Billerud AB (publ) (OTCPK:BLRDY) Q4 2022 Earnings Conference Call January 27, 2023 3:00 AM ET
Company Participants
Christoph Michalski – President and Chief Executive Officer
Ivar Vatne – Chief Financial Officer
Conference Call Participants
Christian Kopfer – Handelsbanken
Robin Santavirta – Carnegie
Oskar Lindström – Danske Bank
Linus Larsson – SEB
Martin Melbye – ABG SC
Johannes Grunselius – DNB
Cole Hathorn – Jefferies
Operator
Good morning and welcome to Billerud’s Presentation about our 2022 Year End Report. The presentation will be held by our President and CEO, Christoph Michalski and our CFO, Ivar Vatne, and as usual, they will take questions after the presentation. So Christoph, let’s begin, please.
Christoph Michalski
Good morning, everyone. I am here with Ivar and I am very pleased to be able to present you our 2022 results and the quarter, in particular.
So before we go to the quarter, I just want to highlight, we had a record year in 2022. You can see we reported 63% growth, which was the Verso acquisition, and on top of that, a very impressive 16% organic growth performance, all-time high profitability, adjusted EBITDA margin of 19%. We were able to mitigate most cost increases during the year with prices and mix. And with our new company, we have now achieved an EPS, which has tripled versus a year ago. And most of the EBITDA was translated into cash, which as you know is an important part of our going forward to transform the U.S. into cartonboard and the projects we have in Norway.
If I go a little bit through the key items of the year, you remember we had a Capital Market Day in November 21, where we basically presented you and discussed with you our strategy. I think in 2022, we have executed and we have worked on many, many on the points of the strategy with some good success. So if you look at our record sales growth, it also means we had an excellent ROCE and our net debt level to EBITDA is only 0.6x, thanks to the performance and to the issuing of new shares in June last year. The acquisition of Verso has gone very smoothly after the closure on March 31. We have started an integration process. And today, we have basically decided already to finalize this project is now finalized in terms of integration and a few outstanding items will be run by the functions. So very good and very quick integration. We have also started to work immediately on the transformation plan, which is progressing well and we continue to work towards the second half – first half of this year, where our pre-feasibility should be completed.
When we talk about Norway, good progress as well, we have completed the pre-feasibility and are now in the feasibility phase. Just as a reminder, Norway is basically a joint venture with Viken Skog, where we would like to build a BCTMP pulp mill with the best-in-class performance, but also with the opportunity for biogas capture and carbon capture and to integrate basically to create the first – our ambition is to create the first carbon-negative pulp mill in the world. So, all progressing well.
Finally, you are aware and this is not about our strategy of the CMD, but about a project that we launched a little bit before that, which is our recovery boiler in Frövi. Despite the war in Ukraine, despite all the logistics delay, despite all the missing items and components and chips in the world, I am very happy that the team has progressed this project on track. So it’s on time, on budget and it will probably go online in quarter three next year, a little bit in advance of the timing of quarter four.
Let me go now in quarter four. So quarter four continued to be strong, both in net sales growth, 14% organic growth and also in profit. I think we are very pleased about our North American business, which contributes significantly to these results. In Europe, we have a slightly different picture. We have now I think maxed out pricing, but cost continues a little bit to climb. And I think this is probably the first quarter where we see some more softer demand, which is in my view very much driven by some destocking of our customers and probably also about the future outlook of the economy, which probably November, December was still very much appear to be bad, which I sense is a little bit better now already. So I think we will see it happening now in quarter one and then hopefully, a quick recovery after that.
Let me take you quickly through the bridge on net sales. You have seen pricing impact in this quarter is still 15% and basically currency rate a little bit. Volume growth has been flat overall, but strong performance by adding North America you can see 60% of the growth. And then finally, I think Beetham is the last time we have it in the quarter, because it was divested about a year ago. When we go to the profitability, again, outstanding profitability from North America and for the first time, unfortunately, you can see that the cost inflation actually exceeds the pricing and mix that we achieved in Europe. We don’t expect this to continue for many quarters, but I think quarter four is still clearly the start and we hope that in quarter one 2023 the worst will be over. I think it comes from the double effect of economic unsecurity and some destocking. And this will be very quickly through, I think through the system.
