BLRDY - Billerud AB (publ) Communications Inc. (BLRDY) Q1 2023 Earnings Call Transcript
2023-04-26 12:03:05 ET
Billerud AB (publ) Communications Inc. (BLRDY)
Q1 2023 Earnings Conference Call
April 26, 2023 03:00 AM ET
Company Participants
Christoph Michalski - President & Chief Executive Officer
Ivar Vatne - Chief Financial Officer
Conference Call Participants
Linus Larsson - SEB
Robin Santavirta - Carnegie
Johannes Grunselius - DNB
Martin Melbye - ABG
Joffrey Bellicha Meller - Bank of America Securities
Oskar Lindstrom - Danske Bank
Cole Hathorn - Jefferies
Jesper Mothander - Dagens Industri
Presentation
Operator
Good morning, everyone, and thank you for your interest in Billerud, and welcome to our First Quarter 2023 Earnings Call. So with us today, we have Christoph Michalski, President and CEO; and Ivar Vatne, CFO. They will hold the presentation. And after that, they will take questions from the participants on the call.
So by that, let me hand over to our CEO. Please, Christoph.
Christoph Michalski
Yes. Thank you, Lina. Good morning, everyone, and welcome to update for the quarter one, 2023. Before I go into the core of the results, I would like to give you a short update on our Escanaba Mill.
As you probably know, on the 14th of April, we have idled the mill and due precaution of basically a fungus outbreak we had at the mill. It is a very rare infection that you find selected areas in North America. And we have been in very close contact with the CDC of the United States plus all the different health and department, be it Federal, be it state or be it local.
We have decided to idle the mill out of precaution. We have not been able to find any traces of the fungus in the mill or in its closing. And because this is such a rare infection, we have relatively little prior knowledge to this fungus infection.
What we are doing today is basically cleaning the whole mill, in particular, all the air conditionings, et cetera. We have about 100 contractors, outside contractor on site doing this job. And for the moment, everything is in line with our restart up. As we said, we would be idle for three weeks.
Clearly, this will impact a little bit the quarter two results. This is not a quarter one issue. It's a quarter two issue. And currently, we foresee a financial impact around SEK 100 million to SEK 150 million. So -- that is basically the update I can give you today. The situation is moving quite fast as we go through the cleaning and discussion with the expert, but from our perspective, there is nothing which stops me to think that we will be up and running again in the beginning of May.
Good. Let me move into the quarterly results. Clearly we had relatively good top line growth as you can see 6% organic, 55% reported with the acquisition of Verso in the United States. But demand has been exceedingly slow I would argue very soft. We had curtailment of about 117,000 tonnes. At the same time, we are reaching the peak or are still in a very high input cost regime. In particular, wood cost is up dramatically about close to 50% from last year, and chemicals is also a very significant cost driver in our P&L.
Price pressure in some categories. We have clearly carried over some price effect from last year into this year. And as I mentioned before we had some increases in liquid packaging board in particular, but I think what we have seen is that the cost increases have been significantly higher than the price effect of quarter one.
And we also have some mix effect when we have this type of soft demand. So in some of the categories like paper for instance if we have a lack of demand or curtailment in paper we would produce more pulp and that's what we have done and that has clearly mix effect. And also within the categories, there might have been some more selling of lower added value products in order to run the mills as optimal as possible.
If you go to the next slide, which shows you the sales growth you can see that we had a reasonable currency and pricing effect. And however, when it comes in volume and mix the addition of the US didn't counter-balance the negative effect of the mix effect in Europe but nevertheless we had, as I said, a good 6% organic growth in the quarter.
When we go and look at EBITDA, the situation is clearly much more dramatic and here you can see the waterfall of our EBITDA positive currency effect, positive pricing effect excluding pulp.
Then you have a very good volume effect from North America of SEK628 million EBITDA, but the overall effect is only SEK574 million which is the negative mix effect from Europe.
And then you see the dramatic SEK1.3 billion additional cost of raw materials and logistics including pulp and wood, so, including wood and chemicals which basically is lowering the results quite significantly.
We have also identified all the effects of our profit enhancement program which was around SEK100 million for the quarter. So we're very pleased by that starting progress. And we had in others it is mainly lack of fixed cost covering and salary increases in corporate projects which add up to about SEK200 million.
So at the end if you take out the maintenance schedules quarter one result is at SEK1.484 billion and you see the overall bridge how these results comes to be. If I move to the next slide which is more about our market condition, clearly, that is what is currently driving the results.
So I think it has been commented many, many times now before in the whole industry. We have basically a double effect of very high stocks which were created at the end of the pandemic with the logistic challenges and things like that where people are not to get material basically ordered a little bit too much.
This stock is now in our customers and their customers, brand owners et cetera. And with the economic situation present, the consumption of these materials in stock is somehow slower as what we expected even still in quarter four or in January when we had our discussion then.
