in this segment undoubtedly more price volatility than we see in container board. Craft and speciality paper. We have weak demand, and we see this not to change significantly to the end of the year, and we see some price erosion in the segment, but coming from record height from 2022. SAC paper, I think what we see is low demand, but we see that the paper stock in our converters has been coming down to reasonable or even low levels. However, the portion of finished goods in their stock is still relatively high, so that we actually see relatively low demand for the time being. And I think another indication that this market is not normalized yet is the fact that converters are taking significant breaks during the summer holiday which I think a normal would be one week or two weeks. It's more three to four weeks, as we can see. Graphical paper is entirely focused on the U.S., and we see low demand but very good price stability. And I think when you look now in our new segmentation of the region of how we report our numbers, you see excellent profitability from a contribution level despite low utilization. So it's very promising. So we think that in the U.S., when graphic paper will start again, which should be in end quarter three, maybe beginning quarter four, that we see a significant uptick. Good. I will not really comment on pulp. As you know, the pulp market, we are a bit long this time because we had lower production and curtailment from a carton board and paper side. But basically the pulp market in terms of pricing remains weak and we see also relatively low demand. But generally speaking, as soon as our production starts again, we will be basically a wash on pulp and therefore it doesn't have a significant impact on our business. Good. I hope that gave you some color of what we see in the market. It's not a particularly positive outlook, but it's not getting worse. And having said that, I would like to hand over to Eva. Good morning, Eva.