Why do we – are still very optimistic for the year 2023 despite relatively weakness in quarter one and maybe already softening now in quarter four? It’s because we have a very significant of our sales in the foods and drinks sector, which tends to be much more stable. But I think overall, it comes from a very high level. And therefore, going forward, by segment, we will have more challenges going ahead. Clearly today, we see already some significant weakness in industrial and – but continue to see good performance in printing and publishing paper in the U.S. and foods and drinks as I said, are more stable as we go forward.
Okay. I will stop here and hand over to Ivar. Good morning, Ivar. And please, I leave you.
Ivar Vatne
Thank you, Christoph and good morning everyone. A couple of words on input cost and price development. We have seen in other quarter, as Christoph was mentioning with steep cost inflation, we have added roughly SEK325 million when we compare to previous quarter, so that will be Q3. However, the situation there is created between the region. For North America, very good news, we have actually seen a reduction of costs, so about SEK60 million versus previous quarter. And this is, first and foremost, related to the decline in natural gas rates post-December period. Chemicals and logistics pretty much flat for the U.S. region. That means for region Europe, we have seen cost inflation in the area of SEK385 million. Fiber and chemicals are by far the biggest cost drivers, each with incremental SEK200 million each when we compare them versus Q3, logistics being stable, while we see a slight help from energy around €50 million.
Now going into Q1, we do expect the same regional trend to continue. So for North America, overall, we expect to see a pretty flat cost picture and we then compare versus Q4. Then however, for Europe, the pace of cost inflation is slowing down, which is good news, but we estimate around SEK270 million of additional cost to be added in the quarter. And most of that is expected to come from fiber pulpwood SEK150 million, followed by energy SEK100 million, and a small tail on chemicals of SEK20 million. We do expect logistics to be flat.
Now if we move on and we start with some coordinates for product area, paper. Product area of paper had another outstanding quarter with excellent performance, both when we look at top and bottom line. As we have seen over the previous quarters, we see double-digit net sales growth across all categories. And for both regions, which is very pleasing. We managed to add approximately SEK100 million of extra pricing when we compare that to Q3, pretty much solely coming from North America impacting the graphic and specialty paper. Pricing in Europe was more or less flat.
Volume came in a bit short for this quarter, and I think Christoph already alluded to this, but it’s mainly related to softer demand across categories and different channels combined with inventory adjusted by some of our customers. Profitability for the quarter outstanding, ending with a 28% EBITDA margin. Most of the profit growth is related, obviously, to the inclusion of our North American business, but also within Europe, we managed to keep an impressive profitability level that we are really pleased to see.
So, let’s move over to product area board and for product area board, some similarities, but also some quite sizable differences. To start with the top line performance is another solid quarter. Yet again, we see high double-digit growth across all of the categories. We have managed to keep prices flat throughout the quarter, although the market is starting to show clear signs of pricing contraction within several categories. Also for product area board, the volume landed a bit soft versus expectations, very similar drivers as we mentioned, for paper, softer demand, in particular for containerboard and cartonboard in addition to some inventory adjustments for some of our customers. We did see a pretty hefty profitability contraction for the quarter.
I’d like to explain that for a couple of minutes. In essence, the margin is coming down mainly due to cost inflation has continued to accelerate while pricing is leveling out. And on top of this, we have had some production challenges during the quarter that incurred some one-off costs and actually, probably a better way to visualize this and give you a bit of a size of the magnitude if you move into the next slide, this is a bit of a one-off event we do to show a quarter-over-quarter bridge for product area board, but I thought that might be very useful this time given the pretty hefty movement we have seen.
