Hello, and welcome to the BillerudKorsnäs Interim Report January 2020. Throughout the call, all participants will be in a listen-only mode, and afterwards there will be a question and answer session. Just to remind you, this conference call is being recorded. Today, I'm pleased to present Lennart Holm, Acting CEO, Ivar Vatne, President and CFO, Christofer Kaseblad, Head of Communications. Please go ahead with your meeting.
Good morning, everyone. This is Lennart Holm here speaking. Welcome to the presentation of our interim report, January to June 2020. I think we should start and take the first slide. Next slide, please. Just to give you very brief introduction, key highlights the second quarter. Continued sales volume increase, relatively limited impact of COVID-19, KM7 ramp-up progress continues as planned. Earnings continued to be affected by lower market prices, and we're on track to deliver our cost and efficiency program. We will come back during the presentation to all these topics. We can have the next slide. Some figures. Ivar will, of course, give you some more meat on the bone around the figures, but the net sales then slightly down 2% versus same quarter last year. EBITDA margins up compared to last quarter, of course.
Here we also have some influence from timing issues when it comes to maintenance, shutdowns, et cetera. Still, I think a good figure for the second quarter. If we look on net debt to EBITDA 2.4 times still within, let's say, the limits that we have set up in the company. Let's have the next slide. COVID-19, big topic for everyone these days, of course also for BillerudKorsnäs. I can say that the impact on us and our company has been relatively limited so far everything considered. Most notably, we have seen an impact within Division Paper and Division Solutions. What we see is then mainly an indirect effect in terms of having a demand decline in certain channels, specifically then in products going to industrial applications and food service applications.
Another big change for us has been the fact that we've had to move or decided earlier on this year when COVID-19 was accelerating to move and reschedule our maintenance shutdowns from first half 2020 to second half 2020. This is, of course, something that creates some issues for us internally. I must say that our teams have been doing a fantastic job rescheduling and really planning in detail now how to go through with these maintenance shutdowns in order to secure that we can get the jobs done, in order to secure the safety of our employees, and in order also to have very close contacts with both suppliers, entrepreneurs, and the local authorities, et cetera, to really plan for the maintenance shutdowns in all the different mills.
We need to realize that, of course, there are still a number of uncertainties around these maintenance shutdowns that can influence us. We've also had to have slow steam or some production reductions, that is in two production sites during the second quarter. It has been in Pietarsaari in Finland, and it has been in Skärblacka in Sweden. These are related then to a weaker market and a weaker demand for, as I said before, industry and food service products. The internal crisis management team that we put in place to deal with COVID-19 effects, we were quite early with this, continues to work in six work streams. I must say that the entire team in BillerudKorsnäs has done a fantastic job to not only secure operations, but also to be very proactive in identifying potential risks and dealing with these.
We've also managed as part of this to have a very close check on receivables balance and overdues. I must say that these are and they remain in good shape, which is also, I think, a good sign that the team is really on these topics. I think we can take the next slide. This might be a little bit complicated, but just trying to give you a feeling for the business status and the outlook. What we can see is that food and drink has been stable during the entire second quarter. This is of course, our most important segment. You can see that the liquid packaging board is the biggest product in this, but also cartonboard, containerboard are big in this segment. We've had a stable situation throughout the second quarter.
On the Board side, we've had some negative effects from two things, I would say, two parameters. One was that we had a plastic contamination that happened in the Gävle mill on liquid packaging board, which means that we had to downgrade some tons in Gävle, which has had a certain influence on the results. The second is also a little bit unfavorable product mix for some of the Board grades, excluding KM7, where we've had a positive effect from a better product mix. Medical and hygiene continues to be stable as well throughout the quarter. It's a smaller segment for us. We've had a more challenging situation in consumer and luxury, excluding, I would say, cartonboard. Cartonboard for us is a niche segment.
We're a niche player in cartonboard, and I have to say that there we continue to see a very good development on the grades that we're working with. Industrial has been continued weak, and of course, here we see a lot of the sack papers and kraft papers that goes to various industrial applications, and it has been continued weak during the second quarter. Looking forward for the third quarter, there is a lot of uncertainties, of course, related to COVID-19, and we are a bit cautious on what will happen during the third quarter. We do see that there has been, during the first half year, a certain inventory buildup throughout the value chain, and that now is, let's say, normalizing, or the consumption is normalizing, so we don't see this buildup of inventory anymore.
Might be that we will, we will probably see certain negative effects from people basically reducing the inventories that they have built up during the second quarter. I think we can take the next slide. KM7, of course, remains very much in focus for us, very important topic in our company. It's now more or less one year since we started up KM7. We have accelerated the ramp-up process, I would say that we have taken significant steps forward quarter by quarter, the second quarter showed very good progress. We have a number of heating problems still to be fixed. I think that is quite normal when you build such a big machine and complex machine as KM7. There are certain topics where you get some design flaws, where you get some initial issues, you have to do basically adjustments on the machine.
We have a list of a number of issues that we were planning to basically fix during the maintenance shutdown that was planned for early this spring. It has had a negative consequence, the fact that we had to delay the shutdown until September. We still have that list on, and that gives us certain limitations right now on what products we can produce, how much we can produce. It has been a bit of a, I wouldn't say stumbling block, but an irritation and something that has costed us some money in terms of a more unfavorable product mix. However, as soon as we get these fixed, I think we will be able to go ahead full speed in developing the grades further. We've also, during the second quarter now, really gone back and looked into the original investment case assumptions.
