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

Welcome to this webcasted conference call following the publication of our Q2 report this morning. As usual, our CEO, Christoph Michalski; and our CFO, Ivar Vatne, will hold a presentation. And after that, we will open up for questions. By that, I would like to hand over to you, Christoph.

Thank you, Lena. Good morning, everyone, and thank you for making the time joining our presentation this morning. I'm quite happy to say that I think quarter 2 has been a continuation of quarter 1. And if we go into the slide Q2 performance, you have seen our results. So first, we had a very good sales growth driven by positive market momentum, which resulted in a 6% growth; 9%, excluding exchange rate. Profits grew in line as well at 14% at EBITDA level. And we also could deliver a good and strong cash flow, with operational cash flow after investment of SEK 694 million. In the quarter, we also had the production of our first commercial liquid packaging board in Gruvön, which clearly was a big milestone. And that will allow us to continue to grow and also to improve our mix across the different mills and factories. So, so far, in summary, our Q2 performance. Let me give you an update a little bit on the business status and the market outlook, if you would like to move slide, please. As you know, during the pandemic, the food and beverage market generally has been quite stable, sometimes positive, but it was basically the other segments, which suffered quite a bit. And today, what we see is despite some of the messages in the market of the next variant or [indiscernible] wave, we still see a positive outlook when it comes to consumer products and, to some extent, luxury products, but also in the industrial area. And you could see that also when you look at our paper sales did relatively well now in quarter 2, and we do not expect a market slowdown in the next quarter to come. So overall, I think we feel that the market conditions are pretty good for the rest of the year. We expect some uncertainty around corona, but we do not expect a sudden stop of the market. So if we move to the next slide and talk a little bit about our highlights. Market condition for all segments were very good. We have strong order books. And I think we singled out liquid packaging board because these are clearly long-term contracts where movements are not so dramatic. But the other segment, cartonboard, containerboard are very strong. And you have seen -- some of you made some comments about our good performance in paper versus board. And I think it's basically the lack of supply out of Gävle for a couple of weeks which created this imbalance between paper and board because from a market perspective, all segments are doing very well. We had a maintenance shutdown in Gruvön. And we're incredibly focused on the COVID situation which at the time was still quite serious. We tested people coming into the plant with about how the maintenance work is coming in and out and did a 48-hour compulsory testing on everyone and discovered also [ few ] cases, which didn't lead to a spread but basically the security worked. And we were able to finish the shutdown, which I think when you compare our data this quarter would have been even better in comparison to last year, considering that last year, we didn't have a quarter -- a shutdown on any of the mills in quarter 2 2020. I mentioned at the Gävle, we had a loss of production of 22,000 tonnes, which was due to an explosion close to a pulp mill, which led to a slower down of all the machinery and to stop [ outlet ]. And clearly, as I said, even in the report, we are incredibly sorry for all our customers. We expected to get these volumes of product. And at the end, we needed to basically prioritize and make sure that everybody got something. But I would like again to apologize for this mishap. Excellent progress for the new board machine at Gruvön. I already mentioned that. And this gives us, as I mentioned, 2 opportunities. The first one is to accelerate slowly the production of KM7 itself, but in particular, to manage now the portfolio in a way that we produce on the mills which are the best made for the different type of products. So we are moving products between Gävle, Gruvön and Frövi. And that -- this mix effect is really what will make profitability better as well as the increased production of KM7 in itself. We continued also our cost and efficiency program, and that is progressing well. If you would like to switch slide, please. The additional contribution from cost and efficiency program in quarter 2 was SEK 70 million, so good progress. I think, to date, we have delivered SEK 475 million. And we expect to reach SEK 600 million at the end of the year, and we will carry some forward to next year. I think we will probably look for new activity, so this is not the end of our efficiency program. But I think this was kind of the first step of saying what are the low-hanging fruit, what can we do. But as you know, the start of this program was based on better cost at -- that we see from competitors, and we want to get in line, and we'll be the best in class. And I think from next year, we will launch probably a program which will look much more into the structural savings and how can we further increase sustainable cost savings going forward. A quick word on raw material on next slide, please, raw material costs in quarter 2. So these are not the cost movement that the market shows, but these are the cost movements that we had internally. So for example, we had lower cost in energy than in quarter 2 last year. But this is mainly due because of good hedging. The energy price actually went up, as you know. So we have relative stable costs for pulp wood, very good availability. There were some movement in the market in quarter 1 and quarter 2 with some closures, which freed up some wood or will free up some wood. Remember in quarter 1, we talked a little bit about some price increases that some players wanted to get through. We haven't seen any movement on price so far in any significant way. And we do not see any reason why fiber availability would change. So I think, overall, we are well positioned for quarter 3 and probably quarter 4 as well. Chemicals' case is a bit more worrying. As you know, we had some -- we had some impact on the [ tax and ] bad weather, which led to some shortage in latex in particular, which really increased costs dramatically. But I think overall, we see a trend of increased prices on chemicals. And we expect this trend to continue, and it's probably a little bit similar to the trends that we are currently experiencing with high demand on packaging material, raw material, chemicals, et cetera, overall. And so probably this trend is in line with our trend as well. Purchased pulp cost has increased. We have seen the record prices in pulp wood. Currently, in China, we see already slight drop, but we expect Europe to hold up. There might be a slight decrease. But I think we're looking more for stability going forward rather than a big increase. As you know, we're also a net seller of pulp, so to say. So high pulp prices for cost base is not good. But generally, for BillerudKorsnäs, this has a positive effect on profitability, and Ivar will talk about that a little bit later. And then I mentioned already energy. Energy costs, because of our hedging policy, will stay stable or even -- which -- sorry, will stay unchanged for quarter 3. But this is not to be said that energy price -- we expect energy prices to go down significantly. It's more our internal hedging. With that, I think I would like to hand over to you, Ivar. Thank you very much.

