Good day. 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 answer session. To ask a question during the session, you will need to press star 11 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. Welcome to this conference call about Billerud's second quarter results. Here in Solna is our President and CEO, Christoph Michalski, and also our CFO, Ivar Vatne. They will hold the presentation. After that, we will open up for questions from the audience. With that, I hand over to Christoph for an introduction of the quarter.
Thank you, Lena, good morning, everyone. 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 happened in quarter 2, which is really about navigating a very challenging market condition. You have seen that in our numbers. It is basically qualified by very low volumes and continued customer inventory destocking, in a very soft end market. I think this is really still the overhang from 2022. We have seen this very strongly in quarter 1. It has continued in quarter 2, 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. In Europe, we just have to remind 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 eighth, I think we believe that it's probably behind us and everything since the startup in May eighth is pointing in the right direction. We had some reevaluation of inventory, which also impacted our result to some extent.
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 2022, and over Q1 and Q2, we were able to bring down the inventory level to a reasonable level, or I would say the normal level. Ivar will later on talk a little bit more about the efficiency enhancement program that we have accelerated to aim for SEK 600 million for this year, and he will give you some example what are these type of activities. Overall, you can see net sales have been declined by 13%. Adjusted EBITDA is SEK 188 million in line with our previous profit warning in June.
Unfortunately, EBIT is basically now -5% of net sales, and earnings per share were negative at -2 kronor. If we 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. We have some mix changes.
For example, when we could not produce paper, we actually produced pulp, clearly there are different price implications on that. Also we have a slight mix effect on customers. As with the soft demand, we are also chasing some non-core customers in non-core region, which results in slightly lower pricing. When you look at the net of raw material and logistics, minus SEK 611, clearly a very significant impact still compared to quarter 2 last year. The efficiency enhancement program shows SEK 430 positive. This is basically, as you know, we started this in January, February last year, sorry, this year. Basically we'll see an acceleration of this program in the bridge as time goes by. Here, a little bit of inventory revaluation, clearly, SEK 400 million, nearly SEK 400 million.
In others, you also have the effect of Escanaba, so others actually normally a little bit lower. Adjusted for maintenance schedule, et cetera, we arrive at SEK 188 million. Good, probably most of you are interested in what we think the market will do and what the market is doing. Let me spend a little bit more time on this slide. I think it's important message to understand that what happened in quarter two is very likely to continue into quarter three. 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 down in the D&E world. We do not expect that this market will have either significant down or upturns in the following quarters as time goes on. Cartonboard, clearly very different story. I think there's still a lot of stock in the system being our, between our converters and brand owners. We see relatively low consumption at this stage, so this situation will probably continue for a while. In this market environment, however, we do not see many dynamic price effects, so relative stability. Containerboard is actually better. I think we have now reached up approximately the level of the stocking that would be normal.
The demand and consumption in the market is relatively good. You also understand we have some exposure to the harvesting in Southern Europe, basically demand is picking up. There is, in this segment, undoubtedly more price volatility than we see in Containerboard. Kraft and specialty 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 in from 2022. Sack Paper, I think we, 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 high of finished goods in their stock is still relatively high, so that we actually see relatively low demand for the time being. 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 1 week or 2 weeks, is more 3-4 weeks, as we can see. Graphical paper is entirely focused on the U.S., and we see low demand, but very good price stability. I think when you look now in our new segments, segmentation of the region of how we report our numbers, you see excellent profitability from a contribution level, despite low utilization. It's very promising.
We think that in the U.S., when Graphic paper will start again, which should be in end quarter 3, maybe quarter, at the beginning quarter 4, that we see a significant uptick. Good. I will not really comment on pulp. As you know, the pulp market, we are, we're a bit long this time because we had lower production and containment from a Cartonboard and paper side. Basically the pulp market in terms of pricing remains weak, and we see also relatively low demand. 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. Having said that, I would like to hand over to Ivar. Good morning, Ivar.