So, basically the strongest effect in industrial where our exposure to the cement industry and in particular sack paper has slowed down dramatically and this probably will last on. You all know the situation that the building industry is facing now. But I think overall we can argue also in the consumer and luxury, food and drinks and the printing and publishing we have the same situation with slightly different drivers.
When it comes to printing and publishing we are clearly exposed to a lot of the marketing spend in North America, when it comes to graphic paper in particular catalogues and direct mail and these type of products and they have been slowed down a little bit in this consumption, but there is I would say a relatively good hope and perspective that this could recover a little bit more in the second half of the year.
While food and drink is mainly European exposure and we have basically seen a relative slowdown or at least the consumer down trading which also resulted in lower consumption of our type of premium packaging materials.
I think what we see going forward is still not much change in quarter two when it comes to the market dynamics. And we expect things to recover slowly in the second half and the initial recovering is basically consumption of stocks that are currently in our customers and brand owners. And then when it comes to the economic development we have to see what is happening in the second half of the year. And what is the outlook also for 2024.
Having said that, I will now hand over to Ivar. Good morning, Ivar. And if you would like to talk a little bit about the movement of input prices and our expectation to those going forward.
Ivar Vatne
Thank you Christoph and good morning everyone. So couple of words on the input costs always a topic of high interest. We have seen another quarter where incremental cost inflation has hit our P&L, but also for this quarter there are big differences between the regions.
For North America, we've seen a flat cost picture when comparing versus quarter four, so that will be Q1 over Q4. There has been some hurt on chemicals, but this is offset through lower energy prices and in particular natural gas, which has taken bit of decline last couple of months, or net-net flat for North America.
For Europe, the situation is a bit different. We've added roughly SEK65 million of incremental cost and again that is quarter-over-quarter so Q1 over Q4. Clearly most of this is coming from higher fiber costs roughly SEK130 million. We also had another smaller hurt on chemicals, which is minus SEK10 million. And then going the other way and helping us, we've had SEK60 million help from energy and roughly SEK15 million coming from logistics.
Going into Q2, we do expect to start seeing some help from input cost first and foremost in Europe. So if you start with Europe we expect in the area of SEK125 million of help coming into Q2 and that means it's Q2 versus Q1. Most of this is expected to come from chemicals estimated to be SEK100 million followed by energy SEK50 million due to spot prices are now on lower level versus what we've seen in the past. We do expect a small hurt from fiber costs, while logistics should stay roughly flat.
Just couple more words on the logistic. We do have a new logistics on the overseas freight starting to help us from May. That will yield significant savings going forward, but that actually is not going to help us into Q3. And that contract is worth SEK300 [ph] million, so it's a pretty big deal. But again, it will start to help us from Q3 and onwards.
For U.S. let me comment quickly on that. For Q2, we do expect some hurt on fiber around SEK30 million. Again, we should be fully offset by estimated lower energy U.S. also in Q2 should be flat versus Q1.
Right, so let's move on over two product areas, and we start with the paper. And the product area paper had a pretty decent quarter given the tough market conditions we have been facing. Organic net sales of 13% when the North America and currency is excluded. And excluding pulp some comments on pricing, it added SEK40 million of incremental pricing. So that is versus Q4 as speciality helped partly then offset the other way by declining pricing on both sack and kraft paper.
Okay. Graphic is holding up pretty stable. Pulp is clearly moving these days which shouldn't be a big surprise and the pulp pricing impact was more than SEK110 million. So net-net for paper including pulp, we look at minus 17 pricing versus than Q4. However, the big event for paper this quarter has been the very slow demand and we have seen continued customer destocking in general order books coming down as market uncertainty is high.
Christoph mentioned this but this has caused most of our paper machines to taking downtime during the quarter in total 78,000 tons that level of curtailment we've never seen before. We were able to hold up the paper profitability in a good manner as input cost inflation in North America has been much more modest versus what we see in Europe.
Having said that, our paper margin in Europe is still impressive and holding up really well spearheaded by the sack profitability and in particular the brown sack has been doing well. But we were hit in the quarter then by this curtailment and the fixed cost on the recovery.
If you move into the next area and that is product area, board net sales growth close to double-digit. Clearly that's also helped by currencies organically we recorded 5% versus year ago. Most of that is coming through the pricing carryover positions and also for this quarter, we see top line growth coming across pretty much all the categories.
In terms of pricing, overall board came in flat when compared to previous quarter. As Christoph also mentioned, for liquid packaging we've had help as revised pricing position has come into play from January and onwards. While we have hold-up pretty well for cartonboard, the big change in terms of the negative pricing for board has been on containerboard where we've seen quite heavy price pressure, but again, total for board flat versus Q4.