So starting with the base than Q3 from ‘22, there is a certain help coming from our net FX position. While pricing is flat, volume and mix hits us negatively, while the big item quarter-over-quarter is the cost inflation. Most of it, as I mentioned already, is pulpwood and chemicals related. You find a small little item as well on the vacation accrual and that is obviously linked to how we handle the vacation we have during Q3 and we also have some other items. There is a red box there at the bottom, SEK145 million of production disturbances during the quarter. You can see that is cost and items that needed immediate care given how we had some troublesome items, non-big insignificant, but for most of our board mills, we had some items that needed extra care in the quarter. Now – and I want to highlight that, that is an item that is one-off in nature and we do not expect to carry with us going into Q1.
Good. So if you take next slide, please and moving over to cash flow. This has truly been one of the biggest successes during 2022. We have had and we have delivered strong cash conversion pretty much in all the quarters and Q4 was no exception. 83% of the EBITDA that we manage to see to operating cash flow and that is a number that we are delighted with. We have seen very similar ratio also for the full 2020 figure. I mean, the strong cash conversion has enabled us to fairly fuel our balance sheet and we end the year, as also Christoph has alluded to, to all-time low net debt leverage ratio coming down then to 0.6x when we close the books for December. The very different profitability level we have also seen has ignited our return on capital employed and as we come a long, long way in a few years and reached now 18% for the total year.
The Board of Directors proposes an increase of ordinary dividend from SEK4.30 to SEK5.50 per share. And on top of this, the Board of Directors has proposed an extraordinary dividend of SEK2 per share. As you know, this will go to the AGM further down the line in ‘23. Slight change of the CapEx outlook for ‘23. We move it up by roughly SEK100 million. So, SEK3.1 billion is the best view we have at this stage, SEK2.2 billion of those coming from what we call base CapEx items between the region and then the recovery boiler, SEK900 million as that project will start to come to completion.
Right. So you can move to next slide, please. And I think in a situation where the market situation is volatile, also difficult to predict, it is of high importance we continue to focus on items that we can all control and that is obviously what we wanted to focus very hard on going into ‘23 as well. We are launching a new profit improvement program that will run over the coming 3 years, setting also the ambition quite high, achieving a profitability uplift of SEK1.5 billion, measured then in the run-rate when we come to end of 2025 and that is obviously measured in an EBITDA impact. Clear target for this year in ‘23 is to already deliver a SEK400 million impact when we close the books then in December ‘23.
Now little bit more about what this program is all about. And I think it’s probably useful in this context to talk about the evaluation and the learnings we take with us from the cost and efficiency program that we started back in the fall 2019. We have run that program now for a bit more than 3 years and closing it down in the end of ‘22. You might recall we have raised the program ambition several times throughout the program. And that program was mainly focused on cost efficiency within fixed and variable cost buckets. And what we take with us from that, I would argue, very successfully executed program, is both [indiscernible] what the impact the organization can generate with the right focus. And we also take with us quite a bit of confidence there is definitely more potential out there.
And what we are really trying to achieve with this program is to reach further to the full potential of the company. And if I can use an analogy, we probably picked some of the lowest hanging fruits now in our previous cost and efficiency program. This time, we climb a bit higher up in the tree to pick some items that are little bit more difficult to reach. And particularly in this case, we will be looking at items and activities that require a stronger functional collaboration and examples in this case being areas to reduce trim, optimize further product recipes and a much more seamless sales and operational planning across the company. You can expect quarterly updates on how we are progressing on this program. We will also, at some point, come back to a target split for the 2024 and 2025 impact respectively.
So with that, I hand it back to Christoph.
Christoph Michalski
Thank you, Ivar. Thank you, very clear. So priority 2023, I think the most important for you to know is our strategy has not changed. We have a growth agenda on cartonboard expansion to the U.S., basically optimizing the footprint of our operations in Europe and to continue to have very efficient wood supplies. And I think if there is one item on the agenda, which has to be clearly number one and where we are, I think, not making the progress I wished is on health and safety. We achieved not entirely our target in 2022. So we need to redouble the efforts to achieve our targets in 2023, so very important. We continue to work on our strategic objectives, sales growth, the continuous focus on sustainable packaging opportunities and innovation. We also will continue to work, as Ivar alluded already on our profitability growth, not only with efficiency programs, but also with when it comes to mix, price management and in particular, production stability and cost discipline.