Thank you, Christoph, and good morning, everyone. And if you can move to Slide #7, please. So a couple of words about our net sales performance. I mean, in general, this is a strong top line performance in the quarter. 6% up reported, and taking out the currency, plus 9%. We have significant positive help from pricing. Roughly half of this impact is coming from our pulp sales. The remaining pricing impact for Q2 is mainly coming from containerboard, where we had several pricing rounds of -- being announced in the beginning of 2021. We also have a sizable help coming from volume and mix. So sales volume is up 2%. And mix help is coming from several places, but a very big chunk of that is coming from KM7 and a steady increased share of coated material and reducing gradually the waste and secondary material, which is extremely pleasing for us as has been one of the priorities. Moving into the next slide and some words about the profitability bridge. There's quite a lot of [ figures ] to share, so I'll probably just spend the time on some of the bigger ones. We have a smaller negative currency impact of SEK 35 million, followed by the Swedish kroner strengthening versus euro and dollar and helped by our hedging positions. The Gävle incident has already been mentioned. The main driver being 22,000 tonnes of volume loss net impact for us in the quarter, minus SEK 75 million. Raw material and logistics, bundle this together, coming in with a SEK 40 million help. There's quite a lot of different items in this bucket. The biggest being we had a fiber and pulp help close of SEK 100 million, which is partly offset then by: chemicals, SEK 40 million; and logistic, SEK 20 million. And as Christoph mentioned, for chemicals, mainly the latex has been an unusual pricing curve so far in 2021. The pricing piece is the biggest bucket we have on the chart, SEK 200 million, has been significant in the quarter. And as mentioned, half of that or roughly half of that is coming from the market pulp sold, but then majority of the remaining part is on containerboard. Yes, we have a solid help from volume mix, as we mentioned. Also then we have the SEK 70 million that Christoph mentioned from our cost and efficiency program. So that brings us up to an EBITDA of SEK 1.083 billion, excluding the maintenance stop. And this is very pleasing to see because this is not a level we have seen for quite some time. So it's really also encouraging to see that part of the programs that we have initiated and focusing on over the last couple of years is working. Including the maintenance stop that we had in Gruvön, it brings us back to SEK 883 million for the quarter. So then moving to next slide and some comments about our Product area Board performance. I mean, it wasn't the easiest performance for Product area Board. Both the Gruvön maintenance stop, which was planned, and the Gävle incident, which you can definitely say it was not planned, 2 major events. Despite all of this, Board deliveries then 2% net sales growth, plus 6% if you exclude currency, and that is with flat volume. You see the breakdown for yourself by segment. All of the growth is coming from cartonboard, which had another excellent growth quarter. In fact, if you look at the last -- well, in 13 of the last 14 quarters, we've experienced double-digit top line growth for cartonboard, which is very pleasing and certainly on strategy. Gävle incident impacted heavily the liquid packaging performance, and also, the Gruvön maintenance stop had an impact on containerboard. Yes, there are several profitability items, but the biggest one being pricing, lower fiber costs, positive mix and help from cost and efficiency program. Then the Gruvön annual shut and Gävle incident drags our EBITDA numbers slightly negative versus a year ago. We move to next slide, some comments around the Product area Paper. And then I think it's very fair to say that the market situation is very different now for Paper versus what we saw in the end of 2020. Net sales, plus 5%; plus 12%, excluding currency. So that's a very strong number. Sales volume, plus 6%. Market pulp sales is leading the growth, followed by kraft paper, where in particular FibreForm had a good quarter. But in general, you can say that excluding currency, we actually see growth now on most of the grades within kraft paper, which is very pleasing. Sack is flat, with the brown sack being positive and white sack slightly negative. But we do had positive sales volume growth for both white and brown sack. Yes. Somehow a little bit similar story that we also had for Board, when you look at the profitability, good progress helped by volume growth, pricing and benefit from our cost and efficiency program. So we move to next slide, talking about another very strong cash flow delivery, certainly one of the highlights of the quarter. Our operating cash flow is up by roughly SEK 700 million versus previous year, driven by both a stronger operating result as well as help from our working capital in particular. It means our balance sheet keeps getting stronger. Net debt leverage now is down to 1.7, as you can see. We are making a small update on our CapEx estimate for 2021. SEK 1.8 billion is the new number that we look at, which is in combination of SEK 1.3 billion base CapEx. And we have taken down slightly the estimated impact of the program of the Frövi recovery boiler in 2021. Good. With that, I hand it back to Christoph.

