BLRDY - Billerud Aktiebolag (BLRDY) Q3 2022 Earnings Call Transcript

Billerud Aktiebolag (BLRDY)

Q3 2022 Earnings Conference Call

October 25, 2022, 03:00 AM ET

Company Participants

Lena Schattauer - Director, IR

Christoph Michalski - CEO

Ivar Vatne - CFO

Conference Call Participants

Christian Kopfer - Handelsbanken

Johannes Grunselius - DNB

Oskar Lindstrom - Danske Bank

Linus Larsson - SEB

Cole Hathorn - Jefferies

Presentation

Operator

Good day, and thank you for standing by. I will now hand over to Lena Schattauer, Director of Investor Relations.

Lena Schattauer

Hello, and welcome to Billerud's conference call about our Third Quarter Results 2022. Today's presenters will be Christoph Michalski and Ivar Vatne. And they will hold the presentation, and after that, we will have a Q&A session.

So with this, I hand over to you, Christoph.

Christoph Michalski

Thank you. Thank you, Lena. Good morning, everyone. So this is the first quarterly result that we are doing under the name of Billerud and we changed the name in order to align ourselves with the international customer portfolio we have now. And we are very happy for the change of name and the simplification that that brings.

Secondly, before I start the presentation, I wanted to talk to you about the appointment of Ivar Vatne as Deputy CEO, which I'm very happy about this appointment. Now that our business becomes a little bit more geographically diverse and we have a strong focus for developing that business, plus the internal improvements and long-term profit performance, we decided that it would be good to have a tandem to make this happen and I think you all will agree with me that Ivar Vatne is an excellent candidate for this role. And I'm looking forward to work with you, Ivar, going forward.

Having said that, let me come to our quarterly results. As we said in the title, we had an exceptionally good quarter. I think if you look at our performance, 82% sales growth, which is clearly also coming from Verso, but nevertheless it's still a 20% organic growth, which is clearly excellent. Adjusted EBITDA at 19%. It's a very strong performance indeed as well.

And I think this is really a tribute to the work that the whole team did by continuously price manage and mix manage as the cost - input cost was going up and I think we have, since we started in quarter three 2021, we have basically achieved this improvement slightly in front of the wave. And I think as Ivar will talk to you about cost development, we think that we are still in a very good position going forward, but clearly times are a little bit normalizing in quarter four and then probably in 2023.

If you look at our earnings per share, a record high at SEK5.42 and excellent cash delivery with more than 80% of EBITDA transformed into cash. Ivar will talk [technical difficulty].

Let me go to the bridge on the next slide, where you can see we had a bit of currency rate effect of 7%, which is only the European and rest of world effect. It doesn't include the U.S. Pricing was 20% of the growth. 57% was North America and there we don't have currency comparison, so it's basically our business in North America as it stands to-date. And then we have a little bit in minus, which comes from the Beetham divestments, which is marginal.

But generally speaking, a very good performance, trying to mitigate all the costs and that you can also see them on the next slide. It was all-time high profit. Quarter three 2021, we had a bit of currency effect and pricing, excluding pulp, North America, and then you see a big red block, which is basically our net of raw materials and logistics. And that also includes the balance of our pulp sales and buying activities.

Cost efficiency, it looks small, but generally speaking, I'm very happy how the company has continued to become more efficient and more cost conscious. And I just want to remind you this program stops at the end of this year.

And one of Ivar's key responsibility is to be set up a new program starting in 2023, which will not look just at cost savings, but which will look particularly at efficiency improvements in our European business going forward. And then finally, you can see in this profit bridge, the maintenance schedule, basically had an effect as well and that brings you to 19% EBITDA for the quarter so far.

Good. I think all of you are very interested how we see the outlook. And I saw in some of your initial comments, you have already commented, an excellent quarter, but what's happening next? And I think I just want to remind everyone that I think we're in a very particular situation, which is due to, A, the acquisition of Verso, which gives us a dual truck, so to say, or a second leg to stand on. And currently, Europe and North America in terms of market dynamic and the categories in which we are in are behaving quite differently.

And then secondly, I think Billerud was always known for its strong portfolio, a lot into the food and drink and - markets and consumer goods, which basically are far more stable segments than say the industrial or the consumer luxury areas.

