Billerud AB (publ) (BILL) Earnings Call Transcript & Summary

Hello, and welcome to the BillerudKorsnäs Interim Report June -- January-June 2020. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present Lennart Holm, acting CEO; Ivar Vatne, President and CFO; Christopher Casselblad, Head of Communications. Please go ahead with your meeting.

Good morning, everyone. This is Lennart Holm here speaking. Welcome to the presentation of our interim report, January to June 2020. I think we should start and take the first slide. So next slide, please. Just to give you a very, very brief introduction, key highlights of the second quarter. Continued sales volume increase, relatively limited impact of COVID-19. KM7 ramp-up progress continues as planned. Earnings continued to be affected by lower market prices and we're on track to deliver our cost and efficiency program. We will come back during the presentation to all these topics. So we can have the next slide. Some figures. Ivar will, of course, give you some more meat on the bone around the figures, but the net sales then, slightly down 2% versus same quarter last year. EBITDA margins up compared to last quarter. Of course, here, we also have some influence from timing issues when it comes to maintenance shutdowns, et cetera, but still, I think, a good figure for the second quarter. And if we look on net debt-to-EBITDA, 2.4x, still within, let's say, the limits that we have set up in the company. So let's have the next slide. COVID-19, big topic for everyone these days, of course, also for BillerudKorsnäs. However, I can say that the impact on us and our company has been relatively limited so far, everything considered. Most notably, we have seen an impact within Division Paper and Division Solutions. And what we see is then mainly an indirect effect in terms of having a demand decline in certain channels, specifically then in products going to industrial applications and food service applications. Another big change for us has been the fact that we've had to move, or decided earlier on this year when COVID-19 was accelerating, to move and reschedule our maintenance shutdowns from first half 2020 to second half 2020. And this is, of course, something that creates some issues for us internally. I must say that our teams have been doing a fantastic job rescheduling and really planning in detail now how to go through with these maintenance shutdowns in order to secure that we can get the jobs done, in order to secure the safety of our employees and in order also to have very close contacts with both the suppliers, entrepreneurs and the local authorities, et cetera, to really plan for the maintenance shutdowns in all the different mills. But we need to realize that, of course, there are still a number of uncertainties around these maintenance shutdowns that can influence us. We've also had to have a slow steam or some production reductions that is in 2 production sites during the second quarter. It has been in Pietarsaari in Finland and it has been in Skärblacka in Sweden. And these are related then to a weaker market and a weaker demand for, as I said before, industry and food service products. The internal crisis management team that we put in place to deal with COVID-19 effects, we were quite early with this, continues to work in 6 work streams and I must say that there, the entire team in BillerudKorsnäs has done a fantastic job to not only secure operations, but also to be very proactive in identifying potential risks and dealing with these. We've also managed, as part of this, to have a very close check on receivables balance and overdues. And then I must say that these are and they remain in good shape, which is also, I think, a good sign that the team is really on these topics. I think we can take the next slide. This might be a little bit complicated, but just trying to give you a feeling for the business status and the outlook. And what we can see is that food and drink has been stable during the entire second quarter. And this is, of course, our most important segment, and you can see that the liquid packaging board is the biggest product in this, but also cartonboard, containerboard are big in this segment. We've had a stable situation throughout the second quarter. On the Board side, we've had some negative effects from 2 things, I would say, 2 parameters. One was that we had a plastic contamination that happened in the Gävle mill on liquid packaging board, which means that we had to downgrade some tonnes in Gävle, which has had a certain influence on the result. And the second is also a little bit unfavorable product mix for some of the board grades, excluding KM7, where we've had a positive effect from a better product mix. Medical & Hygiene continues to be stable as well throughout the quarter and it's a smaller segment for us. We've had a more challenging situation in Consumer & Luxury, excluding, I would say, cartonboard, where cartonboard for us is a niche segment. We're a niche player in cartonboard. And I have to say that there, we have -- we continue to see a very good development on the grades that we're working with. Industrial has been continued weak. And of course, here, we see a lot of sack papers and kraft papers that goes to various industrial applications and has been continued weak during the second quarter. Looking forward for the third quarter, there is a lot of uncertainties, of course, related to COVID-19 and we are a bit cautious on what will happen during the third quarter. We do see that there has been, during the first half year, a certain inventory buildup throughout the value chain. And that, that now is, let's say, normalizing or the consumption is normalizing. So we don't see this buildup of inventory anymore, might be that we will probably see certain negative effect from people basically reducing then the inventories that they have built up during the second quarter. I think we can take the next slide. KM7, of course, remains very, very much a focus for us, a very important topic in our company. It's now more or less 1 year since we started up KM7. We have accelerated the ramp-up process. And I would say that we have taken significant steps forward quarter-by-quarter and the second quarter showed very good progress. We have a number of teething problems still to be fixed. I think that is quite normal when you build such a big machine and complex machine as KM7, there are certain topics that where you get some design flows, where you get some initial issues and you have to do basically adjustments on the machine. We have a list of a number of issues that we were planning to basically fix during the maintenance shutdown that was planned for early this spring. And it has had a negative consequence, the