Thank you, Ivar. So let me spend some time on sustainability and innovation. If we can move to the next slide, please. As you know, we're already 97% fossil-free in our production. And we said -- but we said, like I think most companies did science-based targets for 2030. And as you know, it's always at the margin at the end where the most difficult reductions are. And we designed a program which will bring step-by-step all our mill in the fossil-free state. Next investments which we will implement in 2022 is in Gruvön, where we move towards a backup boiler, which is electricity-driven, basic renewable energy electricity and which replaces an old oil boiler. And step by step, we will take out fossil fuel first. And then in the later stages of the program, we will convert our bio -- sorry, our gas consumption from fossil gas to biogas as quick as we can. So that's a bit on sustainability. So a good program which we will implement within our current CapEx over the years. There is no direct impact to the numbers that Ivar was just mentioning for this year or the years to come. Then we also had some good new product launches this last quarter and this month. One is Pure DecorX, which is a 3-ply and light-coated white top liner. And then it's light, strong and climate smart. What do we mean by that? It's lightweight. It is much stronger, so you can use less material and, therefore, also less weight. CrownBoard Prestige is a coated cartonboard with bleached primary fiber in the top layer. And basically, it's a very good looking carton, which is used mainly in the luxury and consumer goods products. And the market response so far has been very, very positive on these 2 new qualities. Then I come to the outlook. No big change, I don't think, to quarter 2. We expect quarter 3 to behave very similar in terms of market conditions. And probably, we see that trend continuing for the rest of the year. I think we see overall good availability of pulp wood which should keep prices, to some extent, under control and have maybe some pressure, but definitely with the availability of some stability. And then if it comes to other input prices -- input costs, sorry, I think we will manage that with some continuation of looking at our prices and to see in the strong demand area how much we can compensate that. As you know, we have a number of business priorities. Clearly, health and safety is #1, so we continue on that. And I think we're making slowly progress this year. Stable production is the absolute critical factor to deliver our results for the rest of the year. As I said, the market is strong and stable. And stable production is basically the only thing that will allow us to deliver. Ramp-up at Gruvön. I think, I will now, as we said already in quarter 1, we will less and less talk about a specific mill or machine or something. But as we have now -- as we are now producing commercial grade for liquid packaging board in KM7, this will continue. So I see good opportunity there. Competitive wood supply is what I mentioned before. So we are looking -- as you know, we are sourcing in Sweden and the Baltic states, a little bit in Norway. And we will continue to optimize our supply on that front. And then finally, very important, we still have a little bit of our cost-saving program left for this year and next year. And then we have to rework what is our next cost-saving program and efficiency program to make sure that we reach best-in-class cost base for our kind of business. Good. That brings me to the end of the presentation. And thank you for your presence. And I think now we will move into questions. So operator, if I can hand over to you, please.

[Operator Instructions] And our first question comes from Robin Santavirta from Carnegie.

I have 3 questions, and if I take them one by one, if that is okay with you. First of all, regarding H2, if we look at the sales price increases that you would expect and then compare that to the cost inflation and if we exclude the rationalization program, would you then expect a neutral variance or a positive variance in H2 from those 2 items?

Could you maybe, Robin, list all the questions, and then we take them one by one? Is that okay?

Yes. Okay. So that's the first one. Then regarding the KM7, obviously now performing really well. Could you give an indication or an update of the current volume performance, what you would expect for the full year of '21? And then the timing when you expect the KM7 to reach full capacity, is that 2023 or then 2024? And also related to KM7, a question. You stated in the last quarter, it reached EBITDA breakeven compared to the 3 machines or the performance of the 3 machines that you have closed. What kind of profitability did the 3 machines have? And final question is related to the current strong market. Obviously, it is a good market. Is this now only driven by a cyclical strength? Or is there also structural elements, for example, paper-based packaging gaining market share over plastics? So those 3 ones.

Okay. Good. Thank you. Look, let me start with question 3, and then we work our way backwards, and I will share some with Ivar. When it comes to the market, I think you have probably a double effect. I expect that, clearly, you see structurally a lot of preference towards paper. We have lots of brand owners discussing with us what packaging option could we bring out of paper to substitute plastics. You have a lot of interest in that area, and that's clearly more a structural shift. However, I think what we're also seeing is a cyclical change in the sense that I think COVID brought well the economy a little bit to a stop, and now we are starting up again. And as you have seen already in the stock market yesterday and today, the bit of wobble. Is a fourth wave coming or not? Is Delta -- will that impact the economy as previous lockdowns before? Will we have lockdowns or not? And I think there's a level of uncertainty. But I think overall, most people are quite optimistic that the worst of COVID is over in the sense of lockdowns and economic impact and things like that. And that basically drives up a certain amount of economic activity, in which then clearly have been part of a very significant material in that economy where we profit from. So that's my sense. So I think we have these 2 trends. One is more in the area of substitution of plastics, and the other is clearly a good relatively carefully optimistic outlook. KM7, look, we've -- I think we're planning 350 million to 370 million tonnes for the machine this year. The capacity of the machine is 500 on -- 550 on current specs, and we expect to reach that in 2024 or something. And that alludes my comment why I'm saying, hey, if we want to continue to grow 3% to 4% going forward, we need some ideas after 2024, i.e., 2025 onwards, where our volume growth can come from. And that was one of my last statement. When it comes to EBITDA performance, look, we broke even. I don't think we will comment on that anymore. We don't comment profitability by machine or by plant. You have seen the overall result is encouraging. And I think I will leave it like that. Do you want to take -- Ivar, do you want to take the price question maybe?