So let me walk you through to the next slide and see how we felt this quarter and how we - do we see the future on those. So food and drink, I think we're all realizing that European is going into an economic downturn. Generally speaking, that means that consumers are not reducing consumption per se, but they are downtrading.

And all the products we sell in food and drink are, generally speaking, the same market and it's more a question, does it go more to brand owners, does it go more to retail brands, all these kind of things, but the materials they are using are basically similar or the same. And therefore, we see the food and drinks market relatively stable going forward and it has already been stable.

When you then look at printing and publishing papers, which is our graphic and specialty paper in the U.S., we actually saw a very positive quarter three and we do not see any significantly changes towards our positive outlook. So we called it stable in the future.

And the reason, there's a number of reasons for that. In specialty paper, we have a change in the supply side with the closure of the [Beetham] mill. We see still strong demand in specialty paper and this market generally is growing at a positive rate, also historically, and there's no reason that this will not change.

When you look at the graphic paper market, here we see actually a revival a little bit and the revival comes mainly from the premium catalogs in which we are involved in. And there is a continuous downwards trend in the, I would say, the mass market segments of this market. As we are focusing much more on the premium area, we actually saw a very positive trend this year and we believe that this will also stay stable into 2023.

Clearly, with the contraction of the economy, we will see some effects on consumer luxury, but in particular also on the industrial segment. And here, it's mainly the containerboard, as you can imagine, will probably be hit and also the cartonboard side on the luxury side might also be subdued for a while. This is entirely normal and we see both of these segments - consumer luxury and industry less positive than we thought so previously, but it is, as I said, I think overall we're entering into much more normalized situation.

Okay. I think with that, I would like to hand over to Ivar, who will take you a little bit through cost and our different segments and this performance in North America, before coming back at the end with our key conclusions. Thank you. Ivar?

A - Ivar Vatne

Thank you, Christoph, and good morning, everyone.

A couple of words about the cost inflation. It's still very much a hot topic for '22, definitely situation starting to be a bit different, Europe versus U.S. We expect the cost inflation to accelerate going into Q3 and this is certain also what we have experienced. In fact, the cost picture for the quarter is a bit higher versus what we estimated some months ago.

In total, we've seen around SEK750 million of additional cost inflation in the quarter and that is compared versus the previous quarter of Q2. The vast majority of that or roughly 85% is coming in Europe. If you do a rough split of that SEK750 million, you will find it as follows. Fiber or pulpwood SEK200 million, chemicals SEK100 million, energy cost SEK250 million, and logistics SEK200 million. Now, I did mention, this is a bit higher than what we expected to hit us in Q3. Good news is that we have been able to offset all of that through pricing and mix management.

And we look forward and some comments on what we expect in Q4. And I'll just do them box by box, starting with the fiber cost. We still see movement in the market with several of our biggest suppliers announcing new price increases and that's also what we've seen during the quarter. Clearly, this is still linked to the imbalance that was created, kind of post Russia import stop that Christoph mentioned some minutes ago. Pressure is still highest on hardwood and we've seen that also over the last quarters.

Availability on hardwood is still tight. It is actually a bit better versus what we experienced during the summer months and in Q2. For softwood, availability is better and we don't see necessarily the same price pressure. In U.S., though, the situation is different. And we honestly see a slight increase in the fiber cost for the quarter, mainly linked to fuel cost in particular. We would expect in Q4 to add another SEK150 million of additional fiber cost, pretty much all of that coming from Europe. And that should be considered Q4 over Q3.

For chemicals, maybe no surprise. Prices are heavily linked to what we see in the energy side. I think a lot of you know this already, the spot prices went extremely high on the part of the Q3 months. With the chemical contracts that we do have in place, we typically see kind of a two to three months lag until it hits our P&L. We would expect to see of SEK180 million of additional cost. And again, most of this is linked to Europe and that is again Q4 versus Q3.

For energy, spot prices have also started to kind of come down and we expect a much more neutral position for Q4. Still, we are very well covered with our strong energy hedges here in Europe. Also natural gas in U.S. have come down after pretty heavy volatility over the summer months. And to sum it all up, we expect a flat energy cost situation in Q4 versus Q3.

For logistics, we also expect a kind of flat price in Q4 versus Q3. That is combined for European and for U.S. A lot of things happening on that side at the moment. The freight rates for container shipment is coming down and we are trying to achieve these benefits by renegotiating and looking into different options, including the spot market capacity. But you can say that, in general, we don't count on too much of that yet given we did sign a lot of new overseas contracts at least for Europe back in May. So pretty flat logistical situation.