In terms of the production volume, it's pretty much the same story as we explained for paper. Demand is soft for most categories and we are trying also to keep a close eyes on our inventory levels. So we've taken significant downtime in several machines, so 39,000 ton is the number that we've had for product area board. And again, this is also some kind of unprecedented level that we have seen this quarter.
Profitability is a challenge for product area board, clearly linked to also board being exposed to Europe's quite unique and extreme cost inflation level. If there is also some piece of good news we had some production challenges in Q4. As I think some of you remember we have had none of those in Q1. So at least from the stability point of view, it's been very, very solid.
Good. So, we move on and some words about cash flow. Cash flow performance has been a challenge this quarter. In essence, the working capital movement is significant and causes us to land on a negative cash conversion. Couple of factors playing in on the working capital. I mean, the receivables is actually doing very well. We don't have any big movements to talk about. We had slightly higher maybe than you would expect on inventory levels, but it also came actually down quite a bit on the inventory level in Q1. So, we don't think we have a massive issue on overall finished goods inventory versus what it will be.
The big drop has also been on the payables and comparing that to the balance end of 2022, part of that is due to one-off items, part of that is due to some timing and there's also been in general a much lower purchasing pattern with lower-than-expected production schedule and no maintenance shutdowns in the quarter et cetera. But I'm the first to admit that the Q1 cash flow conversions is not something we are happy with and it's a clear priority for us for the rest of the year, so from Q2 to Q4 to move back into solid conversion figures and land 2023 in an acceptable manner.
Balance sheet is still strong and way below the target. Couple of words on the last bullet points there on the CapEx guidance. We do lower the CapEx guidance for 2023 by SEK200 million, so new estimate is SEK2.9 billion. SEK2 billion of that coming from base CapEx across the regions. SEK900 million related to our ongoing project of the new recovery boilers in [Technical Difficulty].
So next slide please. I want to talk a little bit about our profit enhancement program that we launched some months ago. And I think we have now a good quarter under our belt with some highlights to talk about. I mean, there is no doubt that this is one of the most important company priorities for 2023 and we used the last couple of months now to really mobilize and organize the relative project streams. I'm happy really to see the enormous engagement energy that we have now behind the program throughout the full organization. A multiple initiative is now in motion making detailed descriptions all the different initiatives and what we're trying to achieve linking them to specific KPIs.
Q1, we recorded SEK95 million of program impact. And with that we are well on track to deliver the SEK400 million net target, we've set to be delivered in 2023. As well, we are looking more and more into more program pipeline for the coming years, as it certainly is a three years program and we aim to see steady progress for the next quarters. Yeah, just at the bottom of the slide, you can see some of the highlights and examples for Q1 and how they illustrated these initiatives are different from our previous cost and efficiency program where this program in particular focus more on functional collaboration to fulfill more of the potential that we know we can find in this company.
So with that, I hand it back to Christoph.
Christoph Michalski
Thank you, Ivar. So let me talk a little bit about the priorities for the rest of 2023. What Ivar already mentioned is clearly, we have to work on our enhancement program that is basically the only thing which is in our control, compared to the sales and market dynamics. We will continue to have selective curtailment in order to manage our stock levels in a good way. This will lead again unfortunately to under-recovered fixed cost, but it's a far better way of managing our cash flow going forward than to continue production for stock.
We will continue tight control on cash flow. And I think an important point here is, we will continue to scrutinize base CapEx, in the sense that we have already taken the decision now to lower the CapEx by about SEK200 million and we basically turn every stone to see, if there are further savings which can be done this year.
What we will not do is to basically impact the CapEx on our strategic project, in particular Frövi, which is delivering incredibly well. We will probably be online, a few months earlier than we originally planned and the project is well managed in budget and on time despite all the challenges, we had during the COVID period and logistics issue, and cement issues that have touched us.
Norway is continuing in the feasibility phase, and we expect late quarter three, beginning quarter four as the final CapEx decision. Just for you to mind you this is about our BCTMP pulp mills that we are developing together with Viken Skog. And finally, the biggest project in our stable, the US transformation, is also going through all the different project phases in order of preparation.
Just as a reminder, it's basically project, which looks at converting a paper machine into cartonboard machine to install BCTMP pulp mill and basically upgrades the mill, to make it future proof when it comes to all the sustainability performance in North America.
Very good. When we look at the outlook quarter two, I wish I could give you a more positive view, but I think today we are very realistic that we will have continued weak market conditions and that basically is slowing the destocking of our customer and brand owners, but we hope then in certain segments, we will see a little bit better performance in the second half of the year.
We will have lower volumes on the back of production curtailments probably in line of what we had in quarter one. And the cost inflation is expected to ease, but it will ease slowly because all the cost reductions that we're seeing, which we are negotiating as we go forward will only go into our P&L a few months later.