Yes, I can do that. And actually, before that, I just wanted to comment one thing, Robin, because you did ask about the KM7 and on the old machine profitability on that. And I think the 215,000 tonnes on these old machines, we don't go into that level, but the case -- the whole business case around KM7 and this SEK 1 billion EBITDA incremental we talked about, I mean, it is coming from 3 building blocks, and that's no secret. But the vast majority of that will be to get volume up to 550,000 tonnes. A very significant building block is also that we operate our Board side. So Gävle, Frövi and Gruvön has a much better driven, you can say, well, coordination, meaning that we drive the products and segments in the machines they're optimized for. And that will and should give us good scale and even more efficiencies across. And the last piece is fixed cost efficiency in Gruvön. And the status, I think, when we look at it right now is that we're doing well and progressing super well on the volume plan. We're also doing now very good progress this first half on this Board site efficiencies and how we now plan and drive Frövi and Gävle and Gruvön much more planned and coordinated, and again, get the best part of the machines. Fixed cost efficiencies in Gruvön, that we still have something to do. So that's still kind of on the priority list for the coming years. So that was just some comments on kind of reminding on how the business case has been put together. I think on the pricing piece, I think my answer on this would be that there has been several price announcements happening also during the Q2. So you would expect to get a, I think, say, a full quarter impact when we come into Q3 and the second half. If you do it simple, you can say that out of the 3.5 percentage points we reported now in Q2, let me take out about half of that, which is the pulp and liquid packaging, you would land around 1.7, 1.8 pricing impact for the other segment. You probably would expect something similar on top of that for Q3 and going into Q4. And that will mainly be a better impact or stronger impact from cartonboard and from the paper grades, which for the time being has not contributed too much during Q2. I think for the raw material costs, I think the bigger question mark still for us is around chemicals. There is a certain time lag on some of our contracts. And caustic soda, for instance, we know already will go up with some tens of millions per quarter now going into second half. I think latex prices is, on a high level, very volatile. Tough to say. We are basically looking at it roughly stable but maybe slightly continuation into second half. I think pulp wood has already been covered. We have seen a slight increase but with almost neutral position in first half. We don't see any big change going back into second half. Electricity, I think we look with very solid hedging positions that it should be mainly flat for the next quarters. So I think that hopefully should give some coordinates on how we look at gas pricing and input cost.

Our next question comes from Johannes Grunselius from Kepler Cheuvreux.

Yes. Johannes here. I want to come back on your comment there, Christoph, about more supply beyond 2024. Is the message that you are looking more into sort of debottlenecking investments perhaps on brownfield? Or are you talking also about -- are you thinking about any sort of major investments here coming beyond 2024 in the planning? That's my first question.

Do you have another following question? Just give them all, so then it's much easier for us to understand more how to...

Yes. And that is also on the pricing side because it's quite obvious that you didn't get so much or almost no price uplift on sort of paperboard, cartonboard. Could you maybe touch on those prices? And also how you see liquid packaging board. If you could give us any idea if there could be any tailwind from prices for liquid packaging board in the coming quarters. Yes. I think that's my questions.

Yes. So supply 2024, so I think it's a bit too premature to answer that. What we have done or what we are doing right now is we basically looked at all our markets. And it's not surprising to see that actually in containerboard and cartonboard with fresh fibers, you have huge opportunities in the market. And as I mentioned already before, coming into BillerudKorsnäs, my view was we should really focus and have a look. We're doing so many activity, but what can we do in our core business? And actually, we came to the realization that there are massive opportunities in our core. And my sense is we are pretty confident that cartonboard and containerboard and liquid packaging board is on our agenda. We will -- we are looking at Europe, which is strong. The U.S. is probably even stronger, and some of the materials we are making have a strong demand and a little bit undersupplied in those markets. And now the key question for us will be, okay, how will we be able to supply that market during -- from 2025 onwards? Because if all goes to plan, we will be pretty full. And I think bottlenecking is already in the plan until 2024. You have probably seen our productivity is slightly behind that of our competitors in certain aspects, and we are working very hard to improving on that front, and that will be done with SEK 1.3 billion CapEx as we go forward. But then we need to think, are there any significant brownfield investment we could do in order to get better supply? And that has to do not just with the CapEx but also with the wood supply. And as you know, Sweden and wood supply, there are certain -- that is a little bit more constrained, so we need to think about how we manage that. And then we're also looking at opportunities, is it worthwhile to have some supply in other geographies or a mill in other geographies closer to some other markets? And that answer, I cannot give you today. We are in the middle of working through that equation. And then we will have in I think September, October, probably some very good discussion with our Board and hope to communicate a little bit more on this matter then in later in the year for Capital Markets Day that we talked about already in quarter 1. So that is a bit the supply discussion beyond 2024. Ivar, why don't you go back on pricing, if there's anything more to say.