So if you sum it all up, we expect around SEK330 million of additional cost. Pretty much all of that's coming in Europe. And for this coming quarter, we do not expect to offset all of that through pricing. We estimate at this stage to add roughly 1 percentage point of additional pricing and most of that is actually coming in North America.

So next slide, please, and we go into some highlights for the different product areas. And we start with the product area paper. Product area paper had a great Q3, excellent performance across all of the measures. We see high double digit growth in terms of net sales, pretty much across all categories and in both regions. This was also a very heavy maintenance quarter for product area paper, with stops at both of our North American mills. Maybe just couple of words, we will talk more about it in a second about the Quinnesec mill.

That was the biggest upgrade, an investment upgrade that we did on that mill since it was started in the mid-1980s. Happy to confirm that the upgrade had been successfully completed. Again, despite unusually high maintenance cost in the quarter, profitability has more than tripled and margin is up versus year ago. A combination of adding obviously the North American business, but very much linked to strong focus and continued strong focus on price and mix management and delivery of our cost and efficiency program.

So next slide, please, and going into some highlights of product area board. In many ways you can say it's similarities between the product areas. Definitely pleased also with the results that we've seen on board. Double digit net sales growth for most of the categories and plus 18% when adjusting for currency. Just want to highlight, in particular, the great progress we've had on cartonboard.

We doubled that business over the - less than two years and this is extremely pleasing as it's very much in line with our strategy to accelerate growth here. Profitability on a good level reaching 20% margin. Very much the same arguments as I just mentioned for paper, progress on to strong focus on price and mix management. And also, here we see some help from our cost and efficiency program.

If you move to the next slide, some comments on cash flow. It has been another outstanding cash flow delivery, which is extremely pleasing to see. Again, ability to convert our EBITDA to operating cash flow is on extremely strong ratio and this will remain one of our top priorities for the coming quarters. Our net debt keeps coming down and is now just above SEK5 billion. That's almost at last year's level, which is quite extraordinary given the big transactions we've been through over the last 12 months.

Net debt ratio of 2.7 and that is at all-time low in this company history and obviously, it's another milestone to be very proud of. And again, I just wanted to highlight the strong performance we've seen in our return on capital employed you find at the bottom of the chart. We made a massive leap over the last years and we are now just 17% in Q3.

In terms of the CapEx outlook, make a small adjustment for the outlook for '22. A slight increasing for the Frovi recovery boiler. So, taking the total position up to SEK3.4 billion for '22. Just want to highlight that the increase in Frovi that is only a timing impact. It's not an increase of the overall investment scope.

In fact, I can probably say that we are well on track for that project, both in terms of completion on time and for budget. Added some coordinates now for 2023, where we, at least for this time, we estimate SEK3 billion. SEK800 million of that is for Frovi and then we have SEK2.2 billion as a combined base CapEx for both regions.

If you want to move to the next slide, this is actually one of the most pleasing slides that I can present this time and say a couple of words about how extremely proud and pleased we are with the performance we've seen in North America since the start of the takeover. Both categories are performing strong, delivered excellent profitability. But I think, last but not least here, both our net cash flow positive to the Group, no doubt, and we look at the current pace and performance, this acquisition payback will be much shorter than we expected.

I think just linked also to what Christoph was alluding to that the business we have now there in North America, it's a clear geographical diversification, offers a more balanced position for the company where we've been historically almost fully relying on what's going on in Europe and Asia. We successfully completed the mill operating Quinnesec which I mentioned.

This will enable a higher pulp output. It should also improve the machines of the Q41 renewability on heavier grades and improve the formation output. This has a profit upside tied with and we expect to see this coming in from the beginning of 2023. SEK70 million to SEK100 million is the estimate we expect on an annualized basis.

Just for the last point, we have several streams of integration efforts underway, pretty much across all of the company's functions. The progress has been good, well on track, and where we want it to be two quarters into the integration.

So with that, I'm handing it back to Christoph.

Christoph Michalski

Thank you, Ivar.

So priorities quarter four and throughout 2023, no surprises here. We will continue to work on our strategic objectives, sales growth through continuous focus on sustainable packaging opportunities and innovation. And that includes clearly working on the transformation project in the USA. That includes things like how can we improve our sustainability footprint, both in the USA, but also with the project in Norway.