Thank you, Christoph. And good morning, everyone. I wanted to quickly give an update on how we are changing our reporting structure now in Q2 and how it's going to look like going forward. And basically, we moved to a fully regional setup, as this is very closely mirroring our operating model within the company. We'll have the region Europe with all of the material sales and the different production units and within the six categories, and for the region North America, which is material sales from our two production units in Upper Michigan. And for now, we're talking about the three categories we're exposed to. But we're obviously hopeful that we can start adding paperboard in the not too distant future. So we have a third column as well on this slide. So that's the solutions other. And that would then consist of managed packaging or services within Wood Supply. It's a cost center for some of the staff functions on typically HQ basis. The currency hedging you'll find there and some impact of non-core assets. And this category will obviously be looking a bit different from Q3 when we expect to manage packaging, but more about that a bit later. So let's get into it and start with region Europe. And yeah, it's certainly been a challenging quarter for region Europe. We are not experiencing business as usual, and we're having to manage large cost increases and a very unpredictable future. Going through the numbers, negative sales volumes pulling the net sales down to minus 4% versus a year ago. We're seeing most categories now are coming into negative growth as sales prices are starting to drop in combination with somehow or somewhat softer volumes. Pulp is growing as we're allocating more of the machine downtime towards the pulp. Craft paper is also on positive growth with strong performance from in particular white And last but not least, we see growth coming from the liquid packaging board fueled by the pricing positions from the beginning of the year. In terms of the profitability, it's clearly under pressure with input costs close to 700 million versus a year ago. And in particular, this is driven by pulpwood. And we're not expecting pulpwood to come back down to previous levels anytime soon. The cost inflation is only partly offset by pricing held from our efficiency enhancement program and currency. So we'll need to do more to improve the situation and keep working hard on driving profitable mix and review pricing position with our customers going forward as the current profitability level is not satisfactory. So with that, let's move into some more details on the input cost for Region Europe. So as I mentioned versus a year ago, the instance cost inflation for Europe is around 700 million. Now, if we look versus previous quarter, we are starting to see some of the cost component easing off. So we've seen in the quarter a cost relief of around 200 million versus Q1, which is roughly equally split between chemicals and energy. Fiber was up 30 million, but we saw a pretty similar cost relief on the purchase pulp. Logistics, in this case, was stable. Now, going into Q3, we would expect to see another 90 million of additional cost reduction. So that will be then compared versus Q2. And this will mainly be expected to come from chemicals, and in particular, the caustic soda, which has been falling hard over the last couple of months. Logistics should give us another 30 million of lower cost as our new overseas container freight contract is starting to kick in. However, the fiber cost is estimated to increase by 55 million, while we should see pulp coming down by another 25 million. Energy looks to be relatively stable, maybe a small help, given how the June spot prices have materialized. Right, so with that, let's move over to the region North America. So like in Europe, I mean, it's been a very tough situation also in the U.S., but for partly different reasons, I would argue. Demand has been extremely slow with customer destocking continued and softness in the end-user markets. And in the U.S. now, we are operating with a significant production curtailment and operate with roughly around 60% utilization rate of NR2 meals, which is completely unprecedented. On top of this, as Christoph also mentioned, we had the blastomercosis outbreak in Escanaba, and I had to idle a meal for several weeks in April to perform a long list of cleaning activities. But I'm very happy to inform that we have resumed production in Escanaba mill in early May as per plan, and all of the cleaning activities were executed successfully. I mean, so with that background, we're actually pretty happy with the performance of the U.S. region, also in terms of our profit delivery. The underlying of structural profitability is rock solid. And what I refer to that is the gross margin, which we'll find north of 50%. And then that enabled us to close the quarter with a positive result, despite this very, very soft volume we found in the quarter. So we remain very excited about the North American region. And we are very proud, actually, how we've been able to maneuver through a very tough quarter. So if you go to the next slide, please, just some points around the input cost also for North America. The situation is much more stable versus what we've seen in Europe. That has been the trend for quite a bit of time. We've seen roughly 50 million of cost reduction coming in, and that is compared to Q1. Yeah, it's roughly equally split between energy and logistics. And fiber and pulp wood came down by around 50 million. That was pretty much exactly offset by some chemical increase. And going into Q3, we do expect another small help as the input cost is keep trending down and we estimate roughly 30 million versus Q2. And in this case, we expect that mostly to come from fiber and pulp wood and some small savings from chemicals and energy. Logistics in this case estimated to be flat. So let's move into the next slide and some words about cash flow. We successfully drove up our operating cash performance in the quarter. And this is also something which is very pleasing to see as that has been a very clear company priority. And it's first and foremost coming from the working capital where we have continued to drive down our finished goods inventory across both regions. And as also Kristoff mentioned, we now on the inventory level for both region that you're happy with and also sit on a good level when we benchmark versus historical levels. Balance sheet is still solid and keeps the debt ratio sound and way below the target. And I also just wanted to inform that we have renewed our credit facility during the quarter and we have that now secured until 2028, which is good news. For CapEx, we do maintain our guidance for 2023 and unchanged at 2.9 billion SEC. Good. So next slide, please. And I just want to give a little bit more color also on one of the very clear company priorities for the coming, well, this year and also for the coming years. And that's our performance in this efficiency enhancement program. We are off to a very good start on the whole program and we delivered another 130 million Now for the quarter, taking our result up to 225 for the first six months. There's a ton of energy throughout the organization to succeed on this, basically across all of our operating units and functions. We obviously recognize the challenging financial situation we're in, so we literally need to do more faster. Now, the confidence we've gained on this program during the first half enabled us to raise ambition. for our 2023 delivery up to 600 million. And we will need to do this through combination of adding more items and accelerate further different potential pockets we have identified. This is not a sprint, but we also mentioned this is a three-year program, and we are simultaneously working on the program plan of what items we can expect going into 2024. So with that, I hand it back to Christoph. Thank you, Eva.