As Ivar mentioned, we deploy this efficiency program and I think this is really the right program to do. It’s not about cost-cutting. It’s about efficiency improvement, which is basically a big team sport. So when I talk about the key projects, which is clearly on our agenda. On this slide, you see a photo of the closed recovery boiler at Frövi, so very good progress. If you remember the initial photos we showed you in the other quarters when this recovery tower was slowly built expected startup, as I said, through quarter three, I think the Norway BCTMP feasibility ready in quarter three as well. So ready for investments, but we haven’t seen any red flags on that project today. And we are very, very happy with the collaboration with our partner, Viken Skog in Norway. Pre-feasibility of the U.S. is continuing into H1 and that will then define more or less the timings and a better view on the overall CapEx and we will come back to that in due course when we have the right discussion with our board.
Outlook quarter one, more challenging, as we already alluded to, with softer demand. And I think, again, softer demand why, because of slightly adjustment of stocks. And these stock adjustments are probably coming from the logistic difficulties we had in ‘22 and people basically for safety ordered more than they would have normally done. Secondly, uncertain economic outlook, but maybe not as bad as we might have thought a few months back. So I think there is hope for significant improvement. And then finally, I think every time a market goes into this kind of wait-and-see, there is also some expectation to order later just to have more security when it comes to volume needed and surprising at that moment in time. Liquid packaging board is the exception, that is very clearly stable. And as I mentioned before, we even had some good price discussion with our customers in order to mitigate some of the cost inflation and they were very successful across all our customer in liquid packaging board. We will have nevertheless acceleration of cost in Europe still in H1. We hope that this will clearly soften as well as demand generally in the economy is going down. But clearly, the key driver is energy and then when it comes to the forest industry, there is still some basically, we are probably at the peak of the wood price now as we go ahead.
In the U.S., the picture is better when it comes to cost. It’s stable. Some are even declining. And we sit in a very competitive wood basket, and we expect the U.S. business to basically motor on as we go with the same kind of caveat on the economic development and some destocking in graphic and speciality paper.
And then finally, quarter one is clearly the kickoff of the efficiency enhancement program. And as even alluded to it, we have a strong target of €400 million for this year. Quarter one is really the ramp up. We are well preferred, but the projects are rolling in. But therefore, I think quarter one will be the start-up and then in quarters two, three and four, we can probably report some results from that program.
Good. Having said that, I think I come to the end of our presentation. And I will hand over to the operator who will manage the Q&A as we go on. Thank you. Thank you, Ivar.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And our first question comes from the line of Christian Kopfer from Handelsbanken. Please go ahead. Your line is open.
Christian Kopfer
Yes, thanks, operator. Good morning, everyone. Just firstly, Christoph, I think in your final remarks, you mentioned that you have been very successful in raising prices within liquid packaging board. But still, you also mentioned that you are not able to, as I understand it at least, to fully mitigate the cost inflation. Is that because this is, over time, a very stable product so that it is quite hard to get the price hike through or how do you view it?
Christoph Michalski
Good morning, Christian, thank you for that question. Well, look, I think, as I said already in quarter three, and some of you were quite surprised that in liquid packaging board, we have long-term contracts. And I think we took the extraordinary measures this time that we would basically have a round of price discussion with our customers because the inflation – cost inflation we see in Europe, both because of energy and that then translate to chemicals, etcetera, but also on the wood side was significantly more than you would normally expect in the stable markets. And I cannot really go into a customer-by-customer, but we got what we needed in order to continue this business in a good way. And we also understand that costs are probably at its peak now, and they will come down. So when I say it mitigated some of the cost, it’s probably in quarter one. It might not be everything, but over the year, we hope that this will basically help us in profitability as we go forward. And I must say, I must thank also our customers who showed a lot of understanding that the situation in which we are in, quite dramatic and also quite exceptional, I think, compared to previous business practices. Thank you.