And then finally, I think with that weak demand for the moment prices have been under pressure but still have held up reasonably well. I think in quarter two, we will see some more pressures and in certain categories some decreases in prices, which again will put pressure on our profitability as we go forward.
I think none of this is particularly structural, it's more market issue. And therefore, I think with improving market conditions our profitability will recover fast. And in the meanwhile, we basically will focus our efforts on our enhancement program when it comes to efficiencies and profitability and we will continue to focus on cash flow.
Good. With that, I finish the presentation for this quarter one, and I'm looking forward to your questions. In order to make it simple for us as well, I would like to ask you to ask only one or two questions at a time, so that we can give you a proper response. And Ivar and I are ready to go. Operator, could you please take over?
Question-and-Answer Session
Operator
Of course. Thank you. This is the conference operator and we will now begin the question-and-answer session. [Operator Instructions] The first question is from Linus Larsson with SEB. Please go ahead.
Linus Larsson
Thank you very much and good morning. Starting with North America which has become a pretty significant part of your profit pool it's actually bigger than the board division currently, and I think EBITDA margin was something like 19% in the quarter. And you talk generally about potentially lower prices in the second quarter. Does that hold for the US as well?
Christoph Michalski
Yeah, Linus, why don't I try to give a little bit perspective on pricing going into next quarter maybe actually to both Europe and the US at the same time. I think, it's absolutely a bit sketchy at the moment in terms of what we see on pricing. For the time being we are pretty, let's call it confident that we are able to hold pricing in US Q2 over Q1. So we do not expect to see a significant item there. There might be some smaller mix impact, but in general for now we are pretty neutral of what we expect to see.
I think for Europe it's certainly starting to look more challenging and we do expect to see further price drops now both on containerboard, cartonboard and sack and kraft. So we have a rough estimate between 3% and 3.5% of material sales important for the company. So you can use that SEK10 billion of net sales as a good proxy for what material net sales is and that 3.5% is then solely estimated to come from Europe in the quarter two over Q1.
Linus Larsson
Great. That’s very helpful. Thank you very much. And just continuing on North America you're saying this that this start in the second quarter at Escanaba may have an impact of approximately SEK100 million to SEK150 million. I just would like to get this right because you did take -- presumably this is mainly production related and you did take downtime already in the first quarter. So just to get this like-for-like what's the incremental burden that you're expecting at Escanaba Q2 on Q1?
Christoph Michalski
So if you look at the – the mill what we have done is we have pushed as much as we could production into Quinnesec. We also had planned some downtime in Escanaba. And basically both factors in itself will make the stock of three weeks have a relatively little impact as we said SEK100 million to SEK150 million of which I think half is more or less the market effect of things that we cannot deliver there's certain products we can only produce in Escanaba. And the second half is basically cost of subcontractors and third parties and whatever you have in order to do this massive cleaning operation in the mill.
Ivar Vatne
And maybe I can just add Linus. I can confirm that number is incremental number that you should use Q2 over Q1. As Christoph said it's a mix between the incremental downtime and it's the estimated third-party cost that we expect to see.
Linus Larsson
Okay. Okay. That wasn't clear when I read it but that's very helpful. And then continuing on North America I mean at this stage are you as management aware of any claims directed towards Billerud in light of this blastomycosis outbreak that we've seen?
Christoph Michalski
For the moment we haven't received any claims but as we are talking to the North American environment I think we would probably expect some to come. I think this is an illness, which basically you recover -- in the best case scenario recover very quickly without any side effects of what we understand today and therefore we expect the claims to be relatively limited.
Linus Larsson
Okay. And just finally with regards to these health concerns what makes you confident that you will be able to start-up the mill in the beginning of May?
Christoph Michalski
Look it's very simple. When we got to know about the first cases we had a very, very significant search with all the health authorities and industrial hygienists about the causality. In the beginning, we didn't even know that there would be a concentration at the mill. We couldn't find any source of this particular fungus in the mill and basically all the analysis are ongoing. We are following basically the recommendations.
So we started in the middle of March, end of March already some cleaning operations in the mill. And basically, then we realized in order to do a proper old mill cleanup, we need to get people out of the mill during the cleaning operations. And as soon as this was clear we basically took the decision to idle the mill out of precaution to do the cleaning job, but we don't know how people got infected. We just know that all those cases of proven or suspicious cases that these people have been at the mill.
So that is why we are pretty confident that with the help of all these experts that we have engaged we will do the cleaning process. That is very well planned now. And in three weeks that will be done. And also we have already today -- basically the case numbers were very, very high in the middle of March. They already have come down. So our expectation is that we will start-up the mill and we will maybe not even ever know where the fungus came from.
Linus Larsson
Okay. Great. Thank you very much.
Operator
The next question is from Robin Santavirta with Carnegie. Please go ahead.