So there's also some Good news, so to say. I think, as you know, we were incredibly concerned in March, April and May concerning the outbreak in Escanaba. But I think with the hard work together with all the health authorities, we are now pretty confident that the worst is behind us. We idled Escanaba for three weeks in order to do proper deep cleaning everywhere. We still don't know where the outcome came from, but I think we have a pretty good time horizon when it was, and that was probably at the end of the year into January, considering the timeframe of the cases that we have registered. The health organization in the U.S., NIOSH, has basically done mass testing and mass sampling across the mill in May. And this allows us, hopefully, to gain more understanding. But by assessing all these samples, 477 samples was taken, we haven't found any higher concentration or any source of the outbreak yet. And that gives us some confidence that probably this event is behind us. There will be a full report published and made available But this will take time because these samples have to be grown and then DNA tested. And also, I think there's still some work ongoing when it comes to the mass testing of 608 employees and contractors who basically went for voluntary testing in order to gain more knowledge of where and how the outbreak could have passed. Okay, in terms of impact, the impact is about 85 million Swedish crowns. You remember we valued the impact, I think, around 150 in quarter one as a quick estimate of what it would be. It was a little bit lower because through the low demand in North America, the contribution aspects were lower than we expected. And I think the cost was around 60 million crowns when it comes to all the cleaning activity that we have performed. Very good. Then we have a number of capital projects you are aware of. I think the very good news is that the Frövi boiler is basically advanced in time. So it's four months earlier than the deadline for the boiler. And it's also under budget. The other good news is that we changed a bit the scope, and this is now a full biofuel recovery boiler, which will not use any type of fossil fuel going forward. The CAPEX savings are mainly around good negotiation with suppliers, very disciplined project execution. And also, clearly, as we say, time is money. The fact that the project is moving faster than anticipated also delivers some savings. And if you think about the periods in which we built this boiler, which was the cement crisis in Sweden, but also the COVID, I'm incredibly happy with the team performance to deliver this project as it is. For the U.S., we are progressing very fast and very well, but clearly the project complexity and size makes it a challenge. Just to remind you, it's about the transformation of one paper machine into carton board. It's about a new BCTMP mill. It's about a new wood yard. It's about basically rendering the mill in line with our sustainability ambitions and customer needs. And therefore, the project is not yet at the same quality as I would like to see it as we had for Frövi. And therefore, we will take a final look at this probably more at the end of the year in order to decide when to order equipment to start up. We signed with the government of Michigan a grant and tax relief agreement, which will basically follow this project to 2030. And we also started with, I would say, a very important but minor CAPEX, which is basically to create a good infrastructure for this transformation by building two bridges across the river in Escanaba, which will allow us much easier access for people and vehicles into the facilities. The second big project for importance, particularly in Europe, is our Norway project, which is progressing really well. We have now finalized most of the contract negotiation with Wieck & Skog when it comes to our joint venture for BCTMP plan. The project feasibility phase is progressing very well, and we will basically look at all the CAPEX projects together at the end of the year to optimize our phasing and the timing of these different projects and therefore a decision on Norway will also be at the end of the year. I think you're all aware that we have changed strategy about two and a half years ago where basically the key focus has been what is our core business and we should focus on the core and I'm very happy that we are finally divested now managed packaging, not because it was a bad business, but it was not in our core activities. We also exited some holdings we still had from the venture fund and basically sold our shares in Kessler. And finally, we're also looking, we still have some remittances of forest properties, which we call marmoscope, which is one of the Bergvik Earths that were not integrated in Bergvik Earths. And we are also looking at basically divesting non-core assets in order to really be razor sharp on our primary packaging strategy. Okay, when it comes to the outlook, I think no surprise, as I said before, We expect the weak demand definitely to continue into quarter three. We will see some recovery by the end of the year in the US, but I think the bulk of the European recovery will be later, very late in the year, beginning of next year. We will continue to manage stocks very, very carefully in order to basically safeguard cash, which basically means that we will manage some containments as we go along. And unfortunately, despite we think that prices will probably where they should be in the market, but we will have some negative mixed impact just by the fact that we sell more pulp and that we are chasing maybe volumes that in normal circumstances we would not chase. And then finally, good, excellent progress and continuous acceleration with our delivery and with our efficiency enhancement program and as Eva said we are very happy about the engagement and the motivation in the company to drive these projects forward and we see very serious progress also in terms of financial delivery. So that was our presentation for this quarterly to 2023 review. I think I will now hand back and we will open for questions. I would be grateful if you limit yourself to one or two questions and then ask the next ones after that so that we can answer properly. And yes, please operate if you take back for questions. Thank you.

Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. Please stand by while we compile a Q&A roster. Our first question comes from the line of Robin Santavirta from Carnegie. Your line is open.