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 gonna look like going forward. 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 6 categories. For the region North America, which is material sales from our 2 production units in Upper Michigan. For now, we're talking about the 3 categories we are exposed to, but we're obviously hopeful that we can start adding paperboard in the not too distant future.
We have a third column as well on this slide, that's the solutions other, and that would 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 hedge you'll find there, some impact of non-core assets. This category will obviously be looking a bit different from Q3 when we expect to move the Managed Packaging, but more about that a bit later. Let's get into it and start with region Europe. Yeah, it's certainly been a challenging quarter for region Europe, where we are not experiencing business as usual, and we're having to manage large cost increases in a very unpredictable future. Going through the numbers, negative sales volumes pulling the net sales down to minus 4% versus 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. Kraft paper is also on positive growth, with strong performance from, in particular, white MG. 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 SEK 700 million versus year ago. In particular, this is driven by pulpwood. We're not expecting pulpwood to come back down to previous levels anytime soon. The cost inflation is only partly offset by pricing, help from our efficiency enhancement program and currency.
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. With that, let's move into some more details on the input cost for Region Europe. As I mentioned, versus year ago, the input cost inflation for Europe is around SEK 700 million. Now, do we look versus previous quarter? We are starting to see some of the cost component easing off. We've seen in the quarter, a cost relief of around SEK 200 million versus Q1, which is roughly equally split between chemicals and energy. Fiber was up SEK 30 million, but we saw a pretty similar cost relief on the purchase pulp. Logistics, as in this case, was stable.
Going into Q3, we would expect to see another SEK 90 million of additional cost reduction, that will be then compared versus Q2, this would 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 SEK 30 million or lower cost, as our new overseas container freight contract is starting to kick in. The fiber cost is estimated to increase by SEK 55 million, while we should see pulp coming down by another SEK 25 million. Energy looks to be relatively stable, maybe a small help, given how the June spot prices have materialized. With that, let's move over to region North America.
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. In the U.S. now, we are operating with a significant production curtailment and operate with more, well, roughly around 50% to 60% utilization rate of in our two mills, which is completely unprecedented. On top of this, as Christoph also mentioned, we had the blastomycosis outbreak in Escanaba, and I had to idle a mill for several weeks in April to perform a long list of cleaning activities. 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, with that background, we're actually pretty happy with the performance of the U.S. region. Also, in terms of a profit delivery, the underlying or 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 enable us to close the quarter with a positive result, despite this very, very soft volume we found in the quarter. 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. If you go to the next slide, please, just some points around the input cost also for North America. I mean, 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 SEK 50 million of cost reduction coming in. That is compared to Q1. It's roughly equally split between energy and logistics. Fiber and pulpwood came down by around SEK 50 million. That was pretty much exactly offset by some chemical increase. Going into Q3, we do expect another small help, as the input cost is keep trending down, and we estimate roughly SEK 30 million versus Q2. In this case, we expect that mostly to come from fiber and pulpwood, and some small savings from chemicals and energy. Logistics, in this case, estimated to be flat. Good, 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. It's first and foremost coming from the working capital, where we have continued to drive down our finished goods inventory across both region. As also Christoph mentioned, we now on the inventory level for both regions that we'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. 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 SEK 2.9 billion. Good. Next slide, please. I just wanted 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. 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 SEK 130 million now for the quarter, taking our result up to SEK 225 for the first six months. There's 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 enables us to raise ambition for our 2023 delivery up to SEK 600 million. We will need to do this through a 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 3-year program, and we are simultaneously working on the program plan of what items we can expect going into 2024. With that, I hand it back to Christoph.
Thank you, Ivar. There's also some good news, so to say. I think, as you know, we were incredibly concerned at, in April and May, sorry, in March, April, and May, concerning the outbreak in Escanaba. 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. 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.
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 had, could have, passed. Okay, in terms of impact, the impact is about SEK 85 million. You remember, we valued the impact, I think, around SEK 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 SEK 60 million when it comes to all the cleaning activity that we have performed. Very good.
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 marginal, the CapEx savings are mainly around a 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.