And I think there's a number of activities that we're doing, which will deliver a significant improvement in our operations, but also in our sustainability footprint going forward. Clearly, in the more immediate terms, we will continue to focus on mix and price management and that will increase basically all segments and all type of contracts.

As you know, we have long-term contracts with some of our customers, but in view of surprising increase that we have coming, we will actually start to talk to these customers as well, as well as renewing more short-term contracts with relevant price increases, which balance the needs of our customers, but also the need of covering cost.

And then, as I said before, one of the key things that will happen this year, it's a real comprehensive and holistic program to work through our value change and develop a new efficiency program in 2023, which will then follow up over a few years to make sure that our - that we are world class in the activities we're doing and in the operation, both in efficiency, from that perspective capital management but also cost.

I think I don't need to mention Frovi anymore. You said it already, Ivar. We will be ready for the start-up in '23 and with projects for now is totally in line with timing and costs. And maybe one thing to add is, it's - or I'll point an additional point I want to make about the transformation is that I think we have progressed very fast and very well in most of the key themes.

We will audit that program, that integration program in the first quarter of next year and we'll try then depending on the progress, which we think is very good. Close it down as soon as we can. There will always be things that need to be managed in the longer term, but we will manage them as day-to-day, business-as-usual type projects as we do it with all the things we do in Europe as well.

Good. What's the outlook for quarter four? As I said, I think still solid demands for all our key products, but the sentiment is clearly changing as you can read everywhere in the press, in particular, in Europe while we foresee for the moment, at least in our market segments, relative stability in the United States.

Cost inflation in Europe clearly will continue a bit on wood and chemicals basically a direct relation, both on energy prices and the cost in the U.S. is much more flattish going forward. And then focus, as I said, on price and mix management across all customers in order to balance these cost increases with prices.

Good. That concludes our presentation of the quarter three results and I'm happy to hand over for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And your first question comes from the line of Christian Kopfer from Handelsbanken. Please go ahead. Your line is open.

Christian Kopfer

Thanks, operator. Good morning, everyone, and thank you very much for the presentation. Just I think maybe first one for Ivar. Thank you very much for the transparency on the outlook for the fourth quarter. Can you also perhaps comment a little bit what do you expect in the short term on the volumes/mix?

Ivar Vatne

Yes, I can try at least. I think we had clearly a bit of a lower volume into the quarter due to the extremely heavy maintenance stops. So, in that sense, we certainly expect the volume to come back up into Q4 and you can say much more in line with what we saw in kind of a Q2 area. Obviously, that is, as you know, sitting already into the total maintenance cost that we offer. I think on the mix side, you can say that we continue to look at mix from different dimension.

From a sales mix clearly, we know that there are mix category opportunities when we drive the above-average profitability items and we look at that kind of channel by channel, we look at that by customer and customer. I think also on the mix on the input cost, we definitely look now given the hardwood situation extremely strained and high that we continue to look into the recipes, we continue to look into how we can, in a smart manner, balance the mix between soft and hardwood to manage cost. I think those are some of the coordinates I can kind of round up.

Christian Kopfer

Okay, that's clear. And then, I guess for Christoph, you mentioned that you - you mentioned the transformation that - in the U.S., but I am a little bit surprised that I don't see any CapEx budget for the transformation in the U.S. for 2023. So is it supposed to say that you are pushing it forward a little bit because today - and you also mentioned the graphic paper market to surprise you on the upside. So the strength is better there, so you maybe can push the transformation forward a bit.

Christoph Michalski

No, I think, as you know, when you do these big industrial projects, you have to go through couple of phases of analysis. I think when we did the acquisition case, we had a good concept which we costed out based on the experience we had on previous industrial projects in BillerudKorsnas at the time. I think now we're doing basically the hard work on the ground in the U.S. with a pre-feasibility.

Once we achieve the pre-feasibility results, then we will go to our Board and then we will decide what is the CapEx program necessary to perform on this project. And because we haven't done that yet, we haven't had the conclusion yet. We cannot enter any CapEx numbers because at this stage it's too early to tell. And as soon as we - I think it's in - plan is around quarter two we will have much more visibility on that and then we will brief you on that again.

Timing-wise, I don't think that we are working towards the delay. I think it today wouldn't matter, but that's not our intention. But clearly, we also see that our suppliers might not be able to deliver projects in the same time horizon than they did historically. And therefore, we have to wait for the overall feasibility result in order to give you a much more specific view on that project.