We said, Okay, let's do a deep dive and see really has anything changed compared to when we took the decision in 2015, 2016. I'm happy to say that when we've done this work, it basically reaffirms the potential of KM7 when fully ramped up. If anything, I think the potential is better than we thought when we took the decision in terms of that the market still looks healthy and there's a healthy growth for the key products on KM7. At the same time as no other capacity has been added to the market, and we don't see any other capacity coming on stream either. No new machines are built that are in competition with KM7 for the time being. Here it looks pretty good. I think we can take the next slide. We're right now in Q2.
Annualized production rate is around 300,000 to 350,000 tons per year, which is on schedule, I would say. The machine can produce, and it can produce as planned for this year. We have also, during the second quarter, had the first successful production of CrownBoard Prestige, which is one of our most sophisticated cartonboard grades that we normally produce in Gävle. Those volumes have been supplied to customers with very good feedback. This is a big step forward. Here we are actually ahead of plan, I'm happy to say. We are now focusing a lot on improving the product mix in order to minimize low margin and downgraded products. We've had quite a few tons of, let's say, low margin and downgraded products during the initial startup period of KM7. We are now working to reduce those and go into more high-value products.
You shouldn't expect that to have a big impact in Q3, as we have basically the maintenance shutdown and some preparations for that. That means that in this very moment, we are not pushing for the most advanced products. We are producing products that give us a stable production on the machine, but they are not optimal from a product mix perspective. The maintenance shutdown, very important for us. Of course, there is a degree of uncertainty on feasibility due to COVID-19. Right now it looks as if we will be able to push through the maintenance shutdown as planned. There is a number of factors. Just to give you some flavor of it, we can't put external contractors working too close to each other, which means that normally we would perhaps have two or three teams working in parallel on the same part of the machinery.
We have to stage that, so team 1 has to do their job first, then comes in team 2, et cetera. Of course, there is a risk that the maintenance shutdown might take some few days extra, or that some of the jobs that we want to do can't be done, et cetera. We're fighting hard to really plan and go through with the maintenance shutdown. There are risks involved with it, and we have to see where that goes. The negative EBITDA impact is decreasing compared to first quarter. For second quarter, the impact has been SEK 120 million. For 2020, we have communicated earlier on that we will be in the interval SEK 350 million to SEK 450 million. We do expect, at this moment, that we will land in the higher end of that interval.
A big reason for that is, of course, also the fact that the market is, for some of these grades, not as strong as it has been before. When we talk about the less advanced products, we do get less paid for those products, and we have a lower margin contribution than we expected just a couple of quarters ago. However, expectations to become EBITDA neutral during 2021, they remain. We see no reason to change that. We are quite optimistic when it comes to the future for KM7, I must say. It will take time, but we will get there. Next slide, please. Cost and efficiency program is on track. We have promised to deliver SEK 250 million of cost savings and efficiencies in 2020. We have delivered during the second quarter SEK 90 million, I would say we are on track there to deliver.
We are also in full swing, working in order to step by step, identify and initiate those actions that are required, the building blocks to deliver the SEK 600 million run rate by Q4 2021. We are on track. Next slide. Looking briefly at raw materials, we can say that cost of pulp wood decreased somewhat during second quarter. I think we will see a marginal decrease also in the third quarter. Here the situation is, and I think some of you have certainly picked that up, but we have this spruce beetle issue in Sweden that now is changing a bit the dynamics on top of COVID-19 effects in the forests in Sweden. This means that we get a lot of spruce into our pulp mills.
In the forests that are affected by the spruce beetle, where we have to cut that wood is of lower quality, so it costs us more to process it. It's also a fact that those forests with spruce, they contain less birch. It means that we have an oversupply of spruce, but we have definitely not an oversupply of hardwood. When it comes to hardwood, we don't see any reductions at all in price. Overall, slight increase, but no dramatic change I think we expect. Chemicals, not so much to say about. Not big movements, I would say, in second or third quarter. Purchased pulp pricing has gone down. We have the new supply agreement in Pietarsaari, which of course is favorable for us.
However, when we look on that, we should remember that we also sell pulp, and we still have a net exposure of pulp. Roughly for 2020, we're expecting somewhere around 70,000-90,000 tons, compared to 160,000 tons last year. I think 2021, it's reasonable to believe that that will more or less disappear, the net exposure of pulp. As pulp prices have gone down, even if we're saving money in Pietarsaari, of course, we lose even more as long as we have a pulp exposure on the pulp that we sell. Energy cost savings limited during the second quarter, even though spot prices have been low on energy, but we hedge our electricity prices to basically reduce volatility. For us, that means that the savings have been limited during the second quarter. Next slide. This, I think, Ivar, is your time to talk about the figures.
Please go on.
Thank you, Lennart, and good morning. Some comments, just overall on the financials before we dive into the bridges. Net sales, as Lennart was starting off on, down 2% versus a year ago, which is mainly then a function of a 4% volume growth fully being offset by negative pricing impact. This situation we've seen for some quarters already. Looking at net sales versus Q1, it's also slightly down, this is mainly due to slower demand in some segments and some mix impact. Pricing is actually pretty flat versus Q1, this goes for both of the divisions. If you go into the profitability, we are significantly up versus a year ago, but no mistake in that one, that part of this, or actually a pretty big part of it, is due to maintenance timing and scheduling.
Versus last quarter, you can see for yourself, the profitability is relatively flat. That goes for the return on capital employed, relatively unchanged from we've seen over the last quarters. Certainly reflecting that KM7 investment is now fully in our balance sheet while we are still waiting gradually to see the ramp-up effect taking place. Next slide, please. Looking into our net sales bridge, what I was referring to, we're down 2%, pretty hefty negative pricing impact, which is mainly driven by some segments within Division Board. Apologize, the pricing is from Division Paper, where in particular, the brown sack has been a negative trend for quite some quarters. Partly helped and offset positively by 1% of currency, and we have a two percentage point volume in mix, taking us to SEK 6,156,000,000. Moving into the profitability. Next slide please.