fact that we had to delay the shutdown until September. So we still have that list on. And that gives us certain limitations right now on what products we can produce, how much we can produce. So it has been a bit of a, I wouldn't say stumbling block, but an irritation and something that has costed us some money in terms of a more unfavorable product mix. However, as soon as we get these fixed, I think we will be able to go ahead full speed in developing the grades further. We've also, during the second quarter now, really gone back and looked into the original investment case assumptions. We said, "Okay, let's do a deep dive and see really has anything changed compared to when we took the decision in 2015, '16?" And I'm happy to say that when we've done this work, it basically reaffirms the potential of KM7 when fully ramped up. If anything, I think the potential is better than we thought when we took the decision in terms of that the market still looks healthy and there is a healthy growth for the key products on KM7, at the same time as no other capacity has been added to the market and we don't see any other capacity coming onstream either. No new machines are built that are in competition with KM7 for the time being. So here, it looks pretty good. I think we can take the next slide. Well, right now in Q2, annualized production rate is around 300,000 to 350,000 tonnes per year, which is on schedule, I would say. So the machine can produce and it can produce as planned for this year. We have also, during the second quarter, had the first successful production of CrownBoard Prestige, which is one of our most sophisticated cartonboard grades that we normally produce in Gävle. And those volumes have been supplied to customers with very good feedback. So this is a big step forward and here we are actually ahead of plan, I'm happy to say. We are now focusing a lot on improving the product mix in order to minimize low-margin and downgraded products. We've had quite a few tonnes of, let's say, low-margin and downgraded products during the initial start-up period of KM7. We are now working to reduce those and go into more high-value products. You shouldn't expect that to have a big impact in Q3 as we have basically the maintenance shutdown and some preparations for that. So that means that in this very moment, we are not pushing for the most advanced products. We are producing products that give us a stable production on the machine, but they are not optimal from a product mix perspective. The maintenance shutdown, important -- very important for us. And of course, there is a degree of uncertainty of visibility due to COVID-19. Right now, it looks as if we will be able to push through the maintenance shutdown as planned, but there is a number of factors. Just to give you some flavor of it, we can't put external contractors working too close to each other, which means that normally, we would perhaps have 2 or 3 teams working in parallel on the same part of the machinery. Now that we have to stage that, so team 1 has to do their job first, then comes into team 2, et cetera, et cetera. And of course, there is a risk that the maintenance shutdown might take some few days extra or that some of the jobs that we want to do can't be done, et cetera. So we're fighting hard to really plan and go through with the maintenance shutdown. But there are risks involved with it and we have to see where that goes. The negative EBITDA impact is decreasing compared to first quarter. For second quarter, the impact has been SEK 120 million. For 2020, we have communicated earlier on that we will be in the interval SEK 350 million to SEK 450 million. We do expect at this moment that we will land in the higher end of that interval. A big reason for that is, of course, also the fact that the market is, for some of these grades, not as strong as it has been before. So when we talk about the less advanced products, we do get less paid for those products and we have a lower margin contribution than we expected just a couple of quarters ago. However, expectations to become EBITDA neutral during 2021, they remain. So we see no reason to change that. We are quite optimistic when it comes to the [ trajectory ] for KM7, I must say. It will take time, but we will get there. Next slide, please. Cost and efficiency program is on track. We have promised to deliver SEK 250 million of cost savings and efficiencies in 2020. We have delivered, during the second quarter, SEK 90 million. So I would say we are on track there to deliver. And we are also, in full swing, working in order to step-by-step then identify and initiate those actions that are required, the building blocks to deliver the SEK 600 million run rate by Q4 2021. So we're on track. Next slide. Looking briefly at raw materials, we can say that cost of pulpwood decreased somewhat during second quarter. I think we will see a marginal decrease also in the third quarter. Here, the situation is, and I think some of you've certainly picked that up, but we have this spruce beetle issue in Sweden that now is changing a bit the dynamics on top of COVID-19 effects in the forests in Sweden, means that we get a lot of spruce into our pulp mills. But in the forests that are affected then by the spruce beetle, where we have to cut those -- that wood is of lower quality. So it costs us more to process it. But it's also a fact that those forests with spruce, they contain less birch. So it means that we have an oversupply of spruce, but we have definitely not an oversupply of hardwood. So when it comes to hardwood, we don't see any reductions at all in price. So overall, slight increase, but not dramatic change, I think we expect. Chemicals, not so much to say about. Not big movements, I would say, in second or third quarter. Purchase pulp pricing has gone down. We have the new supply agreement in Pietarsaari, which, of course, is favorable for us. However, when we look on that, we should remember that we also sell pulp and we still have a net exposure of pulp. Roughly, for 2020, we're expecting somewhere around 70,000 to 90,000 tonnes compared to 160,000 tonnes last year. I think 2021, it's reasonable to believe that, that will more or less disappear, the net exposure of pulp. But as pulp prices have gone down, even if we're saving money in Pietarsaari, of course, we lose even more as long as we have the pulp exposure on the pulp that we sell. Energy cost savings limited during the second quarter, even though spot prices have been lower in energy, but we hedge our electricity prices to basically reduce volatility. So for us, that means that the savings have been limited during the second quarter. Next slide. And this, I think Ivar, is your time to talk about the figures. So please go on.