We are super excited by it, as you can imagine, because the opportunity in the U.S. is huge. And in the short term, the good performance of graphic paper and specialty paper is clearly making us not unhappy that basically we have very good business, while we are preparing for this transformation.

Christian Kopfer

That's great. Thank you very much. That's all for me.

Operator

Thank you. We will now go to our next question. Please stand by. And your next question comes from Johannes Grunselius from DNB. Please go ahead. Your line is open.

Johannes Grunselius

Good morning, everyone. It's Johannes here. Hi. I have - my first question is on the Q4 outlook statement and thank you very much for the transparency. Just to be clear, you said was it SEK3.30 billion as a headwind for cost and then you were talking about 1% additional pricing. Should one look at sort of it - this to be applied on a SEK10 billion quarterly basis or could you help me a bit there on how to look at the revenue side, please?

Ivar Vatne

Yes, I think that's a good estimate. It's pretty much in the area of SEK10 billion. So you can use that.

Johannes Grunselius

Okay, thanks. And is it - I suppose you are also foreseeing some tailwinds from mix here. Am I right or can you comment on that? I know this was partly discussed in the earlier question, but anyway.

Ivar Vatne

You can say that. We will definitely try to do mix, as I mentioned, to Christian from different dimension, both on category, from customer, and probably also from the input. So that's why, in that sense, it's a bit more difficult to put a price tag on it. You can say that, when we look over the last quarters what we have been able to do, we've had some tens of millions of profit help from mix every quarter. And I would certainly expect to also see that going into Q4.

Johannes Grunselius

Okay. Then my final question is on your second transformational growth projects or strategic projects, the pulp in Norway. When do you think you can be more explicit about this project on what you have indicated so far in terms of size and some indicative CapEx? Is that still valid?

Christoph Michalski

Well, I think it's significantly on the same levels and the transformation in the U.S. when it comes to timing. So, we are working on the pre-feasibility, as we speak. As you know, this will be a joint venture with Viken Skog and here, clearly we need to follow a very, very disciplined way of doing it.

We have also decided that this will be an opportunity to create or at least our ambition is to create the first carbon-free pulp mill. And therefore we are now looking in all these different aspects and my expectation is that the project will be - project information will be available quarter two and quarter three. And then we brief you in more detail.

We are very, very excited by the fact that we have an opportunity to work with Norwegian industry and players around the project to actually making our carbon footprint very, very basically creating a carbon zero mill. And I think if that would mean that we have to lay the project by a quarter or two, I would definitely go for that. This is not an issue of CapEx, but an issue of finding the right partners for carbon storage and carbon usage.

Johannes Grunselius

Okay, thank you.

Operator

Thank you. We will now go to our next question. And your next question comes from the line of Oskar Lindstrom from Danske Bank. Please go ahead. Your line is open.

Oskar Lindstrom

Yes, good morning, gentlemen. Couple of questions from my side. I wanted to start off on the - what you mentioned there or what I think you mentioned, Christoph, about revisiting prices in your board segment. I mean, we saw that the underlying profit here in the board segment declined sequentially or at least as far as I could determine. I mean, what in more detail are you hoping to do here? I mean, is it to apply some sort of temporary price increases or on the liquid packaging board side? That's my first question.

Christoph Michalski

Okay. Yes, you're correct. So we have all these different lengths in contracts and they go from everything from three years to three months, so to say, across the board. And we have decided in view on the very difficult cost situation, as you know about, to basically have discussion with all our customers. Clearly I cannot enter in the commercial strategy of which player, is it liquid packaging board or other segments and how we will do that. But I think the only thing which is important to know here is that we do not let too many stones unturned in order to try to mitigate some of these headwinds.

As Ivar said already, we will not mitigate anymore, as a whole, cost increases and I think that is not the purpose either, because our price management was so successful since quarter three last year that we have always been slightly in front of the cost wave. And now the wave is here and I think as I said, our business will normalize a little bit. But you're correct, we will look at all customers, all contracts, and see what we can do to mitigate some of these cost increases.

Oskar Lindstrom

Would those cost increases be similar to what we've seen with sort market prices for folding boxboard? Is that the magnitude that you are looking for?