Thank you very much, and hello, everybody. Now, I have two questions. The first one is related to demand and volumes. you along with most of your peers have suffered for quite weak volumes now in Q1 and Q2 and as I understand on the back of your comments the outlook for Q3 at least is still quite weak is this now to what extent in your view customer inventory destocking is it import volumes from Asia to some extent or underlying demand and when do you expect sort of the demand and volumes of the performance to improve so a bit more sort of color I would appreciate and also just sort of directly Q3 volumes versus Q2 maybe for e-values sometimes sort of given an SEC millions of Q and Q estimate. Is there something that you could share on that one? So that's the first one. The second one is just maybe a technical question related to the inventory revaluation write down you had in the quarter. What should we expect for the remaining quarters this year? So those two, thanks.

Okay. Thanks, Robin. Good. Let me give you a little bit more color on how we see demand and volume develop. So I think two things. First of all, as I said, across different categories, we have slightly different stocking issues. If I start with the U.S., I think we expect that stocks should hit normal level by quarter three, and then there's a question which month, and probably we say September, October, so quarter three, quarter four. We have actually seen a record low number of imports into the US, so I think the imports are also affected by this low demand. When it comes to the demand in the market, you all know that our products grow and perform in line with GDP growth and economic activity. And then your guess is probably as good as ours when the base demand will basically start up again. I think what we see is the destocking effect will have already some very positive effects for us because then the containment will increase. with all likelihoods stopped. And then it's just a matter for the demand to recover a little bit as the economies will recover. But as I said before, then your guess of saying when that will happen is as good as mine. And we expect 2024 being significantly better, but we do not know when the acceleration will happen, be it in quarter three, probably more in the US and in quarter four, you know, normalized and then in Europe it will probably happen by the end of the year and then definitely hopefully in quarter one. So that's my view on just volume development. Do you want to give some color on the impacts?

Yeah, I mean, good morning, Robin. I think, as Christoph said, I would be quite careful of adding too much quarter of a quarter. It's not unreasonable to assume that we will get a little bit more volume in North America in the back end of the island we had over the Escanaba mill. But we're talking here maybe a 20 to 30 million sec impact just in terms of some of the tons that we probably in normal circumstances would have sold. We would also get a little bit probably more volume just based on the maintenance schedule was a little bit heavier in Q2 versus Q3. But that's already in that number. So remember, we had 400 million of maintenance cost in Q2. We estimate roughly 300 million in Q3 as we will do the Karlsborg, Gävle and part of Escanaba. So we will get another 100 million held from there. But just keep in mind, so you don't double count, that is just on the maintenance facing more than anything else. I would argue that most of the other stuff on the underlying performance should be pretty stable, Q3 versus Q2, as Christoph alluded to. Inventory? Yeah. So your second question, Robin, on the inventory revaluation. And yeah, I was somehow expecting this question to surface. We don't really normally talk about inventory evaluation, since that impact tends to be relatively limited. And just as a bit of a reminder for everyone on the call that we do basically value our inventory and we do that estimate every month. We lose the last two months of, you can call it the cost thing, input cost average to do that valuation. And normally you would see typically a plus minus 50 million between the quarters. That I think is usually a good range of what we see. The reason why it got so much bigger this time was that we did see a very clear trend shift from the end of Q1 where the input principle is spiking and then starting to fall quite sharply going into Q2. So to your question, then if you think about at least for Q3, we are expecting, and I also mentioned this, that the input cost will be falling. So I think, let's say maybe we're up to 50 million or in the range of the 50 million of additional help on this case is not unusual to expect. But if you're thinking about long term and over kind of quarter, typically it would be plus minus 50 million.

Thank you very much.

Thank you, Robin.

Thank you. We will now take our next question. Please stand by. Our next question comes from the line of Martin Melvy of ABG. Go ahead.

Yes, good morning. You gave the input cost changes quarter of a quarter. You said 90 million plus 30 million, right? That is the sum, so 120 million. Is that correct?

Sorry, you meant Q2 versus Q1?

Q3 versus Q2.

Exactly. So Q3 versus Q2, we do expect roughly 90 million from Europe, 30 million from North America. Yes, confirmed.

Excellent. And then the follow up on price, you're saying negative mix and price reductions. What would that be in SEC for Q3?