Thank you, Lennart, and good morning. So some comments just overall on the financials before we dive into the bridges. Net sales, as Lennart was starting off on, down 2% versus a year ago, which is mainly then a function of a 4% volume growth, fully being offset by negative pricing impact. And this situation we've seen for some quarters already. Looking at net sales versus Q1, it's also slightly down and this is mainly due to slower demand in some segments and some mix impact. Pricing is actually pretty flat versus Q1 and this goes for both of the divisions. If you then go into the profitability, we are significantly up versus a year ago, but make no mistake in that one, that part of this -- or actually a pretty big part of it is due to maintenance timing and scheduling. And versus last quarter, you can see for yourself, the profitability is relatively flat. That goes for the return on capital employed, relatively unchanged, what we've seen over the last quarters and certainly reflecting that KM7 investment is now fully in our balance sheet while we are still waiting gradually to see the ramp-up effect taking place. So next slide, please. So looking into our net sales bridge, what I was referring to, we're down 2%, pretty hefty negative pricing impact, which is mainly driven by some segments within Division Board -- apologize, the pricing is from Division Paper, where, in particular, the brown sack has been a negative trend for quite some quarters. Partly held and offset positively by 1% of currency and we have a 2 percentage point volume and mix, taking us to SEK 6.156 billion. Moving into the profitability bridge. Next slide, please. I mean you will see the logic pretty much from what we talked on the net sales bridge. There is a very sizable negative pricing component, so SEK 330 million. That's 6% of our net sales base. It's certainly definitely a significant driver that we are monitoring and also, yes, sequencing a plan to get the contribution margin back on track. From that negative pricing impact, we have a series of positive items bringing the profitability to a better level. Some of the bigger ones, we have raw material help. There's another solid contribution coming from our cost and efficiency program, currency help us and we also have the volume mix part. And you can see the SEK 260 million, that's definitely a big item coming from the maintenance schedule. And part of that is obviously timing, which will come back in the second half. So if you look at a bit more details per division. So next slide, please. And starting on Division Board. Division Board had, again, a very strong sales quarter, up 6%, broad-based growth, growth in all segments. Sales volume growth of 7% and clearly, riding on the strong demand wave across more segments and also positive impact from the KM7 ramp-up. Some details then by the segments. I mean liquid packaging board had another excellent quarter, strong growth versus year ago, 12%. Lennart was alluding a little bit about this in the beginning. We believe certainly that, that market and segment is still strong, but we get indications now that we're moving towards a bit more normalized level and that there is an industry inventory adjustment coming along in the second half, meaning that certainly, we expect the liquid packaging to overall for 2020 end with strong figures, but probably at somewhat lower growth rate than versus the second half. So cartonboard is another very strong quarter and wonderful number with 16% growth. This means we had 10 consecutive quarters with more than double-digit top line growth for cartonboard. And this is very much on strategy and certainly according to our plan. And now with new capacity being added with KM7, this is also going to be continued a priority for us. Increasing position in both existing positions, but also going after new customer base as we still believe that there's ample room for us to expand in both product and also geography. In terms of cartonboard and fluting and liner, still growth, coming to a growth rate which is slightly lower versus what we've seen in the past and also reflects a little bit more challenging market, as also Lennart was talking about. Net operating