Christoph Michalski

No, I don't think so. I mean, look, when we look at cost, I think you're all fully aware of the energy costs and the impact of on chemicals and all these kind of things. The thing which is probably a little bit newer than what we've talked in quarter one and quarter two is now also a significant increase of the wood cost.

And that is mainly driven, in my view, by the war in the Ukraine and the consequent closure of the Russian border, okay, which created some stress in particular in hardwood, but also then resulted in some cost increases of softwood, because I think all players then tried to substitute a bit more hardwood with softwood.

But these other type of costs that we did not predict at the beginning of the year. We were always very much focused on the general inflation and we have to work with these things. There is no wood shortage. Let me be very clear about that. I think we had in hardwood probably a more tense situation even in the summer than we have now and softwood availability is good. But clearly, the war in the Ukraine had a secondary price effect on the Scandinavian wood market.

Oskar Lindstrom

Okay. Just a follow-up question here. You say that the availability is quite good and has in fact even perhaps improved slightly from the summer. Have you or are you aware of others who've brought in volumes of hardwood from outside of the Nordic region to supply this Russian shortfall?

Christoph Michalski

I cannot talk for others. What concerns us, we are clearly looking at all sources. And for the moment, I would say, importing wood from other areas of the world into Scandinavia would be from a price level as bad as with wood from the Baltic States. And as you know, that is kind of equalizer in the market equation.

So for the moment, this is not a significant part we looked at it, but we are working very hard with all our sources in Scandinavia to optimize our wood mix, both in terms of where we source from and what type of wood, be it hard or softwood and we're basically adapting our recipe as best as we can without undermining quality or specs for customers.

Oskar Lindstrom

All right, thank you. Just a final question on the Norwegian project together with Viken Skog. As I recall, this is sort of a mechanical pulp mill or at least partly mechanical. Would that not be very sensitive to energy prices in Southern Norway and which have been very high? I mean, how does that factor into the equation?

Christoph Michalski

Yes, you're correct. The BCTMP mill which has higher energy needs than a normal chemical mill. So it's - on the side, we have a boiler, we have electricity, bioelectricity available, we also look at the green electricity available in Norway. And basically, all these kind of cost - input cost discussion enters this pre-feasibility project that we have with Viken in Norway and the only thing I can say, for the moment, we don't see any red flags that this project will be under threat based on the new energy cost structure that you find in Europe.

Oskar Lindstrom

All right. Thank you. That's good to hear. Those were all my questions. Thank you.

Christoph Michalski

Thank you, Oskar.

Operator

Thank you. We'll now go to our next question. Please stand by. And your next question comes from the line of Linus Larsson from SEB. Please go ahead. Your line is open.

Linus Larsson

Good morning. Thank you very much. A follow-up then on you reviewing, as you say, all contracts. Is it fair to say that such potential adjustments would occur from the start of 2023 and also are you then not only looking at board woods but also maybe into the paper segment?

Christoph Michalski

Yes. Linus, good morning. Yes, with all contract discussions, there's always a delay. So I think you're spot on saying that the effect of this revision will be in 2023 onwards. Look, yes, we look at all segments. And as you know, we still have a lot of disruption in Europe in terms of demand when it comes to paper. We are looking also at different markets. As you know, we have a big sack business towards the concrete industry. And that industry clearly will be slowing down. So there are many different aspects.

And it's impossible for me to take you through all of them. But I think my key point is, we do not take price as a given in an inflationary market situation. And what we will try to do is always to balance the need of our customers, the volumes we have to provide and the prices we can charge for that. And we will do our best to find a good compromise here between our profit targets versus our customers' needs.

Linus Larsson

And if you look specifically at your liquid packaging board business, how much of that business is up for regular, if I may call it regular, contract renegotiation at the start of the year?

Christoph Michalski

Linus, as you know well, we don't comment on specific customer contract negotiation or timings. So I have no comment on that particular question.

Linus Larsson

That's fair enough. And then just finally on the U.S. market. It seems like - I mean, prices are high, it seems that there are even capacity shuts in spite of high prices. Could you just give an update what's your feel of supply/demand and market dynamics in the U.S. paper market right now?

Christoph Michalski

I cannot really comment on the full paper market. We are only operating in two segments. One is graphic paper and here, the kind of exposure we are having is in direct mailing, in premium catalogs, and these type of products and what we call commercial printing. So we sell to merchants and these merchants then sell to small printers all over the place. And it's a very fragmented market.