Yeah, so this is obviously where it starts to be fairly estimate. I think Christoph mentioned, I just wanted to say that first. I think there will be a combination of some selective price adjustment. There will be also then probably some negative mix just because of category impact. I mean, the point is one point, but also that there will maybe be some customer mix impact. But what we estimate, if you talk about the material sales first, We would be looking probably around 130 million. So that would be then a price drop Q3 versus Q2. Rough split of that between the region would be somewhere in the area of 50 million for US and about 80 million from Europe. Just keep in mind, we don't really talk about it, but since now there's so many movements on the pulp piece, we're obviously not the most exposed company in the world in terms of pulp, but We do expect to see also drop now of 120 million-ish on the poll pricing and roughly between the region, that will be 50 million North America, 70 million Europe.

Okay, so it's 120 plus 130. Yes. Excellent. And then the last question, you mentioned this Bagvik Est may be up for sale. What is the book value there, please?

Yeah, so for the 9,000 hectares that we're looking into now, we estimate that book value to be in the area of 100 million SEC. Thank you.

Thank you. We'll now take our next question. Please stand by. Our next question comes from the line of Johannes Grunzelius. of DMV. Please go ahead. Your line is open.

Yes, good morning. Johannes here. My first question is on the ongoing investment project in the US. Very key for you, obviously. Christoph, I think you mentioned it's highly complex and so forth. I understand that. Have you seen anything that has increased in terms of complexity, basically, over the last few months since your last update? And with a lot of companies seem to walk away from investment projects at the moment, is it fair to assume that this will also have an impact on the prices for equipment in your favor?

Okay, thank you. Good morning, Johannes. Look, I think when it comes to the initial scope, when we acquired Verso in 2022, the scope is exactly as we expected it. So there's no significant change there. There's always some minor changes. For example, with the granting, we might do a little bit more work with the grant of the Michigan government. We will do a little bit more work on the sustainability aspects and these type of things. But I think the overall strategy in terms of or the scope of what needs to happen is very much the same. Clearly, we have seen ups and downs of CapEx cost and prices and quotes and things like that, which you probably alluded to. And I think we're in a much better space now in this type of discussion with our suppliers and in the way how we will look at the CapEx and phase the CapEx and things like that. But as I said before, we need a little bit more time to bring it to a planning quality that will allow us to deliver this project on time and in budget. And that I expect now to be around the end of the year that we have all the facts on the table. And then we need to take all the projects we have and phase them in a proper way so that we can financially and in terms of investment strategy have an optimized portfolio.

Okay, got you. And then my second question, maybe I missed this in the initial part of the call, maybe the data information is in the report, but I think you guided for inventory effects of minus 280. What was the actual outcome? And Ivar, is your message that we should expect this number to be slightly positive in the third quarter?

No, I think we guided for, in the end, 310. And that was versus, you can call it a Q2. I think now the number that was shown in the bridge versus a year ago. So I think, you know, we came in pretty close to that estimate versus a Q2. But yes, I did say also to Robin that, you know, typically plus minus 50 million is kind of normal movements. I just want to actually correct myself. So good that you asked this, but I think I accidentally said to Robin that there will be 50 million help going into Q3 versus Q2. Obviously, since the prices are still falling, it will be a herd. So up to 50 million herd in Q3 versus Q2 is currently the best estimate.

All right. All right. Got you there. Maybe I can take a final question as well, and that is on North America. Because, I mean, in a normal market, when you have weak operating rates, there is a price pressure. Not this time, it appears. But are you comfortable that we will not see that the price discipline continues in the US in the coming quarters?

Yes, thank you for that question, because that's clearly, I mean, the US is a very different market from that perspective than Europe. Europe is far more fragmented, both in geographies, but also in players. And I think in the segments that we are now playing in the US, we have a limited amount of competitors. We have imports which can come in and the U.S. dollars are still strong, but the lead times for these imports are quite long compared to local production. And so what we see, I think, in the short term is we don't believe there will be any significant price erosion in the U.S. And imports today are at a historic low. So basically, I think with all our customers we are discussing, it's basically the message is, hey, as soon as our stocks are at a level where we need to reorder, we will come to you. And there is no particular price change forecasted as we go forward. In the long term, I do not think that will change significantly either. As you know, we are the most cost-effective operations in the U.S., and I think there might be other middle closures. So I think the remaining of the graphical market, especially in the added value segments we are playing, it's a very good market at this stage. Okay, thank you. And just maybe to add to that very quickly, it's very different than in Europe, okay? So you cannot just... take the graphic market in Europe and basically convert that to U.S., the market dynamics are different. Thank you.