Yes. No, I can do that. And Johannes, it's a bit of repetition, but I can, yes, look at this again. So as I mentioned, out of the 3.5% pricing impact we saw now in Q2, roughly half of that is coming from pulp. And if you just follow the same logic then going into the mixed quarters, we are very careful. We don't really expect to see much happening more on pulp. I think the levels are pretty high already. And I think you get the same reports from us or as we do in terms of what's happening on the market on that front. I think the pieces on cartonboard and paper grades, yes, we had some announcements happening already during Q2. So a small impact that more will hit us as a full quarter impact in Q3. We also had some new pricing announcement -- or valid as of 1st of July. So you can just say that if you are to expect, excluding pulp, something similar in Q3 and Q4 as we had for Q2, you would be looking at 1.7, 1.8 on the total portfolio. And that means that on average, we do see somewhere between 3 to 4 percentage points of price increase for cartonboard and for the different paper grades, as we have mentioned. I think liquid packaging, I mean, they live in many ways, you can say, the contract life. They are, as you know, longer term. And there is no different mechanic based on that. They are not in a short-term cycle impacted as we will typically see on some of the other segments.

Okay. Very helpful. Yes. And a third question, and that's the CapEx. You're making a small adjustment. Should we expect this less SEK 200 million be invested in 2022? Or is it sort of less CapEx for the company? How should we see that?

No, it's a very good point. And let me just clarify this. So the overall Frövi project of SEK 2.6 billion, that's unchanged. It's just the phasing. So SEK 200 million less expected now for 2021. But you can roughly say you can expect SEK 100 million more for 2022 and 2023 versus what has been previously communicated.

Our next question comes from Cole Hathorn from Jefferies.

I just wanted to follow up on the comments you made at the end around your longest -- longer-term strategic direction. Could you just give a little bit of color? Is this a major rethink, as in starting to think about potentially disposing of some of the units like your solutions business or even something more material like your packaging paper division? Or is this just kind of setting out your longer-term strategic targets, et cetera? It's the first question. And then the second question on the packaging paper division, I'm just hoping you can give a little bit more color by end market. Where are you seeing the demand pull in packaging paper? What is pulling the improved demand in kind of brown sack paper, white sack paper and then your speciality kraft grades? And then the final question around the CapEx into 2024. I do think it's always good to be thinking ahead for -- to grow the business, but return on capital employed was impacted by the Gruvön mill due to overruns there. How do you think about return on capital when you're allocating a new CapEx to grow the project?

Okay. Thank you. Look, as you know, I joined BillerudKorsnäs in November. And I kind of, with the team, decided let's make sure that we continue on the current list of priorities, which were health and safety, which was Gruvön, which was stable production and it's the cost-saving program. And we have done that, and you see the result in quarter 1 and quarter 2. But that's clearly not a strategy in itself, okay? So what we are actually doing is now to work a little bit fundamentally of saying, "Hey, what is the kind of growth rate we want to achieve? What's the kind of profitability level we want to achieve? What is the kind of capital structure we want to have?" Because you alluded to the KM7 and how do we look at that? And my sense is, on one hand, yes, we need to go back to a healthier return on capital employed. But on the other hand, Gruvön is what it is. And therefore, I will not limit the strategic option to some consideration because in the past, things happened which were a bit unfortunate. So I think what we're doing is a fundamental review. We will discuss it with the Board, and at this stage, I cannot give you much more color than that because there's so many options we could pursue. But I think by the end of this year, we should have a very clear idea where the trend is going. Do you want to take the next one, Ivar?

I can do that. And Cole, I think on paper in general, I think the answer is actually pretty simple, since if you look at most of the channels, the way the products in kraft paper and sack is landing, we just basically see a very shift of optimism and a much more activity-based pulp. So if you go into industry and you look at construction or you look at automotive, certainly, the trend is going in the right direction. E-commerce for us is still a growing channel, and it's certainly been booming. Retail in general is also really picking up now during first half. And even foodservice, which was, in many ways, you can say the last channel that started to turn from somehow neutral or soft into growth, we've really seen also that now in second quarter that is gaining momentum. And yes, basically, demand pull is back to a very different level than what we saw, yes, only a few quarters ago. Listen, I think on the last point, it's a good one around our return on capital employed. We are obviously not very happy with the performance we see at the moment with 4%. It's far away from the target that's currently been set. And no doubt that with the overrun, this put more weight than we expected. I can only just say that, Cole, we will be reviewing that as well and clearly have a very clear lens into the future CapEx expect -- and approvals that it should deliver, well, a different level then versus what we've seen in the last couple of years.