So we see two trends here. The first trend is that a lot of companies who were only digitally on the march, so to say, have realized that's a complement of paper, be it a catalog, a small catalog, specialized premium catalog, or that additional mailings or areas, small local companies type promotion based on papers and things like that. It's far more effective than only the digital presence. So we see a big reversal from these type of catalogs than say two years ago.

The second is, which is another positive trend if you - it's a negative trend in itself, but it's a positive impact, which is the awareness of consumers on the issues on privacy. And more and more consumers are actually a little bit more careful and you have seen the type of things like when you use an app now, it asks you if it allow - if you allow the app to track on advertising and usage and things like that.

And clearly lots of people have said, no, we don't want to be tracked. And that brings the marketers in the U.S. back into this normal, I would say, the media market like when I grew up with paper and television and et cetera, et cetera. So a big change, I think quite a fundamental change we are seeing in the U.S. in that market. And that makes the graphic market in the segments we are very attractive.

Secondly, on the specialty paper market, so release liners and stickers and all these type of things. Here, we see two things. A, it was a market which was growing 2% to 3% on a general basis. But on top of that, we saw the closures of a number of mills, which changed a little bit the market balance and which basically brought prices up quite a big a bit.

We do not see immediate changes in this situation. I mean, you know as well as I do that assets in the U.S. are relatively old. We have the best ones when it comes to cost effectiveness and things like that. And if there are not very significant investments, I see that the market will probably stabilize at a higher level as it did before.

Will graphic paper continue to grow? No, overall, in the mass market segment, i.e., these huge catalogs that we had before and groundwood paper, graphic papers, these type of things, I think the decline will continue, but maybe at a slower rate than it has been before.

Linus Larsson

Great. Thanks for the color.

Operator

Thank you. [Operator Instructions] And your question comes from the line of Cole Hathorn from Jefferies. Please go ahead. Your line is open.

Cole Hathorn

Good morning. Thanks for taking my question. I'd just like to understand if you can give any color on - you talked about the sac and specialty kraft market. I'd just like to hear your comments around how demand has been developing there and any particular areas that are big for Billerud that you can call out where you're seeing kind of a slowdown in the order books or kind of a continuation of demand levels, that would just be helpful color.

And then following up on that, just like to understand what you're doing to manage your - the wood cost environment in Sweden at the moment. You talk about changing kind of the mix between hardwood and softwood. Just trying to understand how you see that market developing from here. Are we starting to hit the peak of wood costs in the fourth quarter and what you're going to be able to do to kind of manage that, your total cost from the market? Thank you.

Christoph Michalski

Ivar, do you want to take the first one.

Ivar Vatne

Yes, I can. Hey, good morning, Cole. So, let me try to just give you some flavor as you say on the sack and kraft. I think, it's more reasonable here to just talk about the different channel exposures we have, because I think that is in the end of the day the denominating factor. You know, lot of our sack business going to industry and constructions. And there is no doubt that that is certainly cooling down.

We had a very good you can say last three quarters and actually going back four, five quarters we had some strong numbers. Still okay order book. And in many ways, you can see that's holding up, but there are signs definitely that things are cooling down. We see that just in terms of, I can say, the order book length, but also in terms of some input from our customers et cetera. And this is not a massive surprise given how construction tend to be a very leading indicator in the economic environment in general. And clearly, that's been on a bit of a shaky ground for some time.

I think another channel I might just wanted to highlight in our sack and kraft, that's more on the kraft business, it's the food and it's the sack business that we will typically for just the white sack, it's somehow better. I think also it's linked to some of the channels exposed to their foodservice, still is going pretty well.

So we probably see that a little bit better. Although there are certainly also sign that things are cooling a little bit down on that front. But we don't see as - that as on the industry side. Small, you can say, exposure going into the medical which is holding up pretty well. But as you know, a much smaller part of business at the moment.

Christoph Michalski

Okay. Good. Let me talk about wood then. So, as you know, we have - we had generally speaking, I think, very wood price level in 2020, 2021. What we see now, I think the shock to the market was really two things. First, clearly, the Russia closure of the border as I mentioned before. Second, we're not - the second one, however, not to underestimate is also the fuel price increases which increased basically the cost to collect the wood and bring it to our factories. So that is the key to cost drivers.