Thank you. We will now take our next question. Please stand by. Our next question comes from the line of Christian Kopfer of Handelsbanken. Christian, your line is up.

Yeah, thanks for that, operator. Two questions from my side, and firstly on the revaluation of inventories that you mentioned here. Just to clear, if I made my math correctly here. So if we just isolate revaluation of inventories going into Q3 versus Q2, that in isolation, that should mean that result should be around 260 million better in Q3 versus Q2?

No, no. So we basically revalued now the inventory end of Q2 on, let's call it reflecting the current level of pricing. And given pricing expectations are that they will be coming a bit down into Q3, we would expect then about, let's say, up to 50 million hertz Q3 versus Q2.

Yeah, that I understood, but I thought you had a P&L effect of some, at least if I go by the guidance in the pre-announced numbers, that you said that you had some 310 million negative from re-evaluation of inventories in Q2. That was included in the P&L for Q3.

Yes, so that's basically the impact. So that's the impact. So you can argue that We had a help in Q1 and then now we got hurt in Q2. So the difference is up to the 300 million. And in that sense, now we expect a much smaller impact going into Q3 versus Q2. So the number should be in that sense also much, much more moderate. And the 50 million is the best estimate.

Okay. So the earnings delta when it comes to inventory is 50 million lower. Okay.

Yes, correct.

Okay, okay. Sorry about that. And then on the logistics, I think, Eva, you mentioned previously expected quite material positive impact from more effective logistics or change of logistics. And that should kick in in Q3, right? But you mentioned that you, if I remember correctly, you mentioned about 30 million positive impact from lower logistic costs in Europe in Q3 versus Q2. Is that the full effect of the better logistic?

No, it's a good question. It's a good question, Christian. I think it's also partly because the activity level now is a bit lower in general. So you can say that it probably reflects also some of the volume softness we have I would probably argue that numbers should be more than 50 million per quarter in a normal. So let's say that we probably will also expect to see, going into Q4, et cetera, a bit more of a saving on that one. But a good chunk now will come in in Q3 versus Q2.

Oh, okay, okay. That's understandable. Okay. Thank you very much for that.

Thank you. We will now take our next question. Please stand by. Our next question comes from the line of Cole Hafthorne of Jefferies. Please go ahead. Your line is open.

Morning. Thanks for taking my question. Um, Christopher, in the past you were focused on kind of optimizing, um, machine uptime and, you know, the wider, um, production base of, of Bellarude. And I'm just thinking that with wood costs being higher for longer, Is there an opportunity to think about some rationalization of your current European footprint? And can you give any color of how you're thinking about that? Because, I mean, if you are taking advantage of some sales that you probably wouldn't do in normal times, would you think about further rationalizing your cost base and optimizing your mix across your various mills or machines is the first question. And then the second question is just a follow-up on the inventory write-down. Maybe I'm just being silly here, but I thought the $310 million impairment, is it not, we should assume, you know, that doesn't happen in the third quarter. So we see a positive $310 and then a minus $50 for the inventory write-down. So I'm probably just misunderstanding. Thank you. Okay, let me start.