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 US, 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 Cartonboard. It's about a new BCTMP mill. It's about a new woodyard. It's about basically rendering the mill in line with our sustainability ambitions and customer needs. Therefore the project is not yet at the same quality as I would like to see it as we had for Frövi.
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. 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 and 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 Viken 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. 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. I'm very happy that we have 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 in and basically sold Kezzler, our shares in Kezzler. Finally, we are also looking, we still have some reminiscence of forest properties, which we call Marma Skog, which is one of the Bergvik Öst that were not integrated in Bergvik Öst. We are also looking at basically divesting non-core assets in order to really be razor sharp on our primary packaging strategy. 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 U.S., I think the bulk of the European recovery will be late, 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 curtailments as we go along. Unfortunately, despite we think that prices are probably where they should be in the market, but we will have some negative mix 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. Finally, good, excellent progress and continuous acceleration with our delivery and of with our efficiency enhancement program.
As Ivar 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. That was our presentation for this quarterly Q2 2023 review. I think I will now hand back and we will open for questions. I would be grateful if you limit yourself to 1 or 2 questions and then ask the next ones after that, so that we can answer properly. Operator, if you take back for questions. Thank you.
Thank you. As a reminder, to ask a question, you will need to press star 11 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. Hello, everybody. Now, I have 2 questions. The first one is related to demand and volumes. Now, you, along with most of your peers, have suffered for quite weak volumes now in Q1 and Q2. As I understand, sort of 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, you know, customer inventory, destocking? Is it, you know, import volumes from, Asia to some extent or underlying demand? When do you expect sort of, the, demand and volumes of the performance to improve? A bit more sort of color, I would appreciate.
Also just sort of directly Q3 volumes versus Q2, maybe for Eva, sometimes sort of given millions out of Q on Q estimate. Is there something that you could share on that one? 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? Those two. Thanks.
Okay. Thanks, Robin. Good, let me give you a little bit more color then on how we see demand and volume develop. 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 it's a question of which month, and probably we say September, October, quarter three, quarter four. We have actually seen a record low number of imports into the U.S., 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. 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 curtailment will with all likelihood stop. It's just a matter for the demand to recover a little bit as the economies will recover. As I said before, then your guess of saying when that will happen is as good as mine.
We, 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. That's my view on just volume development. Do you wanna give some color on the impacts?
I mean, Good morning, Robin. I think, as Christoph said, I would be quite careful of adding too much quarter-over-quarter. It's not unreasonable to just assume that people get a little bit more volume in North America in the back end of the idling we had over the Escanaba Mill. We're talking here maybe a 20-30 million SEK impact just in terms of some of the tons that we probably in most 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. Remember, we had 400 million of maintenance cost in Q2.
We estimated roughly SEK 300 million in Q3, as we will do the Karlsborg, Gävle, and part of the Escanaba. We will get another SEK 100 million help 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. 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 revaluation since that impact tends to be relatively limited. 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 use the last two months of, you can call it the costing my input cost average, to do that valuation. Normally you would see typically a ±SEK 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 prices were spiking, and they're starting to fall quite sharply going into Q2. To your question, then, if you think about, at least for Q3, we are expecting, I also mentioned this, that the input cost will be falling. I think, let's say maybe up to SEK 50 million or in the range of the SEK 50 million of additional help on this case is not unusual to expect. If you're thinking about long term and over kind of quarter, typically it would be ±SEK 50 million.
Thank you very much.
Thank you, Robin.
Thank you. We'll now take our next question. Please stand by. Our next question comes from the line of Martin Melbye of ABG. Go ahead, you're live.
Yes, good morning. You gave the input cost changes quarter-over-quarter. You said SEK 90 million plus SEK 30 million, right? That is the sum, so SEK 120 million, is that correct?
Sorry, you meant, Q2 versus Q1?
Q3 versus Q2.
Q3. Yeah, yeah. Exactly. Q3 versus Q2, we do expect roughly SEK 90 million from Europe, SEK 30 million from North America. Yes, confirmed.