You will see this logic pretty much from what we talked on the net sales bridge. There's a very sizable negative pricing component for SEK 330 million. That's 6% of our net sales base. It's certainly definitely a significant driver that we are monitoring and also sequencing a plan to get the contribution margin back on track. From that negative pricing impact, we have a series of positive items bringing the profitability to a better level. Some of the bigger ones, we have raw material help. There's another solid contribution coming from our cost and efficiency program. Currency help us. We also have a volume mix part. You can see the SEK 260, that's definitely a big item coming from the maintenance schedule. Part of that is obviously timing, which will come back in the second half. If you look at a bit more details per division.
Next slide, please. Starting on Division Board. Division Board had, again, a very strong sales quarter, up 6%, broad-based growth in all segments, sales volume growth of 7%. Clearly riding on the strong demand wave across more segments and also positive impact from the KM7 ramp-up. Some details by the segments. Liquid packaging board had another excellent quarter. Strong growth versus year, about 12%. Lennart was alluding a little bit about this in the beginning. We believe certainly that market and segment is still strong, but we get indications now that we're moving towards a bit more normalized level, and that there's an industry inventory adjustments coming along the second half, meaning that certainly we expect the liquid packaging to overall for 2020 end with strong figures, but probably a somewhat lower growth rate than versus the second half.
Cartonboard is another very strong quarter and a wonderful number with 16% growth. This means we had 10 consecutive quarters with more than double-digit top-line growth for cartonboard. This is very much on strategy and certainly according to our plan. Now with new capacity being added with KM7, this is also going to be continued a priority for us. Increasing position in both existing positions, but also going after new customer base as we still believe that there's ample room for us to expand in both product and also geography. In terms of cartonboard, including in liner, still growth. Coming to growth rate, which is slightly lower versus what we've seen in the past, and also reflects a little bit more challenging market as also Lennart was talking about. Net operating expenses flat while sales volume is up 7%.
Efficiency is helped by raw material decrease and a cost and efficiency program. Certainly there's an element also here of the maintenance schedule timing. In terms of profitability, EBITDA margin of 16%. If you look at the KM7 impact, which Lennart was talking about, SEK 120 million, which is still sizable. We are at a 21% of EBITDA, that's certainly also in an area that we believe that we will and target to get Division Board in that range over time. If you go into Division Paper on next slide, please. It has been a relatively similar situation for some quarters. You probably also remember that in end of Q2.
Next slide, please.
Thank you. On the Division Paper. In Division Paper, it is still relatively similar to what we have reported over the past quarters. You probably remember that in Q2 2019 and early Q3 2019, that's when we started to see some pretty negative impact. Starting out to meet a lower base, but still we see an impact. It has been pretty similar to what we've seen over the last quarter with kraft paper holding up relatively well, while sack paper is impacted hard, in particularly in the brown sack, where pricing is certainly a lot down versus a year ago. Now looking versus Q1 2020, our net sales on paper is only marginally down. That also surprised us a bit positively, meaning that when we look into Q2 and seeing the trend, the pricing picture certainly has held better versus what we expected.
While we've seen some volume being reduced, in particular certain channel where we expected COVID-19 to be more influential, and we're talking in particular about the industry and also part of it in food service. Operating expenses coming down, partly due as on Division Board on the maintenance sequencing. There's volume decline, we have the same items here as on Division Board that we have raw material cost decrease and also some cost and efficiency improvements helping us. Meaning that the EBITDA is reported up, a lot of this is fluctuations in terms of the maintenance timing. Let a couple words on Division Solutions. Next slide, please. Division Solutions certainly had a pretty hefty negative decline on top line. This is mainly due to Managed Packaging. Definitely had a challenging quarter with mostly North American brand owners heavily impacted by COVID-19.
Here you can do the link into most non-food retailers, which is the main part of our customer base has been in lockdown mode or certainly very heavily impacted by a different consumer behavior during Q2. FibreForm coming in with moderate growth. We had a very strong Q1, and there has been a little bit of an inventory adjustments just over the first half, but still first half is on a good level. Yeah, costs scaled down since we have done what we could to protect profitability and initiated certain measures in the wake of the business trend we already saw. That means that EBITDA is down due to the net sales decline. We're not talking about very big numbers here in the absolute, as you can see from the table.
If you go into the next slide and just a couple of words on the balance sheet and our net debt leverage. Relatively unchanged from what we had in Sorry, next slide, please. Thank you. In terms of the balance sheet, there's not a lot of change versus what we reported in Q1. It's slightly up from 2.3 to 2.4, which the main effect of that is net debt going a bit up due to the dividend payment that we executed during the quarter. You might also remember that we talked about in Q1 this energy hedging collateral, and the increase that we went through in Q1. That has now been reduced by SEK 150 million during Q2 to a new total of SEK 250 million. That certainly also helped our position partly.
In terms of debt maturity, we have limited positions over the coming calendar years, the rest of 2020 and going into 2021. For CapEx, there's no really news. We have already communicated SEK 1.3 billion in total for 2020, and we are on track to deliver that, and that remains our latest estimate. If you can ask for next slide, please, and I'm handing it back to Lennart.
To summarize the second quarter. Okay, let's wait for the next slide to appear. Could we have the next slide, please?
Okay. Thank you.
Thank you. To summarize the second quarter, continued sales volume increase, relatively limited impact from COVID-19. KM7 ramp-up progress continues. Potential when fully ramped up is definitely reaffirmed. Earnings continue to be affected by lower market prices, mainly then from Division Paper. We're on track to deliver our cost and efficiency program. Could we have the next slide? Very slow changing slides today, apparently. Can we have the next one, please? There it is. Thank you. Outlook for quarter three. Uncertainty related to COVID-19 remains. We have to say that we are somewhat cautious when it comes to the third quarter. We see somewhat more challenging market conditions for most segments, exceptions being products designated for food and beverages and medical and hygiene where we expect a stable situation. We also have several planned maintenance shutdowns which I alluded on previously, some challenges around that.