Christian Kopfer
Thanks, Christoph. Ivar for you. I’m very sorry that I think I missed the numerous call it, guidance that you had for the first quarter on the cost at least if you also said something on price. Could you just – sorry for that, but could you shortly repeat the cost – the numerous guidance that you had for Q1?
Ivar Vatne
Yes. Hi, good morning, Christian, sure. I can do the short version then. So I don’t want to bore everyone with the same thing I said. But why don’t I start with the cost piece. So we did obviously add some numbers for Q4 to Q3. But for Q1, then when you compare that to Q4, the number we have is SEK270 million. And the short version there is that North America is flat. So all of it is coming from Europe, and that is fiber, pulpwood, roughly SEK150 million, energy SEK100 million and chemicals SEK20 million. Now in terms of pricing, it’s starting to be quite a bit mixed bag. We start now to see more of a contraction more than anything else for the categories. I think there is two exceptions, liquid packaging. We obviously have a good solid contribution of positive pricing from beginning of Q1. We also have a bit of a help from specialty in U.S. as a carryover effect. But besides from that, we’re starting now to see basically contraction across pretty much every category, containerboard, cartonboard coming down, same for brown-and-white stack and also kraft paper. So we have an estimate of roughly 2.5% of our material sales quarter-over-quarter and that should be in the area of SEK250 million Q1 versus Q4 as a negative pricing impact for the company.
Christian Kopfer
Yes. Thanks very much for clarification, Ivar.
Operator
Thank you. [Operator Instructions] And your next question comes from the line of Robin Santavirta from Carnegie. Please go ahead. Your line is open.
Robin Santavirta
Thank you very much and good morning, everybody. First of all, related to the production disturbance you had in December. What was that about – where? And is this something that is isolated for Q4 or is there any impact that you expect for Q1 as well?
Christoph Michalski
Good morning, Robin, short answer is the disturbances was basically difficult in start-ups. It touched a number of mills totally disconnected from each other in terms of events, and it’s more the bad – the sum together, which makes it quite of a significant number. So I think most of that, you can assume that this will not happen again, at least we don’t plan for that. And I think things are well under control in a much better situation than we have previously been in. But from time to time, these things can happen. So I don’t see this as any significance, but I just wanted to make sure that you understand that the result in quarter four and particular on cartonboard, were quite influenced because it really happened more or less focused on our cartonboard mills. Thank you.
Robin Santavirta
I understand, thank you very much, Christoph. The second question I have is on pulpwood availability in Sweden. How do you see that situation panning out at the moment? Do you sort of plan to go ahead as you have done before you buy mostly in Sweden a bit, in the Baltics or is it a situation where it could make sense to start to look at Latin America, UK chips, or then wood chips from North America?
Christoph Michalski
Okay. So yes, so you’re absolutely right. As you remember, we missed about 15 million cubic meters coming out of Russia starting from the beginning of the war and that created across Finland, Sweden, Baltic states, etcetera, a lot of uncertainty in the market and also some market adjustments, okay? So just the context again, what we have done, I think we have been very successful to basically mitigate all the uncertainties and supply shortages that some of us have seen over this year. And overall, we are very satisfied with the outcome. When it comes to overall wood supply in Sweden, I mean, you know my view on that. I think Sweden is probably at maximum capacity at this stage and probably Finland as well. You all know about the discussion at the European Union level about what is the role of the forest? Is it a productive raw material, which absorbs carbon or is it a carbon thing where you basically do nothing? And some of this policy clearly will have an impact in the future. And that is why we have a very clear strategy of widening our wood sourcing strategy, where we are investigating different sources. Probably [indiscernible] in that is clearly Norway, with our joint venture with Viken Skog, which is around BCTMP production but also about wood supply from Norway into our Swedish mill system. And just to remind you, I mean, Viken Skog’s main area is about 200 kilometers from Gruvon, so it is by any means a big challenge when it comes to logistics. Secondly, you’re absolutely right, we are exploring different forms of pulp chips and whatever it is across the world, including from our sources in North America. But I think wood prices overall are not yet at the level that you would actually consider this at scale. Where I am very confident is that we have now a good strategy in place, good discussion also with our partners in the forest industry. And our approach between short, so basically short-term purchases and more long-term contracts is also in a much better state than it was maybe 2 years ago. So overall, I’m very confident that we’re in a good position on that. But you’re absolutely right. I think the Swedish wood market as such will – is feeling the effect on the closing of the border with Russia and is also feeling the strain in the political discussion around the forest and in the future.