Excellent. Then a follow-up on price. You're saying negative mix and price reductions, what would that be in SEK for Q3?
This is obviously where it starts to be, you know, clearly 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 probably some negative mix just because of category impact. The one point, but also that there will maybe be some customer mix impact. What we estimate, if you talk about the material sales first, we would be looking probably around SEK 130 million. That will be then a price drop Q3 versus Q2. Rough split of that between the region would be somewhere in the area of SEK 50 million for U.S. and about SEK 80 million from Europe.
Just keep in mind, we don't really talk about it. 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. We do expect to see also drop now of SEK 120 million-ish on the pulp pricing and roughly between the region, that will be SEK 50 million North America, SEK 70 million Europe.
Okay, it's 120 plus 130?
Yes.
Excellent. The last question, you mentioned this, Bergvik Skog Öst may be up for sale. What is the book value there, please?
For the 9,000 hectares that we're looking into now, we estimate that book value to be in the area of SEK 100 million.
Thank you.
Thank you. We'll now take our next question. Please stand by. Our next question comes from the line of Johannes Grunselius of DNB. Please go ahead. Your line is open.
Yes, good morning. Johannes here. My first question is on the ongoing investment project in the U.S., 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 have increased in terms of complexity, basically, over the last few months since your last update? With a lot of companies seems to walk away from investment projects at the moment, is it fair to assume that this is 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. 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 down of CapEx costs and prices and quotes and things like that, which you probably, which you alluded to.
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. 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. 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. Then my second question, maybe I missed this in the initial part of the call. Maybe the data information is in the report, but ahead of Q2, you, I think you guided for inventory effects of -SEK 280. What was the actual outcome? Ivar, did you, 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, that was versus, you can call it a Q2. I think now the number that was shown in the bridge versus year ago. I think, you know, we came in pretty close to that estimate.
Okay.
versus the Q, Q2. Yes, I did say also to Robin that, you know, typically ±SEK 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 a SEK 50 million help going into Q3 versus Q2. Obviously, since the prices are still falling, it will be a hurt. Up to SEK 50 million hurt.
Okay.
in Q2 versus Q2 is currently best estimate.
All right. All right. Got you there. Maybe I can take a final question as well. 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. 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 U.S. is a very different market from that perspective than Europe. Europe is far more fragmented both in geographies but also in players. I think in the segments that we are now playing in the U.S., we have a limited amount of competitors. We have imports which can come in, the U.S. dollar is still strong, but the lead times for this import are quite long compared to local production. What we see in, I think in the short term is we don't believe there will be any significant price erosion in the U.S., imports today are at a historic low.
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. 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, you know, there might be other mill closures. 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.
Just to, maybe to add to that very quickly, it's very different than in Europe, okay? You cannot just take the graphic market in Europe and basically convert that to U.S. The market dynamics are different.
Mm-hmm. Thank you.
Thank you. We'll now take our next question. Please stand by. Our next question comes from the line of Christian Kopfer of Handelsbanken. Christian, your line is open.
Yeah, thanks for that, operator. Two questions from my side. Firstly on the revaluation of inventories that you mentioned here. Just to clear if I made my math correctly here. If I, if we just isolate revaluation of inventories, going into Q3 versus Q2, that in isolation, that should mean that result should be around SEK 260 million better in Q3 versus Q2.
No, no. We basically revalued now the inventory, end of Q2, let's call it reflecting the current level of pricing. Given pricing expectations are that they will be coming a bit down into Q3, we would expect then about, let's say, up to SEK 50 million hurt Q3 versus Q2.
Yeah. That I understood, Ivar, but I thought you had a P&L effect of some, if, at least if you, if I go by the guidance in the call it pre-announce numbers, that you said that you had some SEK 310 million negative from revaluation of inventories in Q2. That was including the P&L for Q3?
Yes. That's basically the impact. That's the impact. You can argue that we had a.
Value, yeah.
In Q1, then now we got the hurt in Q2, the difference is up to the 300 million SEK. In that sense, now we expect a much smaller impact going into Q3 versus Q2, the number should be, in that sense, also much, much more moderate. The 50 million SEK is the best estimate.