Raw material costs are expected to decline marginally, so that will, of course, have a certain positive impact. This is just trying to give you a rough idea about the third quarter. Thank you so much for that.
Okay. Thank you, Lennart. Operator, we are ready to open up for questions.
Thank you. Ladies and gentlemen, if you have a question, please press 01 on your telephone keypad and you'll enter a queue. We have a question from Christian Kopfer, Nordea. Please go ahead.
Thanks, operator. Good morning, everyone. A few questions from my side. Firstly, on the paper. I take the questions one by one. Wanted to ask, have you seen any positive effect demand-wise as the plastics consumption, especially on bags, are coming down a lot in Sweden?
Basically material going to bags for us is not really a product area that we're focusing on. Marginally, yes, but not any major or significant impact. It's true, paper bags consumption has gone up and plastic bags has more or less collapsed, I think, in Sweden. For us, I wouldn't say that that has any significant impact at all.
Okay. Fair enough. On the outlook for Q3, firstly, on volumes for paper, is it fair to say that you expect volumes to come down a bit? I'm talking underlying volumes, and also prices coming down a bit.
I think what we see is demand for MG paper is quite weak now. We expect a weak quarter for MG paper, which means that we plan to take downtime in Frövi on two of the paper machines and continue with low steam in Pietarsaari. Volume demand for certain of the packaging paper grades, we do expect that to be somewhat weak. Sack paper, volume-wise, is fairly stable right now. We don't see prices so much dropping. Prices appear to be stable. It's mainly volumes where we will see negative trend in Q3, I think.
Right. Then on Board, if you could do similar comments there, Lennart, on volumes and prices for Q3 versus Q2.
Yes. On Board, I would say that the market for liquid packaging board is stable. I think Ivar mentioned that I think we've seen a certain inventory build-up in the first half of the year and the consumption there is normalizing, but still on good levels, I would say. We do expect a stable demand there. cartonboard, we foresee, for us, a continued growth. Our opportunities to exploit that in the third quarter are a little bit limited as we have the maintenance shutdown. We don't expect any huge increase there. Our containerboard, I'd say that containerboard is somewhat under pressure, I would say, volume-wise, and possibly also price-wise. I think we can expect that we will have some pressure on the containerboard grades during the third quarter.
Driven, I think, not necessarily by a much lower consumption, but rather by a reduction of inventories in the downstream from us among our customers. Seems as if they have had some buildup. Our sales team there is fairly optimistic, but they say that quarter three will be a challenge. Did I forget anything there? No, I think it's okay.
Yeah.
I hope that answers roughly.
Yeah, thanks. Do you have any numbers here for CapEx for 2021?
2021, basically, we will follow the earlier communicated levels around SEK 1.3 billion. No major deviation.
Right. Finally from me, on Pietarsaari, the cost savings that you will realize from that new agreement, is that on top of your communicated cost savings of SEK 250 million for 2020 or?
Yeah. You probably can look at that a bit as an outside item. Yes. We clearly have an ambition to deliver our 350, 600, and this is an item that is going to help us on top. Yes.
What would that bring for you in total then?
Yeah. We don't really comment on, in particular, margin on specific sites or help for certain machines. I'm not sure I would like to open up more on that topic.
Okay. Thank you very much.
Thank you, Peter.
We have a question from Alexander Berglund, Bank of America. Please go ahead.
Thank you very much. I just have a question on your comments on a bit more challenging markets in the industrial end markets. I'm just trying to square those comments with other comments that we've seen from construction companies and other industrial companies of an improvement. Is this, from your perspective, more due to the inventory destocking that you mentioned in your presentation? Is it something underlying still being kind of weak sequentially in Q3?
Well, it's an interesting question, and we're not sure of the answer directly, but it could be probably a combination of both. I also suspect that we haven't seen volume-wise so much impact perhaps from construction earlier on, because they have been still in the motion of finalizing already ongoing projects. There might be certain hesitation now to initiate, or some delays to initiate new construction projects. I would guess that the demand will be a little bit down in Q3 and possibly also Q4 from simply lower activity. I think it takes some time to restart those types of projects.
Okay. Thank you very much.
We have a question from Robin Santavirta, Carnegie. Please go ahead.
Thanks very much for taking my questions. First of all, just sort of going back to the demand outlook for Q3. If you look at the Group overall, is it fair now based on what you say, to expect demand to be slightly weaker for the whole compared to the outcome that you had in Q2?
I would say, to give a short answer, I would say yes. There is a lot of uncertainties. Of course, we don't know where it will end up, but we would be somewhat cautious in this situation. We still believe that, of course, as we said before, that certain of the grades are stable, others a little bit weaker. We also need to remember that we have the maintenance shutdowns, which will somewhat limit the volumes that we can deliver during the third quarter.
I understand. Thanks. The same question goes for prices. Should we expect prices to slightly decline in Q3 quarter-over-quarter, or is it more in line with the raw change prices, quarter-over-quarter in Q3 that you see now?
I think it's more of an issue of volume than price in general. I think it's likely that we will see certain price pressure on containerboard. For the rest, I would say that we have rather stable prices.
All right. Thanks. That is clear. In terms of FX we've seen, the Swedish crown now strengthened quite significantly, I guess it's as strong a level, compared to the past two years. How will that now pan out for you in Q3 and Q4? I guess some headwinds already in Q3 if the FX rates remain at the current spot levels. Is that right?
That's correct.