expenses flat while sales and volume is up 7%. Efficiencies helped by raw material decrease and a cost and efficiency program. But certainly, there's an element also here of the maintenance scheduled timing. In terms of profitability, EBITDA margin of 16%. If you look at the KM7 impact, which Lennart was talking about, SEK 120 million, which is still sizable, we are at a 21% of EBITDA and that's certainly also in an area that we believe that we will and target to get Division Board in that range over time. If you go into Division Paper on the next slide, please. Yes, it has been a relatively similar situation for some quarters. And you probably also remember that in end of Q2 -- next slide, please. Thank you, on Division Paper. So in Division Paper, I mean it is still relatively similar to what we reported over the past quarters. You probably remember that in Q2 '19 and early Q3 '19, that's when we started to see some pretty negative impact. Starting out in [ meat ], a lower base, but still we see an impact. And it has been pretty similar to what we've seen over the last quarter with kraft paper holding up relatively well while sack paper is impacted hard and particularly in the brown sack where pricing is certainly a lot down versus a year ago. Now looking versus Q1 '20, our net sales on paper is only marginally down. And that also surprised us a bit positively, meaning that when we look into Q2 and seeing the trend, the pricing picture certainly has held better versus what we expected. While we've seen some volume being reduced, in particularly certain channel where we expected COVID-19 to be more influential. And we're talking in particular about the industry and also partly within food service. Operating expenses coming down, partly due, as on Division Board, on the maintenance sequencing. There's volume decline, but we have the same items here as on Division Board, that we have raw material cost decrease and also some cost and efficiency improvements helping us. Meaning that the EBITDA is reported up, but a lot of this is then fluctuations in terms of the maintenance timing. So just a couple of words on Division Solutions. So next slide, please. Division Solutions certainly had a pretty hefty negative decline on top line. This is mainly due to Managed Packaging, definitely had a challenging quarter with mostly North American brand owners heavily impacted by COVID-19. And here, you can do the link into most nonfood retailers, which is the main part of our customer base, has been in lockdown mode or certainly very heavily impacted by the different consumer behavior during Q2. FibreForm coming in with moderate growth, we had a very strong Q1, and there has been a little bit of an inventory adjustment just over the first half, but still, first half is on a good level. Yes, I mean cost clearly down since we have done what we could to protect profitability and initiated certain measures in the wake of the business trend we already saw. And that means that EBITDA is down due to the net sales decline. We're not talking about very big numbers there in the absolute, as you can see from the table. So if you go into the next slide and just a couple of words on the balance sheet and on our net debt leverage, relatively unchanged from what we had in -- so next slide, please. Thank you. So in terms of the balance sheet, there's not a lot of change versus what we reported in Q1. It's slightly up from 2.3x to 2.4x, which is the main effect of that is net debt going a bit up due to the dividend payment that we executed during the quarter. You might also remember that we talked about in Q1, this energy hedging collateral and the increase that we went through in Q1, that has now been reduced by SEK 150 million during Q2 to a new total of SEK 250 million. So that's certainly also helped our positioned partly. In terms of debt maturity, we have limited positions over the coming calendar year, I mean rest of 2020 and going into '21. For CapEx, there's no really news. We have already communicated SEK 1.3 billion in total for 2020, and we are on track to deliver that, and that remains our latest estimate. So we can ask for next slide, please, and I'm handing it back to Lennart.