Okay, so the delta, the earnings delta, when it comes to inventory is SEK 50 million lower then? Okay.
Yes, correct.
Okay, sorry for that. On logistics, I think you mentioned previously expected quite material, a positive impact from more effective logistics or change of logistics, and that should kick in Q3, right? You mentioned that you, if I remember correctly, you mentioned, I hope, SEK 30 million positive impact from lower logistic costs in Europe in Q3 versus Q2. Is that, is that, is that the full effect of the, you know, the better-
No, it's.
Logistics
It's a good question, Christian. I think, it's also partly because the activity level now is a bit lower in general.
Okay.
You can say that, it's probably reflects also some of the volume softness we have. I would probably argue that number should be more in a SEK 50 million per quarter in a normal. 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. A good chunk now will come in Q3 versus Q2.
Oh, okay. That's understandable. Okay. Thank you very much for that.
Thank you. We'll now take our next question. Please stand by. Our next question comes from the line of Cole Hathorn of Jefferies. Please go ahead. Your line is open.
Morning. Thanks for taking my question. Christoph, I've in the past, you were focused on kind of optimizing machine uptime and, you know, the wider production base of Billerud. I'm just thinking that, you know, with wood costs being higher for longer, is there an opportunity to think about some rationalization of your current European footprint? Can you give any color of how you're thinking about that? Because, I mean, if you are, you know, taking advantage of some sales that you probably wouldn't do it in normal times, would you, would you think about further rationalizing your cost base and optimizing your mix across your various mills or machines? That's the first question. 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 SEK 310 million impairment, is it not we should assume, you know, that doesn't happen in the 3rd quarter, so we see a positive SEK 310 and then a minus SEK 54, further inventory write-down? I'm probably just misunderstanding. Thank you.
Let me start. Thanks, Cole. Yes. As I said before, what we are trying to do is 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, you know, look at them as a system. What we see today is that this is working very well. For example, we took in these two quarters, more curtailment in, say, Frövi, and we prioritized KM7 and Gruvön for the production, because of production margin, production costs are lower.
We did the same in North America, where we have some capabilities in Quinnesec, which are similar to those in Escanaba, and then we prioritize Quinnesec. 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. The question is always, should we continue with them or should we shut them down? That's a continuous process. I think what you have seen, what Iva is also mentioning, this optimization, this TME improvement and efficiency improvement also goes clearly when it comes to machinery.
That's an ongoing process. 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. If demand comes back, then this capacity is absolutely needed.
Yeah, no, on the second one, no, I just try to repeat what I mentioned earlier, that this, we wrote off the inventory valuation both last year in Q2. We also wrote it off in Q1, given that the prices were still moving up, and clearly now, the prices are coming down. Keep in mind, this inventory item is the stuff we put on the balance sheet, right? There will be balance sheet items flowing into the P&L. In that sense, you know, the impact now is pretty big in the quarter, given we had a trend shift, and it is the 300, roughly Q versus Q1.
Given how the trend continues a bit further down, we do expect, just a smaller impact, going into Q3 and Q2. So this should be around, yeah, SEK 50 million additional in Q3 versus Q2.
Thank you. Then just as a follow-up, Christoph, you gave some good color around, you know, Containerboard effectively stabilizing and seeing mostly the destock ending on that market. Could you give a little bit more color around the Sack and Kraft, where you think we are in the destocking cycle there? Thank you.
Hold on one second. Sack and Kraft has still some weaker demand. I think on MG, we are doing better than on MF at this stage. We see also some price volatility. I think when you look at the segment, we do not believe that we will have very significantly 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 taking the questions. I've just got a couple. I'll ask the first one. First and I'll come to the next one after you answer that. Just on the project in North America.