Robin Santavirta
Thank you very much, and good morning, everybody. I have a question related to the pulpwood cost and availability situation in Sweden and in the Baltics. How do you expect pulpwood cost and availability to develop now going forward in Sweden and the Baltics? It seems you guide for a smaller increase in pulpwood cost in Q2 Q-on-Q. How does that stack-up with Sweden and Baltics? Any difference there? And do you expect sort of further increases down the road? I saw in the last call now increasing again. Will that impact you going forward?
Christoph Michalski
Okay. I think there are two aspects to this question. The first is market dynamics. So clearly after the closure of the Russian border the market took some time and there were even some availability issues in order to rebalance between Finland, Sweden, Norway and the Baltics. What we see today is that we do not have any specific availability issues, but overall the prices of pulpwood have gone up in Sweden on a very progressive way and in Baltics there was a huge peak and we see already prices coming down from the peak. Okay. So that's the market situation.
For us clearly, the situation is specific to our buying structure. So we still buy hardwood from Balticum [ph] and prices are coming down and we are shifting within -- sources of wood Balticum and Sweden et cetera but then also channels like forest owners, private forest owners and forest companies and therefore we expect hardwood to basically be more or less at the peak and for us basically stable and then probably coming down a little bit in the second half, but to marginal extent.
Robin Santavirta
All right. Thank you very much. Then the second question I have is related to your North American business. It seems demand is actually quite weak at the moment, but still profitability holding up surprisingly well. I guess Ivar was commenting that Q2 performance when it comes to pricing would be essentially unchanged at very high levels. How do you see sort of the second half of the year related to pricing? What are the dynamics? I mean if demand is weak, input costs are probably not coming up rather down. Why are prices not coming down? Is this something we should expect for the latter half of the year?
Christoph Michalski
Okay. I think let me split few of those dynamics. I think the number one dynamic in the US is that probably you cannot compare price movements five, six, seven years ago to today. There are far less players in the market. You have much less mills, and therefore, I think there is a much better price discipline in the market because basically there is only a limited availability once basically demand starts again. And, therefore, I think prices are holding even with basically lower demand.
When it comes to the demand I think we see some clearly signs in the US economy that things are what they are but are not getting worse and potentially might even get better and that will definitely then have an impact on advertisers in the US to continue to basically restart the communication.
As you know the general effect that printed advertising with digital advertising together has proven a winning concept for most advertisers. And, therefore, I think we see some positive structural sign and the usage of paper be it direct mail or catalogs and things like that. And last but not least, we are also in categories, which are basically printing of school books and things -- things will not go away, et cetera.
So we see basically once the stock levels is through in our customers then we basically see demand basically normalizing again because we have true flow. I think what we may be underestimated earlier on is the speed at which that stock would disappear. So initially we hoped in quarter two, we would have already some positives, and I think now we are seeing this probably moving more into the end of the summer.
But generally speaking I think we are confident that the US business will motor well and this was more like in Europe a bump in the overall track. And I think overall we are very, very well-placed to exploit the opportunities both in Europe and in the US.
Robin Santavirta
I understand a much.
Operator
The next question is from Johannes Grunselius with DNB. Please go ahead.
Johannes Grunselius
Good morning, everyone. It’s Johannes here. Thanks for your comment about pricing in the Q2. That's very helpful. Just to clarify Ivar, did you mention it was SEK125 million in total tailwind from mainly chemicals? Was that right?
Ivar Vatne
No it was a little bit more balanced than that. But the number is right, the SEK125 million that's what we expected where the big chunk should be chemicals SEK100 million. We expect in the area of SEK50 million coming from energy and then we will have at least an estimated hurt of SEK25 million for the fiber.
Johannes Grunselius
Okay, got you. Then my question is that it sounded that the easing of the cost inflation or the lower cost, it's only partly impacting Q2 because of delays in the P&L. I mean, how should one think about cost easing in Q3 versus Q2 here? Is it like a similar tailwind in the third quarter would you say, what you see now?
Ivar Vatne
Yeah. I mean we are a little bit more careful of guiding that far since the visibility starts to be lower but I can certainly say that if you think about it was also Robin alluding to there is still a little bit movement on the negative side on the fiber. So we probably have a little bit further tail of some of the latest price announcement on the pulpwood here in Nordic, but everything else equal at least when they see now the spot rates let's call it during Q1 continuing forward, we would expect chemicals and energy to help us. And we as also mentioned have another significant logistics help kicking in from Q3. So everything else equal, we at least should have the same level Q3 versus Q2. But again this is where it starts to be a little bit more difficult to give good guidance.
Johannes Grunselius
Okay, got you. And I was also curious if you could share your thoughts on where the market is right now for the board division. I mean, the food and beverages markets in Europe where do you see little markets year-over-year because of the in terms of destocking behavior.