So to summarize, the second quarter continued -- okay, let's wait for the next slide to appear. Could we have the next slide, please? Thank you. To summarize the second quarter, continued sales volume increase, relatively limited impact from COVID-19, KM7 ramp-up progress continues and potential when fully ramped up is definitely reaffirmed. Earnings continue to be affected by lower market prices, mainly then from Division Paper and we're on track to deliver our cost and efficiency program. Can we have the next slide? Very slow changing slides today, apparently. Can we have the next one, please? There it is. Thank you. Outlook for quarter 3, uncertainty related to COVID-19 remains, we have to say that. We are somewhat cautious when it comes to the third quarter. We see somewhat more challenging market conditions for most segments, exceptions being products designated for Food & Beverages and Medical & Hygiene, where we expect a stable situation. We also have several planned maintenance shutdowns, which I alluded on previously, some challenges around that. Raw material costs are expected to decline marginally. So that will, of course, have a certain positive impact. So this is just trying to give you a rough idea about the third quarter. So thank you so much for that.

Okay. Thank you, Lennart. Operator, we are ready to open up for questions.

[Operator Instructions] We have a question from Christian Kopfer, Nordea.

Just a few questions from my side. Firstly, on Paper. I just wanted to ask and I'll take the questions one-by-one. I just wanted to ask on the -- have you seen any positive effect demand-wise as the plastics consumption, especially on bags, are coming down a lot in Sweden?

Bags, basically, material going to bags for us is not really a product area that we're focusing on. So marginally, yes, but not any major or significant impact. But it's true, paper bags consumption has gone up and plastic bags has more or less collapsed, I think, in Sweden. But for us, I wouldn't say that, that has any significant impact at all.

Okay. Fair enough. On the outlook for Q3. Firstly, on volumes for Paper, is it fair to say that you expect volumes to come down a bit, just talking underlying volumes, and also prices coming down a bit?

I think what we see is demand for MG paper is quite weak now. We expect a weak quarter for MG paper, which means that we will most likely take some -- or we plan to take downtime in Skärblacka on 2 of the paper machines and continuing with low steam in Pietarsaari. So volume demand for certain of the packaging paper grades, we do expect that to be somewhat weak. Sack paper volume-wise is fairly stable right now. We don't see prices so much dropping. Prices appear to be stable. So it's mainly volumes where we will see a negative trend in Q3, I think.

Right. And then on Board, if you could -- could you -- similar comments there, Lennart, on volumes and prices for Q3 versus Q2?

Yes. On Board, I would say that the market for liquid packaging board is stable. I think Ivar mentioned that I think we've seen a certain inventory buildup in first half of the year and the consumption there is normalizing, but still on good levels, I would say. So we do expect a stable demand there. Cartonboard, we foresee continued -- for us, a continued growth, but our opportunities to exploit that in the third quarter are a little bit limited as we have the maintenance shutdowns. So we don't expect any huge increase there. Our containerboard, I'd say that containerboard is a bit more somewhat under pressure, I would say, volume-wise and possibly also price-wise. I think we can expect that we will have some pressure on the containerboard grades during the third quarter, driven, I think, not necessarily by a much lower consumption but rather by a reduction of inventories in downstream from us among our customers, seems as if they have had some buildup. Our sales team there is fairly optimistic, but they say that quarter 3 will be a challenge. Did I forget anything there?

No, I think it's okay.

I hope that answers roughly.

Yes. Do you have any numbers to give for CapEx for 2021?

2021, basically, we will follow the earlier communicated levels, around SEK 1.3 billion. No major deviation.

Right. And then finally for me, on Pietarsaari, the cost savings that you will realize from that new agreement, is that on top of your communicated cost savings of SEK 250 million for 2020 or…

Yes. So you probably can look at that a bit as an outside item. Yes, so we clearly have an ambition to deliver SEK 250 million, SEK 600 million and this is an item that is going to help us on top, yes.

So what would that bring for you in total then? So around…

Yes. So we don't really comment on, in particular, margin on specific sites or held for certain machines. So I'm not sure I would like to open up more on that topic.

We have a question from Alexander Berglund, Bank of America.

I just have a question on your comments on a bit more challenging markets in the industrial end markets. I'm just trying to square those comments with other comments that we've seen from construction companies and other industrial companies who saw an improvement. So is this, from your perspective, more due to the inventory de-stocking that you mentioned in your presentation? Or is it something underlying still being kind of weak sequentially in Q3?

Well, it's an interesting question and we're not sure of the answer directly, but it could be probably a combination of both. I also suspect that we haven't seen volume-wise so much impact perhaps from construction earlier on because they have been still in the motion of finalizing -- we're already ongoing projects, but there might be a certain hesitation now to initiate, or some delays to initiate new construction projects. So I would guess that the demand will be a little bit down in Q3 and then possibly also Q4 from simply lower activity. I think it takes some time to restart those types of projects.