Thanks, Colt. Okay, yes. So as I said before, what we are trying to do in Europe, but we do the same now in the U.S. as well, is that we treat our mills more and more as a system where we try to optimize production capability by mill and basically look at them as a system. And what we see today is that this is working very well. So, for example, we took in these two quarters more curtailment in, say, Prüvi, and we prioritized KM7 and Gruvern for the production because the production, marginal production costs are lower. And we did the same in North America, where we have some capabilities in Quinisec, which are similar to those in Escanaba, and then we prioritized Quinisec. And therefore, yes, we optimize quite a bit. When it comes to overall sites, all the sites today are still profitable. So there is basically not a discussion of footprint when it comes to mill level. However, clearly, as you know, there are always machines here and there which are basically less profitable and more profitable or need significant capex investment. And then the question is always, should we continue with them or should we shut them down? And that's a continuous process. I think what you have seen, what Eva is also mentioning, this optimization, this TME improvement and efficiency improvement also goes clearly when it comes to machinery. So that's an ongoing process. But when it comes to mill closures or things like that today, We do not have basically a good argument to close a mill because they're all cash positive. And if demand comes back, then this capacity is absolutely needed. Do you want to take the... Yeah, no, on the second one.

So, no, I can... I just tried to... Well, repeat what I mentioned earlier, that we brought up the inventory valuation both last year and Q2. We also brought it up in Q1, given that the prices were still moving up. And now the prices are coming down. And keep in mind, these inventory items are stuff we put on the balance sheet, right? So there will be balance sheet items flowing into the P&L. So in that sense, the impact now is pretty big in the quarter, given we had a trend shift. And it is the 300, roughly, Q2 versus Q1. And given how the trend continues a bit further down, we do expect just a smaller impact going into Q3 and Q2. So it should be around the 50 million additional in Q3 versus Q2.

Thank you. And then just as a follow-up, Christoph, you gave some good color around container board effectively stabilizing and seeing mostly the destock ending on that market. Could you give a little bit more color around the SAC and CRAFT where you think we are in the destocking cycle there? Thank you.

Hold on one second. So SAC and CRAFT, has still some weaker demand. I think on the white sack, no, sorry, on MG, we are doing better than on MF at this stage. But we see also some price volatility. So I think when you look at this segment, we do not believe that we will have very significant uptick before the end of the year. because of basically stocks in the system and the weak demand that we are facing.

Thank you. Thank you. We will now take our final question. Please stand by. Our final question comes from the line of Andrew Jones of UBS. Please go ahead. Your line is open.

Hi, gents. Thanks for the questions. I've just got a couple. I'll ask the first one. First of all, I'll come to the next one after you answer that. Just on the project in North America, it seems obviously you're sort of delaying that, or delaying the decision slightly, and that's understandable. But how are you seeing the market changing in light of obviously recent volume weakness? I mean, if we look out in the medium term, how do you see the supply and demand balancing up, given, obviously, we've got fairly large plant capacity additions from, you know, yourselves, if this happens, SAPI, GPK, you know, coupled with the fact that, you know, Stora and Metz are obviously building large machines in Europe and planning to export to the US. I mean, do you see capacity coming out to balance that? Do you see, you know, growth rates, demand growth rates sort of accommodating all that volume and in light of the weakness we've seen in demand this year, how does that change your medium term assumptions relative to when you were potentially initially thinking about this project? I mean, can you just talk us through how the market evolves in the medium term as far as you see things today? And I've got another question, but I'll ask that afterwards.

Okay. So I think we have to have two separate views on graphic paper and then clearly on carton board. So let me start with graphic paper. So I think in graphic paper, we don't see significant trend shifts in the US. It's a declining market and it will continue to decline. We don't know where the bottom is, but probably we are not there yet. However, we see in some of the segments of graphic paper some very interesting opportunities. And these are all in the premium segments of catalogs. It's in direct mail. It's in books, in certain school books that we are supplying. And there we see good opportunity. And as you know, we have clearly with Quinnisec the last man standing and an extremely good cost-based to be able to compete and there will be many other machines which will stop before Quinnisec and to some extent who is the second best mill in North America, Escanaba. And why are they so effective? For both, clearly we have a very good access to a very competitive wood basket. And then for Quinnisec on top of that, it's an incredibly efficient mill. So I think there is absolutely no challenge on that front. So do we see a future in the graphic market in terms of would we invest more in graphic? No, that is not the strategy. The strategy is to take these assets, of which one is excellent in Quinnisex, and convert the other asset as we go along into carton board. And do we have a different perspective of carton board than, say, a year ago? Absolutely not. We see a long-term trend of growth in the carton board market. we see an incredible opportunity to convert the U.S. carton board market much more into FBB. So we will offer a different product in the U.S. markets than the current mainstream. And on top of that, compared, say, the other machines which are currently invested in Europe, our cost position when it comes to logistic, fiber baskets, and closeness to key markets is unbeatable. So strategically, there's absolutely no reason to think that we're on the wrong way. I think we are absolutely on the right way. When you have cyclical weakness like we have today, and I think today's situation has never been seen in the industry, that we had such a peak in 2022 and now such a trough in 2023. And therefore, I think these short-term movements are difficult, as I said, navigate a very difficult environment. But we don't see that as a new normal either. As much as we said last year, this is not the new normal at the high level either. So I think the market will go back to his normal trend line with some ups and downs in the cyclicality. But we see great opportunity in the North American carton board market. And I think our strategy is exactly on the right spot.