All right. In terms of the KM7, I was wondering, now, is it positive EBITDA in 2021 or neutral? I guess, I think you had positive as the sort of original guidance, and also in the report, I think it says positive. Now in this presentation, it says neutral. Is this now a change in the outlook for 2020 or 2021, or is it the same guidance you had before?
No. Let me try to clarify. I can see why you ask that. I think Lennart was a little bit alluding to the beginning that there is certainly a big quarter coming up, in Q3 now, and then if we can do the maintenance stop as we had hoped and do the improvements that we really hope to do. It's very difficult at this stage now to sit and do a very credible and good forecast for 2021, because the big item that certainly moves the needle a lot here would be on the product mix. Certainly our ability to move up as fast as we want to will be impacted also by part of the items we are going to fix in the maintenance stop. There is no doubt, and assuming that we will be able to do in a good manner, the maintenance shut down.
We definitely foresee in the beginning of 2021, if that's Q1 or Q2, difficult to say, that we reach a break even stage, then certainly from there on, we're starting to go into the positive. As a whole of 2021, we would expect to have a positive impact. In the beginning of the year somewhere, we would expect to reach a new milestone, which is a break-even point.
I think we will have a much clearer picture after the maintenance shutdown that we are going through here in early September. We see if that goes through as planned, we're in a good position. If we get some hiccups there's some things we don't have time to do, then that will affect the product mix, until probably during the first quarter also next year and also during the end of this year. I'm sorry for not being able to answer exactly, but I think when we have our next quarterly review, I think we can come back with some more facts on that.
Yeah, more detail on 2021.
No, I understand. Thank you very much for the sort of clarification on that. It's very useful. Just finally on the maintenance, you mentioned a few times actually sort of that it seems that you're a bit worried about how that will pan out. What is sort of the key challenge? Is it just sort of the busy maintenance schedule you have now in H2, or is it some particular things although that worries you?
Well, I think it's number one is we have now a lot of stops in a very short period of time. It's not only our mills that have that, it's also the other forest industries. They have pushed their maintenance shutdowns, as had the large parts of the process industry itself, and not only in Sweden. I think it's going to be a stretched period for everyone, with all these shutdowns that have to take place. Of course, let's hope that COVID-19 doesn't come into second wave or something like that, because then I think the main concern is to get all the people that we need, all the specialists we need to come in during the maintenance shutdown.
We need to have them in place, and we need to be able to give them conditions so they can do their job. What we don't get done during the planned shutdowns will be difficult to do later on, because then they will be fully occupied at another mill, et cetera. It's a very tight schedule with tight resource planning. I think that's the main concern we have.
I understand. Thank you. Those were my questions.
Thank you.
We have a question from Johannes Grunselius, [inaudible] . Please go ahead.
Yes, sir. Hi, everyone. It's Johannes Grunselius here. A couple of questions, but starting with the wood cost. Lennart, you mentioned here that there is pressure on the price, obviously, but also that you don't have the favorable mix in the feed in the third quarter with low amounts of birch, I think. Can you say anything about how you're looking at this in the longer term perspective, let's say when looking into next year? Could that also be a concern?
Well, I think that.
Yes, sorry.
Yeah. Okay, I can start. I think when we talk about this, I don't even know if it's called spruce beetle in English, but granbarkborre in Swedish. I think that issue is serious for the entire industry. I think it's something that we will have to learn to live with for a number of years going forward. We need to develop strategies both in the forest and in our mills, how to deal with that problem. This especially goes for the southern parts of Sweden. In our case, it's mainly Skärblacka that is affected right now. Of course, we need to develop strategies for that, and we need to develop alternative sourcing, et cetera, for hardwood. I think these are things we're looking into right now, and I do believe that we will be able to handle the situation.
I think the fact that birch supply will be a bit more under stress also in the coming years, and that it will have an influence on the price.
Okay. Is it a fair assumption, given where spot prices are now or rough market prices, that you will have, let's say, 5%, 6% lower wood cost for the next rolling 12 months compared to what you have had, or could you help us there with some sort of number?
I'm not so happy to give you a number on that. I do think we will see a decrease, whether it's 5%, 6% or something else. I would probably say 3%-5%, if anything.
Okay, thank you. Also another cost item, electricity. Could you also perhaps help us with possibly some numbers, how one should think about that for next year, given that I know you're working a lot with hedging, and presumably you're hedging in at much favorable rates now than in previous quarters. How much of a cost easing can we expect from electricity, would you say?
I think I will give that question to you, Örjan.
Yeah, thank you. It's a very good question, and I wish I would be able to tell you this in a solid manner. As you probably also realize, there's a pretty hefty spot rate development in the first half. Looking at the forward contracts, there's certainly an expectation from the market that it stabilizes and come back to a more normal rate. In that sense, you can say that, yes, you're right. We have been hedging in certain positions going forward at some favorable position, you can hope. If this continues and we don't see the spike back to normal, there will be definitely an impact for next year. Not very comfortable at this stage to give an estimate or give some kind of a number of what we would expect.
We should probably have also a better overview when we come into Q3, latest Q4, and give a little bit more guidance on what we expect for the coming year.
Okay. Sure. I was thinking about your comments here on cartonboard, that you have had consecutive nice growth in this area for many, many quarters. One of the reasons, I guess perhaps KM7 is helping you perhaps with indirect effects, I don't know. Is it any market reasons or what's behind this, basically?
I think as a preparation for KM7 and the ramp-up, we have clearly said that we will focus on certain segments within the cartonboard business area or end use area for KM7. We have definitely established a number of new customers in that region, in that area, and we are step by step then ramping up business with them on expectations that KM7 will be able to supply good volumes there. We've had very positive feedback both in terms of how they see our quality and also when they see, let's say, our ability to increase volumes going forward. This is why I'm very pleased that we've made so good runs now on KM7 here during the second quarter with coated cartonboard.