Our next question comes from Linus Larsson from SEB.

Yes. I'd like to start on the wood supply side, and it sounds reassuring, at least for the short-term outlook that wood costs are expected to be stable. You also say and you have been saying on a couple of occasions that you are looking into the long-term strategy and to safeguard competitive sourcing. Could you possibly expand a bit on that? What potential changes are you looking into that, that could have a material impact on your currently quite exposed situation in the wood cost aspect?

Do you have any more questions? Or shall I go for this?

Yes, I do. Actually, I can continue on -- as a follow-up on this very question and maybe tying into a previous question in terms of capacity growth beyond 2024. And my question here relating to my first question is whether you're also looking into that question in relation to my first question, i.e., would you consider teaming up with someone in a potential capacity investment situation to safeguard the crucial raw material supply?

Yes, I agree, this is fully related. And yes, when it comes to the long term, any capacity expansions condition has to basically be very clear in view of wood supply. So we're looking for capacity expansion, which will allow us to have a stable wood supply to competitive pricing. And that clearly opens up the world to some extent but also makes the choices quite difficult because there are not too many areas in the world where you have competitive wood supply like in Scandinavia. I think in the short term, it's more an issue of our behavior and the behavior of that of our competitors and suppliers. And I think that clearly, we see in the north -- in the north, we've seen in the future probably some increases in wood price because of the pulp mill which is built in Finland. You have also seen some expansion plans from Stora. But then you have also heard about some closures from Stora. And these are the big moves which will have a medium-term impact on the supply availability of pulp wood. Then you have a long-term trend, which is clearly the policy Fit for 55 of the European Union, where in particular, the forestry management is mentioned. And clearly, I think many of the industry were not particularly happy about the ideas which were voiced there. But I think at the end of the day, we are all sourcing from the same basket. So even if we had a forest, while wood prices would also go up because we wouldn't make the same amount of money if we were to sell to someone else. So I think from that perspective, with our competitors, it's all a zero-sum game. And at the end, packaging material will evolve also with wood sourcing, what is wood prices per se. So my sentence here, it's a strategically very important question. And like most things in life, on the short term, it's about our good relationship with our supplier, our ability to manage prices, our ability to develop new sources of wood. And in the long term, it's about placing our mill strategically in areas where overall, the wood supply is in good shape. Would we partner with people? Maybe, yes. Yes, I would never exclude it. Do we do negotiation on these type of partnerships? Well, I cannot really comment on that. So I think when it happens, it happens, but my perspective is on the supply side, yes, you can always investigate partnerships. And if there's a win-win, great. I mean, you have seen the case of Metsä, which was done in Husum. Good. I think that's about it, I think. Thank you. Thank you for your questions.

Yes. That's very helpful. May I just -- that's very helpful. And just a quick one. You said the FibreForm had a good quarter. As an update, could you provide any more color on FibreForm? It's a very interesting product. It has some great features. But how big is it really? Is there any way to quantify how -- what the size of that business has become?

Look, FibreForm is a great innovation, and it's a great product. But I think in comparison with our total business is so marginal at this stage, that I cannot really comment on that. It's small, and it's growing fast, okay? And -- but it will take a significant amount of time and the change of brand owners to use this type of products with scale. But it's -- I think I'm very happy about this innovation and the margin that these type of products are delivering.

Our next question comes from Martin Melbye from ABG.

Yes. I think my questions on pricing have been answered by now. One question remains on KM7. Could you make it simple and say how much remains of the EBIT that is supposed to come from this project? I think it was SEK 600 million. How much have you actually realized as per Q2?

Yes. No. So Martin, as Christoph already mentioned in the beginning, we're moving away a bit from, in particular, commenting particular machines. And of course, I understand interest given this is a big one. But maybe I can just go back to some of the points I also answered to Robin around the business case, that the vast majority of building block of this famous SEK 1 billion is coming from volume going to SEK 550 million versus then the kind of starting point of the old machines of SEK 215 million. Christoph did mention that this year, we are expecting to land somewhere between SEK 350 million and SEK 370 million, following being ramped up in 2024. So that should give at least a big indication. We are making good progress then on the second building block, which is the -- driving the Frövi and the Gävle and the Gruvön as a much tighter organized unit. And the last one which we still have to be, you can say, completed or done is to further get efficiencies on the fixed cost out of Gruvön. That's probably as far as I'm willing to go on that question.

Our next question comes from Christian Kopfer from Nordea.

Yes. Just 2 little bit more longer-term question from my side. First, it's about a follow-up perhaps then on the product launches earlier here. If you look at them as an aggregate, you typically come up with a lot of innovative new products. And if you look at it from an aggregated level, will it still take a lot of time until you see a material impact from those new products? Or do you think you will see a gradual impact during the next 4 to 8 quarters or so? That's the first question. The second question is on the -- also a follow-up on the wood supply in the more longer term. If you could comment a little bit on what we hear from the European Union on perhaps a risk that less will come out of the European forests and how that -- how -- what's your view on that versus an increased risk of competition from mills outside of Europe that doesn't have this situation?