And clearly, I think, if you ask me today, I think the wood market is about to stabilize. I don't know if it will go up or down or stabilize it is. I think the big shock of the lack of the Russian wood in Finland is now basically understood and the market players have adapted. As I said before, with the two way how we manage that. The first one is as an input, so where we basically ask ourselves a question, can we change the recipe, can we change our product portfolio in a way to actually consume less hardwood which is more the impact on hardwood was clearly bigger than on softwood. So that's one.

And the second one, as you know, previously we had, I think, a very much a spot price approach to woods purchase. And we have - as I said already on the Capital Market Day, we are now looking at wood more like a sourcing activity as you would do in professional sourcing and then we take calls, should we have longer-term contracts, how should we structure them, where should we source for, how much would we buy from forest owner companies versus from small holders of forestland and et cetera, et cetera, et cetera.

And this is basically what we're doing, optimizing as we get around our input cost, but again, I think it's like with pulp prices we can only speculate whether or not we reach the peak of the wood market or not and what happens next, okay. So we try to influence really working on the things we can influence, but at the end of the day, this is a big market and the market will find its price level.

Operator

Thank you. I will now go to our next question. Please stand by. And your next question comes from the line of Johannes Grunselius from DNB. Please go ahead. Your line is open.

Johannes Grunselius

Yes. Hi, again. Can't stop myself from asking you a few more questions. But my first one is on how one should look at the maintenance cost for year in this sort of new company here including the U.S. business, can you help me with that, please?

Ivar Vatne

Yes, I can do that, Johannes. It's a good question. I think the Europe maintenance schedule shouldn't be a massive surprise. I think that you should just consider pretty similar to what we've had over the last years. I think, you can say, as a summary, in the U.S. that we tend to do a bit of a longer stop kind of every second year and then a shorter stop every year.

It is also true that historically that rhythm has been not always 100% clean, in the sense that it's also discussion we typically have with insurance company and what the need is, et cetera. But to just give you some examples of this, for next year, given the very big maintenance shutdown we had in Quinnesec, we do not expect to have any shutdown on Quinnesec next year, while we would expect to have a smaller or something similar like we did this year on Escanaba.

Johannes Grunselius

Right. So I haven't looked at the numbers or I don't have them in front of me, but it sounds to me that is a SEK300 million, SEK400 million less maintenance cost then for next year?

Ivar Vatne

Yes, at least. I don't have actually that number in front of me, but it's at least that. If you give me minute, I can give you some estimate. I think we said Escanaba is SEK180 million and that's probably good estimate for next year. We had a bit more than SEK400 million, I believe, for this year in Quinnesec and that should not occur next year.

Johannes Grunselius

Okay, that's helpful. And then I also saw in the report that you did some improvement on Quinnesec leading to sustainable results improvement on SEK70 million to SEK100 million. It's actually quite significant if one assume that is sticking every year, but is that a combination of more pulp volumes and better qualities, as you said, or could you perhaps give some color on that and what kind of assumptions are you using on the pulp price I am thinking?

Christoph Michalski

Okay. So on the pulp price, I cannot give you any assumption because that moves up and down, but it's about...

Johannes Grunselius

It's not the spot rates, I suppose?

Ivar Vatne

No. Let's say, it's the long-term average we typically use in that estimate.

Johannes Grunselius

Yes. Okay.

Christoph Michalski

So the big improvement is actually we can produce significantly more pulp. I think it's around 30,000...

Ivar Vatne

30,000, yes.

Christoph Michalski

And that was done by basically just changing the head of the digester, which created a far better flow. And then the second improvement, which is really important is the headbox of Q41 machine and that allows us to basically widen the operating window of the machine and will allow us to play between graphic paper and also now grades of specialty paper. As you know, the graphic paper, we are in the premium segments, so that's pretty good, but the overall market is less stable than the specialty paper, which is growing strongly.

Johannes Grunselius

Okay, understood. Thank you.

Operator

Thank you. There are currently no further questions, I will hand the call back to you.

Lena Schattauer

Okay. So any final words, Christoph, before we conclude this call?

Christoph Michalski

Yes, I think we are done. So thank you for your attention. Thank you for joining the conference this morning and I'm looking forward to hear from you and to talk to you. We'll talk to you in January where we will have the full year. Thank you very much and bye-bye.

Lena Schattauer

Good-bye.

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Billerud Aktiebolag (BLRDY) Q3 2022 Earnings Call Transcript