Yes.
We expect that to continue.
Good. That's my final question on the KM7 ramp-up. Is the reason why you have sequentially better earnings impact, is that because you have added the higher advanced products with the coated surfaces? That's behind it? If you perhaps could also help us, is it so that the next major improvement will come in the fourth quarter, and that's due to the mix improvement that you foresee? That's my question.
Product mix is much more important than volume, to be honest, on KM7.
Okay.
Of course, we need to run the machine, and we need to get out the volumes, but the product mix is very critical, especially as the market right now looks. For example, we do some cup stock production, and then the margins on cup stock are not fantastic right now for sure. That's a simple product for us to produce. We want to produce less and less of those type of grades, uncoated grades, and we want to go into more coated grades. That is definitely higher margins for us. We also have, of course, had, during the startup period, some waste or let's say, downgraded production of Board. Those volumes are quite difficult right now to sell at any decent price at all. We basically have close to zero margin on those grades. Of course, we want to get rid of those.
A lot of the focus right now is to get rid of those low or almost no margin products, and then step by step, get into high margin products.
Yes. Can you say something about how much, let's say, in the end of Q2, how much was coated material here, and how should we see this, for example, in the fourth quarter, if things goes according to plan?
I think in the second quarter, most of the products that we produce are still uncoated products.
We need this maintenance stop, as I went into early on. The reason for the maintenance stop is that we have to do some rather limited alterations on the machine, but they do have a fairly significant impact on the product mix. I don't want to go into any technical details here because then we can talk two hours about that.
Sure.
Basically, as soon as we can get those, we can move more into coated grades. Let's say of the 90,000 tons that we produced during the second quarter, less than 10,000 were coated products.
Mm-hmm. Yeah.
For the third quarter, don't expect too much coated products either, because we have the maintenance shutdown. We have right now a period where we have had to let some of our guys on holiday. They've been working quite hard. We do some uncoated grades here as well not to risk anything. From the fourth quarter onwards, I think you can see that the coated grades will increase.
At this stage, you don't want to give an idea of how much coated you will produce in the fourth quarter?
No. I don't want to give that.
Fair enough. Thank you very much for answering my questions. Thank you.
Thank you. Thanks.
Our next question comes from Lena Schattauer. Please go ahead.
Thank you, and good day to everyone. You said that the CapEx in 2021 indicatively at least will be around SEK 1.3 billion. I wonder if that is regardless of the outcome of the investment processes in the Frövi and Gävle pulp mills. Also, if you could please update us on the progress of the investigations into reinvestments in the recovery boiler systems and pulp mills at those two mills, please.
Okay, I can do that. We have a pre-project in Frövi looking into a new recovery boiler in Frövi. That pre-project will present its conclusions to the board late this year, the board then will decide on whether to go for a new recovery boiler in Frövi or not. I would like to say that the probability of us taking decision to build a new recovery boiler in Frövi are quite high. I think it's the right decision to take. If so, that will basically then result in CapEx costs for us in 2022, 2023. It will not so much affect 2021. When it comes to Gävle, we are not in a stage where we're looking on investing in a new recovery boiler at this moment. This is something that we will look into and that will come later on.
I think that's not going to influence the coming couple of years here.
Great. That's very helpful. Thank you. Could you please also understand there are a number of potential investment alternatives. What's the range of CapEx if you decide to invest or reinvest in the recovery system at Frövi?
I don't have a figure on that yet. I think what you should do is you can probably see on other producers who have built recovery boilers, roughly what size of investment that results in. I think for us, of course, there is a lot of equipment around the recovery boiler that we don't have to invest in. We will not over-invest in the Frövi mill. We will basically invest to secure the present capacity of the board mill and pulp supplies to that board machine. Size of investment, no, I think it's a bit I'd like to come back to that when we have a bit more visibility later on this autumn.
It will not have any major effect on 2021.
Right. That's very helpful. As a consequence, if you go ahead with a recovery boiler reinvestment at Frövi, would the natural consequence also be that you go ahead with a fiber line upgrade on that site?
Not necessarily. We will do regular maintenance and we will basically keep the fiber line in good order, the fiber line that we have, but we're not planning to build a new fiber line in Frövi.
Mm-hmm. That's very helpful. Thank you very much. Something completely different, you said that you have made a reassessment of the whole KM7 investment, and I think that's a very good thing to do, and you said that the initial potential has been reaffirmed or even strengthened. In terms of returns, is that something you could please comment upon? This project had a big cost overrun. How would you comment in terms of the returns on the project, please?
I think what we do see is that, we have a market that is still growing, and we have, well, I would say competition is not investing in new capacity for those grades that we're looking into right now. That looks favorable. You know as well as I know that we have had a more expensive, or the CapEx in KM7 was significantly higher than we had the budget before initially. That effect will be there definitely. Hopefully we will be able to compensate that by the fact that we have a strong market for the product going forward. We also then look into opportunities to, let's say, optimize more the product mix on the machine. That also could enable us to actually improve on our marginal contribution from KM7 going forward. I don't know, Ivar, if you want to comment more.
I think as Lennart was saying, the size of the price we assessed, we confirmed, and a lot of the assumptions we put into play back in 2015, 2016 around what we expected market to look like, assessing it now, it looks certainly as good and maybe in some items even better. There's no doubt that when you now know with the answer in hand, the higher CapEx, certainly the payback period of this is longer. From original we had some estimates around payback intervals and return on investment. That certainly has had an impact. The more important thing, which we're glad to find, was that the size of the price looks to be still there, and going after the right items would enable us to clearly get a good lift in our EBITDA.