Okay. Let me answer on innovation first. So clearly, we're not in a business like an FMCG company, where you have very clear -- after a couple of months, you know exactly where the rabbit is running. So I think all the innovation we are doing are -- tend to be quite evolutionary. So they create lower weights, more strength, better printability, better pliability, all these type of aspects, or better barriers for that matter. And as we move on, people tend, at least those who are working in the quality areas, tend to substitute the previous grade with the new grade. And the new grade, we price them very competitively, so we get better margins as well. So this is the kind of day to day. What we have done this quarter, so quarter 2, is we have actually looked in our total innovation portfolio. We talked a little bit about that, I think, when I had my -- the quarter 4 review. And a lot of you asked me what did I find when I entered BillerudKorsnäs and what my perspective was. And I must say, now 6 months along the line and in particular with the work we did in quarter 2, we have basically streamlined our approach to innovation in the sense that I wanted to see a portfolio. I want to understand what the business case of the -- with projects are. I want to understand where they are. I want to understand where -- when will they be launched. And this work has now been done. And I think now we're in a much better situation of being able to prioritize resources on specific projects, do projects more in sequencing rather than in parallel. And I'm pretty confident that we will -- can accelerate our innovation rate going forward. And when it comes to the financial returns of this innovation, clearly, that is one of the key aspects. We need to understand that any innovation has to have a very significantly high return on capital that offset what we have. So that's clearly a must. And then the second part is all the innovation we are doing has to have a better margin than what we have. And that is basically the game we are playing on the innovation side. Second question was on the wood longer term, yes, EU. Look, I must say as probably most of my colleagues in the industry, we are a little bit confused by the European policy on wood or on forestry per se because you clearly see a competing interest even within -- or contradictory policy within the EU. So the first one is we want circular economy. We want to have recycled products. We want to basically change, move away from plastic and this type of materials and become much more carbon neutral. And on the other side, you want to have biodiversity, and you want to have a carbon sink with the forest, and you want to stop people basically taking down trees, et cetera, et cetera, et cetera. So these are 2 very, very difficult policies to combine. And then on top of that, I think on the European proposal on policy was to make the overall forestry strategy more European affair rather than national affair. And as you know, countries across Europe managed their forests in a very, very different way. I think Sweden is probably -- Sweden, Finland and, to some extent, Norway are world champion in managing their forestry in an excellent way. And we have so many other organizations like FSC, et cetera, who set very good, sustainable forestry rules and whatever you have. And therefore, I think we are a little bit skeptical at this stage on -- in particular on the forestry proposal. But we have to recognize that clearly some of these aspects are also true, and I think biodiversity is important, et cetera. It's a matter how you handle it. And our preference would be that this would be continued to be handled by -- on the national level because countries are quite different and the forestry tradition are very different. And the second part is probably that in the long term, I see some -- we're talking now over the next 10 years. I can see some increases in raw material prices on wood just by the fact that you limit the amount of wood you can explore -- exploit, especially in Scandinavia, where a lot of -- where forestry, if you like, compared to other countries is very active and very developed. So that's a bit my view today. We are working clearly with the forest industry association and our different trade association to have -- to basically have an input into the debate. And then we will adapt ourselves to whatever comes out of this debate, and I think the time line is 2022, 2023. So it will happen rapidly, and it will have, I think, an impact on the overall industry.

The final question comes from Mikael Doepel from UBS.

Just a couple of questions still from my side. On the sack and kraft paper markets, could you give any comments on the growth rates in the markets in Q2 on a year-over-year basis across the key products there? Perhaps if there's something you could comment what's happening on the supply side in terms of disruptions or [ Sweden ] mills. And also, if you can say anything about the magnitude of price increases that you have achieved in this business area and what you expect to achieve ahead. My second question would be on the solutions business. Performance was perhaps a bit disappointing in the quarter, with revenues up clearly on a year-over-year basis, but the earnings still down. Perhaps you could talk a bit about what's happening there and what you expect for the second half of the year. And then finally, on the cash flow, we did see a good working capital inflow in Q2. I think you had an outflow in Q1. But how should we think about the full year from working capital perspective?

Okay. Ivar, I will hand that to you.