Robin Santavirta
For sure. Thank you for that details. A final quick one on Verso performing exceptionally well, so well done on that, what is the outlook for the market balance on – for Verso for your North American business now going into 2023?
Christoph Michalski
Okay. So let me answer that question in two parts. We have two main markets. One is graphic paper and one is speciality paper. In graphic paper, we see a level of good stability with holding prices and a little bit softer volume as people are reconsidering their marketing plans based on the economic environment in the U.S. As you know, we are a big supplier to premium catalogs and to commercial printing. And on the specialty paper side, the situation looks very good. It has to do with two things: A, the market, as you know, is growing; and on the other hand, there are some players who won in particular, was left to the market at the beginning of this year, which makes basically the market balance quite positive in view of producers. There is a bit more volume in the U.S. where [Technical Difficulty] comes from a statistic in November and December comes mainly from ordering because there was a shortage for a while, and the supply arrived basically for everyone at the same time. I believe these imports into the U.S. will stabilize at the normal level as we go forward. And therefore, I believe the U.S. has a good chance to have a good stability in the market, which makes us believe that our business performance will continue to be good.
Robin Santavirta
Thank you very much. Thanks.
Operator
Thank you. [Operator Instructions] And your next question comes from the line of Oskar Lindström from Danske Bank. Please go ahead. Your line is open.
Oskar Lindström
Yes. Good morning, gentlemen. Three questions for me. The first one is on cost inflation. Ivar, did I hear you say that cost inflation is slowing? And if so, what signs are you seeing here and where? And also, you talked about the outlook for pulpwood obviously, your most important cost item. But I was wondering a little bit about the chemicals and caustic soda situation, in particular, which we hear is prices are up sharply and perhaps availability is slower. So that is my first question.
Ivar Vatne
Oskar, can I just maybe get all of you three at once, and then we will take them.
Oskar Lindström
Yes, certainly. My second question is on the solutions and other business. I mean here, we still saw red numbers or earnings last year, despite it being otherwise very good year. Is this the other part that’s dragging it down or is the solutions business still loss-making? And if so, what will it take to improve profitability in that business? And then finally you talked about customers reducing inventories. Do you have – and you’ve guided for pricing in Q1. Do you have any feeling for what’s happening with the volumes in Q1? Those are the three questions. So cost inflation, including caustic soda, the solutions business and volume outlook for Q1.
Ivar Vatne
Why don’t we actually flip it around? Do you want to start with the last question to you, Christoph?
Christoph Michalski
Yes, with customers and destocking. Hey, I think my read of the market is the following. You remember ‘21, ‘22 coming out of COVID. Basically, there were big disruption logistics. There was a sense there was some shortening in the market on product. And I think a lot of the brand owners and customers basically went after to order maybe a little bit more than they normally needed because they didn’t want to run out of material. And clearly, our material for brand owners represents a very small portion of their costs, and therefore, it’s actually quite a smart strategy to have a little bit more stock in terms of security. So I think what’s happening now is that logistic, as you know, has a little bit – the strains are gone and flowing much better. Therefore, brand owner and customers are now reviewing their stocks and have started in quarter four, I think, to go back to normal levels and that is absolutely normal. So I’m not particularly worried about that. And this basically is also probably going into quarter one as we speak.