Christoph Michalski
Yes. So on the cartonboard business, clearly, there are many, many categories, so to say. So let's start. Liquid packaging board, it's very stable. I think, there's overseas growth, but in the developed market, it's stable. So that's very good.
When you look at things like fluting, our focus has generally been in the production of citrus fruits and things like that in the south of Europe. And you have probably heard that we had a relatively dry harvest and therefore under-production on products like lemons and avocados and whatever you have. Therefore, we expect that people still have quite some stock and that will carry over the whole year. So we think that this business will not recover very fast.
When it comes to other containerboard products, we see some weakness there, and that will basically only significantly recover once the economy in Europe is recovering in a good way. And cartonboard, it's really accounts by accounts we see shifts here and there. And it depends a little bit on our customers and their exposure to different food types and product types in the market.
Johannes Grunselius
Okay. That's very clear.
Christoph Michalski
But as we always said, we are very much the economic activity is the key driver for consumption here. And as long as people are struggling with inflation and higher energy costs and mortgage costs, and whatever you have I think that is the key driver for the slowdown of consumption and that we hope will ease-up a little bit later in the year.
Johannes Grunselius
Yes. I have also a final question and that is if you can help me about your sort of where you are in terms of your nominal capacity or so. I mean, your shipments in the board division is slightly less than 500. Where would you say your capacity is at because there has been quite a lot of changes, obviously in the company over the past year?
Christoph Michalski
You want to take that Ivar.
Ivar Vatne
Yes. Maybe I can actually give a little bit on the total number. And I might not actually have the split for you Johannes. But I can say that in general when we were in the area of 950,000 tons for this quarter in terms of sales volume, if we are going full blast for, let's call it, all the mills and you say that the market is strong across both regions, we should be about 100,000 tons higher than that. So that gives you some indication. And if you just do a little bit of a pro rata of that, you will probably come to around two-third of that, or 60% so on should be in paper.
So that just gives you a bit of an indication that, yes, it is soft at the moment, and hopefully, we will get to see a little bit higher utilization rate when we come into the second half of 2023.
Johannes Grunselius
Okay. Thank you very much.
Operator
The next question is from Martin Melbye with ABG. Please go ahead.
Martin Melbye
Good morning. So we've covered price and cost. Regarding volume, you've given the Escanaba effect, but you also say that lower volumes will be a topic for Q2. Is that a continued negative compared to what we already had in Q1 in terms of EBIT?
Ivar Vatne
Yes. This is a good question, Martin. Let me try to answer this. I think we know that Q1 was softer. I just explained also to Johannes, that they are quite far from where we believe the technical capacity could be. I think in many ways a quite neutral in the sense of we don't expect much better in Q2 versus Q1.
The only thing you probably could add as another negative is the Escanaba event. It's in the area of additional 15,000 to 20,000 ton that probably we get as an impact of that. As you know we also have the Skärblacka and Gruvön maintenance stops coming in and that usually also has some implication on the volume. That's anyway -- that volume impact baked into this estimate of 330 that we have provided.
But this is where it starts to get a bit challenging this time, because now given we have quite lower than 100% utilization we also have a bit of inventory to lean on. But summing it up, I would say that, hey, Q1 was challenging. We probably don't expect much more and maybe do a correction for the extra downtime in Escanaba 15,000 to 20,000 tons probably a reasonable estimate of what Q2 will be.
Martin Melbye
Right. And then what was the key reason for the higher working capital and what do you see on energy cost in 2023 versus 2022? I think you've guided on that earlier.
Ivar Vatne
Yeah. Let's start with the cash flow item. I think there is quite big improvement, but I can try to take them, kind of, one by one. The receivables that actually we had some help from that so lower receivables related to the electricity hedges came in a bit down so that's SEK400 million. Inventory not a major difference. If I'm honest there's a little bit of hurt. That was mainly due to the inventory revaluation input. But to be honest the finished goods inventory was actually not much changed at all.
And the biggest piece that -- that's more than SEK1 billion is coming from the payables. And I think, I mentioned it quickly, but it is a combination of some one-off items that we had in the quarter. We had some bonus payment for instance in US that is a bit of a new item that we have with a different timing. There is certain timing impact just around the New Year there that played a part.
And in general we just have low work activities now because of managing inventory and lower activities so let's call it purchasing of raw material and input factors have come down quite a bit. So those are the big -- that is to explain and as also mentioned we have a very clear ambition and motivation to improve this from Q3 and onwards. And I think can you just repeat the question Martin on the energy again? What was it?
Martin Melbye
I think you have guided on energy costs earlier because it's.
Ivar Vatne
Yes.
Martin Melbye
Given hedges et cetera. What do you see now in 2023 versus 2022 on energy costs for the full year?