Mm-hmm
... obviously, you're sort of delaying that or at least delaying the decision slightly, and that's understandable. 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 sort of supply and demand balancing out, given obviously we've got fairly large planned capacity additions from, you know, yourselves, if this happens, Sappi, GPK, you know, coupled with the fact that, you know, Stora Enso are obviously building large machines in Europe and planning to export to the U.S. I mean, capacity coming out to balance that? Do you see, you know, growth rates, you know, demand growth rates sort of accommodating all that volume?
You know, in light of the weakness we've seen in demand this year, you know, 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? I've got another question, but I'll ask that afterwards.
Okay. I think we have to have 2 separate views on graphic paper and then clearly on Cartonboard. Let me start with graphic paper. I think in graphic paper, we don't see significant trend shifts in the U.S. It's a declining market, and it will continue to decline. We don't know where the bottom is, but probably we're 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. There we see good opportunity. As you know, we have clearly with Quinnesec, the last man standing, and an extremely good cost base to be able to compete.
There will be many other machines which will stop before Quinnesec, and to some extent, who's the second best mill in North America, Escanaba. Why are they so effective? For both, clearly, we have a very good access to a very competitive wood basket. For Quinnesec, on top of that, it's an incredibly efficient mill. I think there is absolutely no challenge on that front. 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 Quinnesec, and convert the other assets as we go along into Cartonboard. Do we have a different perspective of Cartonboard than, say, a year ago? Absolutely not.
We see a long-term trend of growth in the Cartonboard market. We see an incredibly opportunity to convert the U.S. Cartonboard market, much more into FBB. We will offer a different product in the U.S. market than the current mainstream. On top of that, compare, say, the other machines which are currently invested in Europe, our cost position when it comes to logistic, fiber basket, and closeness to key markets, is unbeatable. 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, I think today's situation has never been seen in the industry, that we had such a peak in 2022, now such a trough in 2023.
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. I think the market will go back to its normal trend line, with some ups and downs in the cyclicality, but we see great opportunity in the North American Cartonboard market, and I think our strategy is exactly on the, on the right spot.
Okay. Then just to clarify, what's the growth rate are you expecting on a sort of CAGR over the next sort of five years or so in the U.S.?
The CAGR assumption that we have taken for Cartonboard market is between 1% and 2% in the U.S. If you look at today, I think the market is about 7 million tons around, you know, 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.
Mm.
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 will be very competitive.
Okay. 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.
Yeah
probably it.
Absolutely.
Yeah.
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. 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. 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. Just a final question on the 3Q versus 2Q bridge. I mean, we talked about a few of the moving parts. You know, cost savings, 120, prices down, you know, 130 in the end products, 120 in pulp. We have 100 million less maintenance. Moving past the volume outlook, you say, you know, weak 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 weak 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, what's the sort of volume bridge into 3Q as you sort of see it today?
Do you want to take that, Ivar, or?
Yeah, and just to be clear, you mentioned Q3 versus Q2, right?
No, I'm saying 3Q, this current quarter versus 2Q. Like, I'm just trying to bridge from, you know, 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 Escanaba Mill.
Mm.
- to perform this cleaning of this, customer causes activities.
Mm.
We do expect also then, just so we don't double count anything, that we guide typically for this maintenance stops. We had SEK 400 million of that in Q2. We have about SEK 300 million of that in Q3.
Mm.
part of that is also volume.
Mm
... you can say that, you know, we would get SEK 100 million less maintenance costs, Q3 versus Q2, and that includes a little bit better volume.
Mm.
Besides those things, I would not, at this stage, count on much more in Q3 versus Q2.
Mm, mm. Okay. Understood. Thank you very much.
Thank you. That concludes our Q&A.
Okay.
I will now hand back for closing remarks.
Thank you very much. I just want to reiterate what we said before for Q3. I think we talk about stable volumes, we talk about relatively weak demand. We talk about probably, you know, some minor price movement, some mix effect as we go forward into Q3, and we see in the US clear some improvement sign for the end of Q3 and Q4. 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, thank you, Ivar, I would like to wish you an excellent summer, I'm looking forward to speak to you in Q3 result in October. Thank you.
This concludes today's call. Thank Thank you for participating. You may now disconnect.
Yep, thank you.