Okay, and then just to clarify, what sort of growth rate are you expecting on a sort of CAGR over the next sort of five years or so?

So the CAGR assumption that we have taken for carton board market is between 1% and 2% in the US. And if you look at today's, I think the market is about 7 million tons around. You know, you need, you basically need new machines coming into this market to absorb that growth, and you have also a relatively old machine park in the U.S. And if you look then at our fiber basket, at our proximity, et cetera, even U.S. competitors would find it difficult to copy our situation, and our both mills in the Upper Peninsula would be very competitive.

Okay, so it doesn't sound like there's any lack of commitment to the project. It's just a case of you're taking more time to do the engineering.

Yes, absolutely. And I think we have to be very clear. I think we have a history where with KM7, as many of you have pointed out, that the project was not as well managed as it should be. And the whole learning is when you do these projects, you have to be incredibly well prepared. You have to be very thorough with your planning, analysis, and then implementation. And we will not start this project if we have not achieved the planning excellence and planning quality which is necessary to deliver this project on a flawless execution.

Okay. And just a final question on the 3Q versus 2Q bridge. We talked about a few of the moving parts. So, you know, cost savings, 120. Prices down, you know, 130 in the end products, 120 in pulp. We have 100 million less maintenance. Just on the other... moving past the volume outlook, you say, you know, we demand expected to continue and you're not really expecting a big pickup before, you know, later in the year. I mean, when we say we demand expected to continue, are we seeing it being sort of flat on 2Q? Are we seeing it sort of falling further with a bit of seasonality? What's the sort of volume bridge into 3Q as you sort of see it today?

Do you want to take that, Ivan, or...

Yeah, and just to be clear, you mentioned Q3 versus Q2, right?

No, I'm saying 3Q, this current quarter versus 2Q. I'm just trying to bridge from the numbers we've just seen to the next quarter.

Yeah. No, I mean, I think volume, we did actually mention it. I think one previous question that I think underlying for most of the categories, we are not expecting much difference versus what we saw in Q2. There will probably be some extra thousands of tons coming into the North America operation, in particular since we had quite a bit of idling of this cannabamil to perform this cleaning of these blastomercosis activities. We do expect also then, just so we don't double count anything, that we guide typically for these maintenance stops. We had 400 million of that in Q2, and we have about 300 million of that in Q3. Part of that is also volume. So yes, you can say that we would get 100 million less maintenance costs Q3 versus Q2, and that includes a little bit better volume. But besides those things, I would not at this stage count on much more in Q3 versus Q2.

Okay. Thank you very much.

Thank you. That concludes our Q&A. I will now hand back for closing remarks.

Yeah, so thank you very much. I just want to reiterate what we said before for Q3. So I think we talked about stable volumes. We talked about relatively weak demand. We talked about probably some price, minor price movement. some mixed effect as we go forward into Q3. And we see in the US clear some improvement sign for the end of Q3 and Q4. But I think the bulk of the improvement in Europe will only come at the end of Q4 and maybe or even in Q1 2024. I would like to thank you to join the call today. It was a pleasure to have you. And thank you, Eva. I would like to wish you an excellent summer, and I'm looking forward to speak to you in Q3 result in October. Thank you. This concludes today's call. Thank you for participating.

You may now disconnect.