Ivar Vatne
Yeah. No so I think if you start with Europe only I think the electricity cost we landed on for the year was €52 per megawatt and again that's a combination then of very high spot and some hedges. The latest estimate we have now for 2023 is around €59 per megawatt.
And everything else equal if you just use the roughly two terawatt that we tend to purchase in Europe that should be in the area of SEK140 million SEK150 million year-over-year. And 59 megawatt – sorry, €59 per megawatt it's combination of the spot rate now around €80 that we at least for this calculation assumed will stay flat rest of the year and we have hedged 67% of the consumption in Europe and we have hedged at pretty good level €38 per megawatt. So hopefully that's some help along the way.
Martin Melbye
Excellent answer. Thank you.
Operator
The next question is from Joffrey Bellicha Meller with Bank of America Securities. Please go ahead.
Joffrey Bellicha Meller
Good morning, Christoph and Ivar. Thank you very much for your time today. I have two quick questions on costs. The first one is could you remind us what is the cost of your efficiency program over the year? I'm just trying to understand what will be the net benefits of the program in the bridge? And then the second question I have is in the report you mention that you had a negative effect from sales from inventories on your fixed cost position in Q1. Do you expect this to reverse in the second quarter and will you be able to give us an impact this could have? Thank you very much.
Christoph Michalski
You take it please.
Ivar Vatne
Yeah. Now I just need to maybe actually start with the second one. I think the answer is, no. We probably don't expect that to reverse in Q2. I think maybe more in the second half will be more helpful. But I think for the first one or [Technical Difficulty]. I think the first question is around the efficiency program. And as I said I think SEK95 million is recorded in Q1 versus year ago. And the net effect we said for the full year is SEK400 million. So you can say that we are good on track for delivering this.
Clearly in the conditions we are in we will do everything we can to potentially also accelerate the delivery on that. But for the time being the target is SEK400 million and we want to really get solid and good building blocks for that. Difficult to say much about the sequence of those quarters, but probably for the prudency for this purpose I would just assume a flat split between the quarters for that 400 million along the year.
Joffrey Bellicha Meller
Thank you very much, Ivar. Can I just follow up with one quick question on Escanaba. Is there any impact from what is currently going on on the conversion project?
Ivar Vatne
No, not at all. So the conversion project basically development of the project is continuing and the Escanaba situation right now is only impacting short-term production in the next three weeks.
Joffrey Bellicha Meller
Very clear. Thank you very much for your time.
Operator
The next question is from Oskar Lindstrom with Danske Bank. Please go ahead.
Oskar Lindstrom
Good morning. Oskar from Danske here -- questions. First off are you feeling any -- you talked a little bit earlier about, the fiber situation and I wanted to focus a little bit more on Northern Sweden and your Karlsborg mill where we have both Kemi mill starting up later this year across the border in Finland. And we've also heard from [indiscernible] that they will sharply reduce their harvesting levels up in Northern Sweden. Is this something that's putting pressure on sourcing fiber for your cost per mill? That's my first question.
Christoph Michalski
Okay. Let me take that and then you can ask your second question. Good morning, Oskar. Yes, clearly I think wood supply on a very micro level in the north of Sweden will be more stressed by the startup of Kemi and also by the -- harvesting. So we have our mitigating program in place and that basically is looking for additional private forest holders' harvest and purchases but also we realize this is -- I mean, the challenge is for all players in the north. And then, it's a question how far the wood has to be transported in order to fill that gap. As you know, Karlsborg is a very profitable mill for us, and I think we are in a very good position to mitigate the increased cost because I do not think it will result into an availability issue.
Oskar Lindstrom
Right. And my second question is on CapEx. I mean you say the CapEx reduction of SEK200 million for this year, is not going to impact your strategic projects, which I understand most likely wouldn't have CapEx expenses until next year really. However, could the weaker market outlook that we're seeing now, have any impact on your strategic investment decisions?
Christoph Michalski
Not really, because we are currently working on the projects basically, as you rightly said, there is only limited CapEx in -- and then significant more CapEx in the years to come once we have decided on the timing and the size of the conversion, and Norway, et cetera. I think like most things in time, you also know, that we can move CapEx. We have maintenance CapEx, we can move around a little bit. We can delay projects, kind of smaller improvement projects and things like that and we will discuss, at the time when we are ready, what is the timing of the big strategic CapEx is. But there is no effect on the projects today, as you mentioned, because we don't spend too much CapEx on these strategic projects.
Oskar Lindstrom
All right. Thank you. Just a quick question to Ivar, I guess. What was the electricity consumption figure you mentioned, for Europe specifically? Was it two terawatts?
Ivar Vatne
Yeah. So, you can say the overall consumption is in the area of 3.2 terawatt, we make around 1.2 in our mills and then we purchase, or buy in estimate of two terawatt on a yearly basis.