We have a question from Robin Santavirta, Carnegie.

Now first of all, just sort of going back to the demand outlook for Q3. Now if you look at the group overall, is it fair now, based on what you say, to expect demand to be slightly weaker in -- for the whole compared to the outcome that you had in Q2?

I would say, to give a short answer, I would say, yes. There is a lot of uncertainties. So of course, we don't know where it will end up, but we would be somewhat cautious in this situation. We still believe that, of course, as we said before, that certain of the grades are stable, others a little bit weaker. But we also need to remember that we have the maintenance shutdowns, which will somewhat limit the volumes that we can deliver during the third quarter.

I understand. And then the same question goes for prices. Should we expect prices to slightly decline in Q3 quarter-on-quarter or is it more in line with [indiscernible] prices quarter-on-quarter in Q3 that you see now?

I think it's more -- I think it's more of a issue of volume than price in general. I think it's likely that we will see certain price pressure on containerboard. But for the rest, I would say that we have rather stable prices.

All right. That is clear. Then in terms of FX, we've seen the Swedish krona strengthen quite significantly. I guess it's a strongest level compared to the past 2 years. How will that now pan out for you in Q3 and Q4? I guess some headwinds already in Q3 if the FX rates remain at the current spot levels. Is that right?

That's correct.

All right. And then in terms of the KM7, I was wondering, now is it positive EBITDA in 2021 or neutral? I guess I think you had positive as sort of original guidance and also in the report, I think it says positive. But now in this presentation, it says neutral. So is this now sort of a change in the outlook for 2020 -- or 2021? Or is it the same guidance you had before?

No. I mean let me try to clarify. I can see why you asked that. I think Lennart was a little bit alluding to the beginning, that there's certainly a big quarter coming up in Q3 now. And if we can do the maintenance stop as we had hoped and do the improvements that we really hope to do. So it's very difficult at this stage now to sit and do a very credible and good forecast for 2021 because the big item that certainly moves the needle a lot here would be on the product mix. And that certainly, our ability to move as fast as we want to will be impacted also by part of the items we're going to fix in the maintenance stop. But there's no doubt, and assuming that we will be able to do in a good manner the maintenance shutdown, we definitely foresee in the beginning of 2021, and if that's Q1 or Q2, difficult to say, that we reach a breakeven stage and then certainly from thereon, we started to go into the positive. So as a whole of 2021, we would expect to have a positive impact. But in the beginning of the year somewhere, we would expect to reach a new milestone, which is a breakeven point.

I think we will know -- we will have a much clearer picture after the maintenance shutdown that we are going through here in early September. And then we see if that goes through as planned, we're in a good position. If we get some hiccups there, there are some things we don't have time to do, then that will affect the product mix until, well, probably during the first quarter or so next year and also during the end of this year. So sorry for not being able to answer exactly, but I think when we have our next quarterly review, I think we can come back with some more facts on that.

And more detail on 2021.

I understand. Thank you very much for this clarification on that, it's very useful. Then just finally, on the maintenance, you mentioned a few times, actually, sort of that you're a bit worried about -- it seems that you're a bit worried about how that will pan out. What is sort of the key challenges? Is it just sort of the busy maintenance schedule you have now in H2? Or is there some particular things sort of that worries you?

Well, I think it's -- number one is we have now a lot of stops in a very short period of time. And it's not only our mills that have that. It's also the other forest industries, they have pushed their maintenance shutdowns, as had the large parts of the process industry itself and not only in Sweden. So I think it's going to be a stretch period for everyone, with all these shutdowns that have to take place. And of course, let's hope that COVID-19 doesn't come into second wave or something like that, because then I think the main concern is to get all the people that we need, all the specialists we need to come in during the maintenance shutdown. We need to have them in place and we need to be able to give them conditions so they can do their job. Because when we don't get jobs done during the planned shutdowns, it will be difficult to do later on because then they will be fully occupied at another mill, et cetera. So it's a very tight schedule with tight resource planning. I think that's the main concern we have.

We have a question from Johannes Grunselius, Kepler Cheuvreux.