Yep. Got you. I just wanted that clarified. That's helpful. Thank you very much. Then just one final question. I was positively surprised by performance in Paper, if I understand it right, so were you. Specifically on pricing, if I look at the price mix for Paper on a sequential basis, it's improved by 4%. It's a bit of a nitty-gritty question maybe, but is that due to currency? Is it due to mix, or is there anything special going on? If anything, I would have thought at least the pricing would be negative in Q2 on Q1.
Yeah. No, it's a good comment. I definitely admit if we turn back the clock three months, we also would expected a bit what you ended your question with. We certainly have been, you can say, positively surprised. What drives the item you said is mainly a positive mix and in particular customer mix base. There's definitely also a smaller item of currency, but mix is the big piece. I think keeping also in mind that we also have a very clear, and I'm happy that the division is doing this very [grand there]. There are certain profitability targets that we definitely pursue. We also have a very clear walk-away position when we feel that some of the customer requests or some of the pricing challenges coming to a level that we don't want to do. That is also part of the reason why.
Volume has been partly impacted in some cases for us taking a conscious choice and saying that that's not the level we want to play. I hope that answers your question.
Absolutely. That's very helpful. Just to follow up then, in the third quarter, you commented earlier that you're seeing pretty stable pricing in the market going into the third quarter, should we expect further positive mix, that aside?
I think it's very difficult to have an credible customer mix already at this stage. I would be careful to think about further help, maybe keeping at this level here is not as a bad starting point. As you know, mix can hit pretty fast, and there will be surprises. It's just how much and in what direction. There's nothing planned consciously from our side on that piece that would yield at this stage an answer of a further enhancement. I would not think too much either way on that piece. As Lennart was going into, there are some question marks more around on the volume and the demand side.
That's great. Thanks for helping out there. Thank you.
We have a question from Oskar Lindström, Danske Bank. Please go ahead.
Hi. I've got two questions left here, and the first one is on liquid packaging board, where you renegotiated a number of your contracts, but I believe not all of them. Are there any of your liquid packaging board contracts coming up for renegotiation during the second half of the year? With, i.e., new prices next year?
I think we will give the same answer as we have earlier on, that we don't want to disclose specifically when we are renegotiating any contracts. That happens on a regular basis. Well, I think that's basically what I would like to say on that topic.
All right, fair enough. Another question is, there was a question about paper bags replacing plastic bags earlier, and I realize that's not a big product for you, but there is this trend of replacing plastic packaging going on, which you're very much part of. I know one of your project, which I believe you're a joint venture partner, is in a paper bottle for a Danish brewing company. What's the progress here on these sort of new products, which are fiber-based instead of plastic-based?
Yes, that's the Paboco joint venture that you're referring to that we have together with Alpla. Of course, Carlsberg, in this case, has been one of the promoters of this project. We also have then, of course, discussions with other producers of liquid packages and other products. Ivar, I think you're actually in the board of that joint venture. I don't know if you want to elaborate.
No, I can. Not on the paper bags, but on the paper bottle. As you rightly say, it's a company we have a stake in. We have that together with Alpla. You can say that that progress has had an incredible strong attention. There's a partnership now with four very strong brand owners. We have Coca-Cola, we have L'Oréal, we have Carlsberg, and I'm missing one, and Absolut. You can say we have still, at the very early stage, a plan, and we have now on the stage of getting a new machine installed that will increase capacity and certainly get that whole production to a different level. There's no doubt that still we're talking relatively humble volume.
There's a clear plan forward now to tackle some technical challenges, also to sequentially get your hand onto more machine with more cavities so we can increase the overall capacity. You can say that, yeah, it's a lot of positivity. There's a lot of interest. We have to say no to several brand owners because we just literally cannot do that. You're at an early stage, and we expect now the next couple of years to be quite crucial for that company in the future. I don't know, Lennart, if you want to comment more on the paper bottle from what you already said.
I think just talking by my own experience, new products take more time than you think until they become significant businesses, especially in this type of industry. There's a lot of investments, not least among the converters if they want to go to new products. We see positivity on this, but we don't expect it to explode from one year to another. It will take time.
All right. Thank you. I'll be following that with great interest. Thanks. Those were all my questions.
Thank you.
Thank you, Oskar.
We have a question from Cole Hathorn, Jefferies. Please go ahead.
Good morning. Just to follow up on containerboard, could you just give a little bit more color on what you're seeing in fluting versus the white liner space? I imagine you talked about the weakness in the white liner versus fluting. Then on a longer term perspective, is there any color you can give on maybe Division Board of where you see EBITDA trending, let's say 2024, 2025, once the machine's fully ramped up, since you did do a review of how it would impact the business longer term.
Okay. fluting stable, to make it easy. I think where we see certain challenges more on the white liner, as you say correctly, for the coming quarter or so. When it comes to expectations on profitability going forward, I think, Ivar, do we want to say anything about that this stage?
Yeah. It's a tough question to answer because there's certainly a big X factor here on the raw material, which is tough to estimate. You can certainly say that if we more or less keep what's happening now as a bit of a constant and don't expect any major deviation on currency or other raw material input, then there's no doubt that we should be up in the sniffing on the 20% EBITDA margin once we have the KM7 up and running, and probably even if we get the mix where we need to and want it to be, a bit even above that. That's probably the best I can see. It's clear an ambition, and it's a long way there. There's no doubt that when we look into the building blocks and see what we likely would achieve, we will be in that range.
Just one follow-up. With fiber sourcing, I suppose moving around with the spruce beetle, and in fact, the last few quarters, you're saying you're working on some of the mix, particularly in the kraft and sack paper space. Are there any optimization programs or potential machine shifting around that you could be announcing near term on your product mix? For example, doing more brown pulp instead of some of the brown sack kraft paper.