Yes. Well, thank you, Christoph. I think on the sack and kraft, let me just see if I got my notes right here. I think the market growth, also some lag in terms of some of the reports. We don't have fully updated yet from the first half performance, but I can definitely confirm that second quarter underlying demand is higher than what we've seen. I think we would expect to probably see for the first half somewhere between 2% to 3% growth. There is -- because this is also a question that we've been asking our sales guys, if the performance that we've seen in Q2 is more of an inventory adjustment or actually believe that the market pull is real. And the vast and overwhelming response is it's the latter. So we actually do believe that a lot of the fundamentals behind the demand and the channels coming back to growth after a bit of hibernation, you can say, in the COVID times is certainly, maybe not fully over, but it's definitely taking a very big step back into the right direction. I think on the supply side, there's nothing major. I think [indiscernible] probably had been a little bit less active in the first half of this year versus maybe what we saw last year, but I think that's more a temporary item that we don't expect to go going forward. I think on the pricing, I think I have mentioned, and I don't think I have too much more to add more than it is true that some of our pricing announcements within paper, we didn't have a lot of impact on that in Q2. It was relatively marginal. So we will certainly expect to get more of that now then into Q3 with, again, full year quarter impact and some new items coming in at 3rd of July. I think my range of 3% to 4% is still pretty good as a kind of a bit of a proxy of how we expect the different segments to deliver. I think on solutions, I think actually one of my favorite tables, I'm just going to check that, that's also picked up. It's based on Page 23 in report because it's one of the last tables on that page. I mean, we saw the hedging or the currency hedging, et cetera, because that always is a bit of a moving item based on the revaluation of receivables and our hedging position. So when we take that out and we look at the solutions other a little bit more cleansed, you can say it's slightly better than what we had in Q1, which is basically the managed packaging business doing a bit of a better. And that level now or what you see is somehow what we expect also to go into second half. And the drivers, you can say, from last year, when we say it's minus SEK 44 million is actually that the Q2 last year was unusual low, you can say, or better than maybe this year being strange. And some of the bigger building blocks to explain that gap has been around phasing of some of the variable pay provisions that we do. And we also have some emission right timing, which explained a little bit that number. I think your last point around the cash flow, I think you're absolutely right. And maybe I can just quickly remind people on this because it's not an unimportant point that we had a very good cash flow delivery first half. And when you think about what are the main drivers so far in 2021 versus what we saw last year on the working capital, it's actually -- well, most [indiscernible] related to some of the items we had sitting in last year's result. For some of you remember that we had this energy collateral balance, which now we will be taken out and eliminated that when we came to the end of 2020. So that explains the SEK 260 million. There's also some receivable balance of some incoming tax payments last year, a bit more than SEK 200 million sitting in. That explains also part of the balance. And then the delta to come up to what we delivered as an improvement this year, it's mainly inventory-related. Probably inventory first half last year was a bit on the high side. I can certainly confirm that inventory now going into end of Q2 this year has been on a very low level, very much linked to market and demand being very strong across. And with some of the challenges, for instance, we had in Gävle, inventory levels are very low. So that means if you think about the second half, I mean, [indiscernible] is one thing, but we do not expect to see the same pickup of working capital in particular that we have seen in the first half. Actually, I think we will even get a small hit on inventory because inventory would, if everything else goes well, come a little bit back into a more normal level, which is a more sustainable level for us to keep up a good service level rate. And that means we would expect to see working capital in the area of 9-ish percent of net sales. I think that will be my estimate. Hopefully, that answers some of your questions.

We do have a follow-up question with Oskar Lindstrom from Danske Bank.

Yes. Just 2 questions here. The first one is on the low inventory levels at the end of Q2 for your part. Should we expect this to limit your delivered volumes in H2? So that's my first question. And the second one is on the insurance compensation for the Gävle incident. I understood that the cost for that came in at the higher end of the range. I believe it was SEK 75 million in Q2. When and how much of that can we expect to be compensated through insurance? Those were my 2 questions.

Okay, Oskar, last question from you in this meeting. That's good. Okay, first one is inventory. Look, if production goes well, there's no issuance delivery in the second quarter and -- in the second half, sorry. And actually, one of the reasons why we have so low inventory as well now has to do with the Gävle incident because then basically all the stocks in all areas went down. And now our challenge is that while we are fully booked, we need to reconstruct some of the stock levels, either because they are security stocks of customers or, generally speaking, in order to keep our service levels high. So if production works as planned, we will have no issue, and that's clearly our key [ assumption ] going forward. Ivar, do you want to take the Gävle?

Yes, I can do that. I think -- Oskar, listen, just a quick recap on the case. So what happened in terms of the extra cost enforced upon us, clearly the volume loss was the biggest item with a lot of days of either completely reduced speed or pretty much no production at all. There's a certain repair cost as well that will need to be done to sort the basically asset back into shape. We also had a third part because this digester certainly influenced the internal pulp supply in the site, and we were forced then to go out in the market and buy a bit more external pulp than we normally would do. So all of this combined kind of adds up. So in this estimate now of SEK 75 million, it is a certain expectation on the insurance compensation for that. And we have a very good dialogue with our insurance providers, and we don't expect any big movements now from the amounts that we have already communicated.

And sorry, the timing, when should we hope for this money?

No. So already now in the Q2, it sits a provision or an expectation for the insurance compensation based on the dialogue we have with them. So we don't expect another or big future [indiscernible] based on the number we've already talked about.

All right. I would like to thank you all for your attention and your participation to our quarter 2 call. And I would like to wish you all a very, very good summer. And I'm looking forward to speak to you in our Q3 results. Thank you very much.