Oskar Lindstrom
And this is in Europe?
Ivar Vatne
Yes correct.
Oskar Lindstrom
Okay. Wonderful. Thank you very much.
Ivar Vatne
Thank you.
Christoph Michalski
So I think we arrive at the end of the time, but we will continue for a little bit as we lost time in the beginning. So I think we have maybe two or more -- we will take one or two more questions I think and then we close the call in about five minutes.
Operator
Okay. The next question is from Cole Hathorn with Jefferies. Please go ahead.
Cole Hathorn
Good morning. Thanks for squeezing my question. Just some commentary on the wider sack market what you're seeing there firstly from a demand perspective and splitting it between your kind of bleach grades where you've got a good strong market position and then the wider sack market where I believe you sell more into the export space? Thank you.
Ivar Vatne
Yeah. Always good to talk a bit on second kraft Cole, so good morning to you. Listen, I think in general you can say that, if you go into the consumer side of second kraft and talking about MG in particular, it has hold up pretty well in Q1 maybe relatively to some of the other channels. Clearly in the nature of consumer, also going into foodservices, they tend to be a bit more stable there the pattern we see. So you can say that, we have had, let's call it relatively well held up on different MF and MG grades in particular in Europe. It starts to be quite more challenging as Christoph alluded to on the sack market.
We're very happy still with the profit that we generated in Q1, but it's clear sign now that there is increased price pressure and we expect actually quite a bit of a net sales per ton drop on both white sack and also then on brown sack in Q2 versus Q1 and we're talking then probably more than 10%. And I think it's a combination of the construction sector is just in general very challenged at the moment not only in Europe. And again, also some of the industry other applications that we will see including paper et cetera is also very challenged at the moment. So we have much less positive probably on the sack market Q2 versus Q1 versus what we saw on our Q1 versus Q4.
Cole Hathorn
Thank you.
Operator
The next question is from Jesper Mothander with Dagens Industri. Please go ahead.
Jesper Mothander
Good morning, and thank you for taking my question. Two quick questions on Escanaba. The first one is did the fact that blastomycosis exists in the vicinity come up during the due diligence process when you purchased Verso? And the second question is the fact that you were informed by local healthcare authorities already on February 3, I think that the typical pneumonia cases among workers were suspected of blastomycosis cleaning the mill for future operations is one thing protecting workers is another. So, can you please take us through the over a month long process leading up to the decision to idle the mill on April 13?
Christoph Michalski
Okay. So let's talk about the due diligence. I mean, blastomycosis is such a rare illness that clearly this came not up as an issue during the due diligence. I think there are very few cases across the United States as far as, I know, and it happens on a very irregular and sporadic perspective that people actually get hurt from blastomycosis. When it comes to the -- it's an illness as far as I understand that has to be reported by the hospitals to the health authority which they do. And we heard about the first case being notified on 3rd of March.
And basically after that, us not being the expert of this very rare disease we followed all the recommendation of the public health authorities be it the CDC which you probably know as one of the big organization in the US the Center of Disease Control and Prevention and we have worked very extensively with the health and safety -- health authorities be it state or be it federal and local in order to understand what we need to put in place.
The knowledge on this illness is relatively little. People know a lot about fungi, but not a lot about this particular one, because it's so rare. And we have basically followed all the recommendation leading into basically some cleanups, some analysis of air et cetera. And after all these activities we haven't still found anything unusual in the mill.
Basically we then discussed around early February what else needed could be done we basically decided to idle the mill. We made a cleaning program together with the health authority of what kind of cleaning was required and what kind of specific air conditioning basically reviews and checks should be done. And because it was so extensive, we needed to close the mill in order to get people out of the different areas where this cleaning took place.
Today we have now 100 and something sub-contractor in the mill as I said before and they are running through very systematic program. And therefore I'm pretty confident that we can start up the mill after these three weeks which basically I think we have two weeks left and the startup timing is basically planned for the 8 of May.
I think our biggest challenge is that no one knows where the fungi. We don't know if it was an event, we don't know if people brought it from the outside. The only thing, we know is that, the number of people inside -- they have all been inside the mill have been affected by this fungi.
Jesper Mothander
Okay. Thank you. I'm sorry for my error. I said, February 3rd, when I meant March 3rd while asking the question.
Christoph Michalski
Yeah. Yeah.
Jesper Mothander
Please allow me to correct myself.
Christoph Michalski
Yeah. No worries.
Jesper Mothander
Thank you very much.
Christoph Michalski
Okay. I think that ends our Q&A for the quarter one presentation. Thank you for your attention. And I'm looking -- to talk to you all in July for the second quarter and until then bye-bye.
For further details see:
Billerud AB (publ) Communications Inc. (BLRDY) Q1 2023 Earnings Call Transcript