Could be, yes. Brown pulp, for example, we have done some recent investments, which means that we can produce brown pulp, should we so wish. What we produce will basically depend on where we get the best contribution. We have deliberately, let's say, created a degree of flexibility here so that we can go for best contribution.
Thank you.
We have a question from Marko Järvinen. Please go ahead.
Yes. Good morning. I just had a few questions regarding your cost savings program. You now achieved SEK 90 million in Q2, and I guess SEK 140 million in H1 in total. You're still guiding for SEK 250 million for full year. Is that a conservative estimate, or is the maintenance having a negative impact in H2, or how does it work?
I think, Ivar, you're the specialist when it comes to following that development.
Yeah, I think, well, you can certainly, just looking at the pure figures, that it looks a bit conservative. We can say the following, though, that we are certainly happier with the progress after the first half than maybe we would have thought six months ago. That's great news. Certainly now we are tracking and pursuing a bit more than 250. I think it's still too early to say, because as you also point out, there will be a clear organizational focus in the next quarters, more centered around some clear maintenance tasks. I think in Q3, we should be able to give an update, but it could definitely be that we will be able to deliver a bit more. I wouldn't expect a crazy delta, but certainly there is a 250 plus here now at play for 2020.
I think also it was mentioned in the slide that Lennart went through that a lot of the focus now is actually now on identifying new and bigger building blocks for 2021, and that [fix on the] challenge, it still stands. We have already part of the plan in place, but there's no doubt that we need more, and we need new items to be developed and initiated before we feel comfortable reaching there. Hopefully that gives you a bit more flavor.
Good. Thank you. Did you also have some one-off cost savings in Q2? What was the magnitude and what type of savings were those if those were significant or impactful?
We haven't had any significant ones, to be honest. We've all reported some one-off in adjustments, but in terms of one-off items, no, there's not really any big ones standing out. You always would have a certain emission right that we sell a little bit fluctuating, but I wouldn't call that as a one-off saving in any way. No, there's nothing really stands out that I would lift up as a one-off saving item for Q2.
I'm sort of thinking more in terms of lower travel costs and that sort of thing with the current environment, anything like that.
Yeah. Well, of course you can always [Ahmed], you're right that, in general, we don't have a very sizable travel cost for the company. In the big scheme of things, of our cost, you are certainly right that there are some, but I would not call them in any sizable manner. I'd be talking single digit millions there. Yeah. You are probably right that there are some smaller items like that, but nothing really big that stands out.
Okay. Very good. H2, you have quite significant maintenance, and you guided for the impact of those. Now you're also guiding for somewhat lower demand. How do those impacts overlap? Will the maintenance have a less significant impact now that demand may be a bit softer as well? How do you see it?
I think on the maintenance cost, that we publish separately in the report on page 24. They should stand like they are. We did talk about the SEK 35 million on top for the late Q2 maintenance shifts to Q3. They still stand. It's hard to put a precise number on that, from being very late at some of the rescheduling and how you then optimize your wood flow to get some contractors rescheduled, it's always a little bit of an extra tipping point. As Lennart said, it could be that we're not able to do all of them in the quarter we want. Certainly, that will impact the overall cost, we don't know. Currently we plan that we go full steam ahead on all. Yeah. I think that's probably the best I would say to this stage.
Okay. Then the FX impact you had in Q2, what should we sort of envision at current levels for Q3? Is it similar or was it particularly negative in this quarter?
No, I think there was a question earlier on this as well. As you know, we have a pretty hefty hedging in place on this. With the current level we see, we should get in a positive impact. It's tough to say anything. Yeah, if everything else is equal, we should have a positive impact. We're not really coming at this stage or in the quarter on anything, what that interval would be.
Okay. Very good. Still on the Frövi investment. If you in the end decide to replace the recovery, is there any room for capacity growth through that investment or is it just pure replacement?
There is going to be a certain degree of volume, but fairly limited, I would say, in terms of that we're not planning to expand the capacity on the Board machine itself. The purpose of the pulp mill there is to supply the board mill with pulp. What will be the result of, let's say, somewhat higher pulp production is, of course, that we can reduce externally supplied pulp to the mill. That's not going to be a major difference. Of course, we will get down costs, because with the new recovery boiler, obviously we get operation costs at a lower level than we get with our present old boiler. No major capacity expansion there, no. Basically, it's a replacement investment, to be clear. Yeah.
Good. Thank you. Those were my questions. Thank you very much.
Thank you.
Thank you.
We have a question from Martin Melbye. Please go ahead.
Yes. Many questions here, last question is regarding sack kraft paper. That market really seems to be lagging quite a lot when they report the prices. What have you actually seen there on pricing in the actual market that could influence market prices in the second half and the start of next year?
Well, you have to distinguish, as you know, between brown and white sack. If we see on brown sack, what we see right now is actually volumes are pretty okay. Perhaps a bit better than we expected. Prices, they have basically dropped earlier in the year, but now we feel that they are rather stable. Not much is happening on the prices. We don't see them going down substantially more. I can't say that they're on their way up either, so more or less. When it comes to white sack, basically, I think we've had some softness there in the market when it comes to volumes as well during a period of time, and perhaps still a bit soft on the volumes. On prices, we basically see that they are stable. No big movements on those grades right now, price-wise.
You know as well that they've taken a huge hit compared to last year.
Yes, they have. They've dropped like 15%. Is that the trough or is there more to come next year?
You tell me. I don't know. I think we don't foresee any drastic drops, but you never know.
Good. Thank you.
Thank you.
Thank you. There are no further questions at this time. Dear speakers, back to you for the conclusion.
Okay. Thank you, operator. I think that concludes today's conference call. Thank you all for joining in.
Thank you.