It's Johannes Grunselius here. A couple of questions. But starting with the wood cost and Lennart, you mentioned here that there is pressure on the price, obviously, but also that you don't have the favorable mix in the feed in the third quarter with low amounts of birch, I think. Can you say anything about how you're looking at this in the longer-term perspective, let's say, when looking into next year, could that also be a concern?

Well, I think…

And also -- yes, sorry.

Yes. Okay. I can start. I think when we talk about this, I don't even know if it's called spruce beetle in Sweden -- in English, but [Foreign Language] in Swedish. And I think that issue is serious for the entire industry and I think it's something that we will have to learn to live with for a number of years going forward. So we need to develop strategies, both in the forest and in our mills, on how to deal with that problem. And this especially goes for the southern parts of Sweden. So I think up to -- so in our case, it's mainly Skärblacka that is affected right now. But of course, we need to develop strategies for that and we need to develop alternative sourcing, et cetera, for hardwood. So I think these are things we're looking into right now. And I'm -- I do believe that we will be able to handle the situation. But I think this -- the fact that birch supply will be a bit more under stress also in the coming years and it will have an influence on the price.

Okay. Is it a fair assumption, I mean given where spot prices are now or rough market prices, that you will have, let's say, 5%, 6% lower wood cost for the next rolling 12 months compared to what you have had? Or could you help us there with some sort of number?

I'm not so happy to give you a number on that. I do think we will see a decrease, whether it's 5%, 6% or something else. I would probably say 3% to 5%, if anything.

Okay. And also another cost item, electricity. Could you also perhaps help us with possibly some numbers how one should think about that for next year, given that I know you're working a lot with hedging and presumably, you're hedging in at much, much favorable rates now than in previous quarters? I mean how much of a cost easing can we expect from electricity, would you say?

I think I will give that question to Ivar.

Thank you. It's a very good question and I wish I would be able to tell you this in a solid manner. But as you probably also realize, there's a pretty hefty spot rate development in the first half. Looking at the forward contracts, there's certainly an expectation from the market that it stabilizes and come back to a more normal rate. So in that sense, you can say that, yes, you're right. We have been hedging in certain positions going forward at some, yes, favorable position, you can hope. And if this kind of continues and we don't see the spike back to normal, there will be definitely an impact for next year. Not very comfortable at this stage to give an estimate or give some kind of a number of what we would expect. We should probably have also a better overview when we come into Q3, latest Q4, and give a little bit more guidance or what we expect for the coming year.

Okay. Okay. Sure. Then I was thinking about your comments here on cartonboard as you have had consecutive nice growth in this area for many, many quarters. I mean one of the reasons, I guess, perhaps KM7 is helping you perhaps with indirect effects, I don't know, but is it any market reasons or any -- what's behind this, basically?

I think we have -- as a preparation for KM7 and the ramp-up, we have clearly said that we will focus on certain segments within the cartonboard business area or end-use area for KM7. So we have definitely established a number of new customers in that region -- in that area and we are step-by-step then ramping up business with them on expectations that KM7 will be able to supply good volumes there. And we've had very positive feedback, both in terms of how they see our quality and also when they see, let's say, our ability to increase volumes going forward. And this is why I'm very pleased that we've made so good runs now on KM7 here during the second quarter with the coated cartonboard, so and we expect that to continue.

Good. Good. And that's my final question on the KM7 ramp-up. I mean is the reason why you have sequentially better earnings impact, is that because you have added the higher sort of advanced products with the coated surface? Is that -- that's behind it? And if you perhaps could also help us, is it so that the next major improvement will come in the fourth quarter and that's due to the mix improvement that you foresee, yes? That's my question.

Product mix is much more important than volume, to be honest, on KM7. Of course, we need to run the machine and we need to get out the volumes, but the product mix is very critical, especially as the market right now looks. For example, we do some cup stock production and then the margins on cup stock are not fantastic right now for sure. And that's a simple product for us to produce. And so we want to produce less and less of those type of grades, uncoated grades, and we want to go into more coated grades. That is definitely higher margins for us. We also have, of course, had during the start-up period some waste or, let's say, downgraded production of board and those volumes are quite difficult right now to sell at any decent price at all. We basically have close to 0 margin on those grades. So we want to get rid of those. So a lot of our focus right now is to get rid of those low- or almost no-margin products and then step-by-step get into high-margin products.

Yes. And can you say something about how much, let's say, in the end of Q2, how much was coated material here? And how should we see this, for example, in the fourth quarter if things goes according to plan?