The second part of the softening volume on the stocks is really the outlook. So I think most people maybe accept drink sites are basically looking at what is the industry doing? I think I cannot hide from you. Cement is not a good business today, and we have big supply for cement bags. And here, we see not just the destocking but also lower order levels and the flushing through of some of the materials will take a little bit more time. So that is our view. We do not clearly have – we do not have a very good view on the brand owners and the end customers, but we have a pretty good view on our conversions we are providing this packaging material. And therefore, in our current view is between quarter four this year and quarter one next year, that stock situation should have been normalized, and then it depends more and more on the economic development in Europe. Ivar, one and two?
Ivar Vatne
Yes. So good morning, Oskar, so going into your first question around cost inflation and I think you asked this from two different [indiscernible]. I mean we did already mention on the pulpwood side, we expect inflation going into Q1 versus Q4. I think it’s difficult to give any other number beyond that, so we won’t. But I think in general, you can say that we see a very clear time that the pricing on hardwood in Baltic is slowing down and coming down actually quite a bit.
Christoph Michalski
Can I ask you Oskar, could you put on mute? We get some noise from your line, I believe. Thank you and then come back. Please Ivar.
Ivar Vatne
Yes. So on hardwood in Baltics, we definitely see that the prices are starting to come down now from a very high level, it has to be said. I think in Sweden, in general, it’s a bit mixed. I think as Christoph alluded to that, there has been some price announce coming through and in late Q4 and beginning of this quarter. Now we do see, in general, if you use the big brush here that there is a definitive expectation of lower activity, slower volume in general in the industry for ‘23 as demand has slowed down and everything else equal, that should put less pressure on the pulpwood demand, in general, and that should calm the situation down and even start to see some costs coming down in Q2, but I do not want to put a number on that for now. I think on chemicals, in general, I mean, it’s a little bit different situation between the region, but you can say that the overarching principle is that the energy and chemical price correlation is what you kind of need to look after. And there is also a bit of a lag between when the prices are announced as it hits our P&L based on our contracts. So who knows what the energy situation will be on. But for the time being, we also see that things have calmed down or not as extreme quarter-over-quarter in terms of the energy picture. So we are, you can say, cautiously optimistic that we get a small tail now of chemicals increase Q1 over Q4, as I mentioned, but actually then a bit more positive that we start to see stable and to be maybe even more optimistic a slight decline going into Q2 and onwards.
Now to your last question about the Solutions & Other, I think the best table probably you looked at that as well is 21 – Page 21 in the report where we strip out the currency hedging and also any other items impacting comparability and actually had positive number on that as well. I think the Solutions & Other, by nature, it has managed packaging in it as the bigger item, but it also has other things, I mean, group items. We also have services we do on forestry, etcetera. So, it’s definitely a mixed bag with some ups and downs. But I can say that with the big piece of one managed packaging, we actually had a very good development during ‘22, and we managed definitely to move that piece from a, let’s call it, breakeven to slightly negative past years to actually make some percentage points profit this year. Now, it’s not too much, but it’s also no asset business, as you know. So, we are very happy to see that we turn that business into good profitability territory for ‘22.
Oskar Lindström
Thank you.
Operator
Thank you. We will now go to our next question. And the next question comes from the line of Linus Larsson from SEB. Please go ahead. Your line is open.
Linus Larsson
Thanks and good morning everyone. Continue on pricing and maybe specifically on board. Do you expect higher or lower board prices in Q1 compared to Q4 for the division as a whole?
Ivar Vatne
Yes. No. Good morning Linus, I can take that. We definitely expect to see pricing to fall down for board in total. I can say that, that is then a function of good pricing help on liquid packaging. But as I mentioned, the train is moving quite fast now in the negative direction on containerboard and cartonboard.
Linus Larsson
Great. That’s very clear. And what did you say – could you just repeat, I think you said a figure for the price impact Q1 on Q4 for the group as a whole. Could you please repeat that?
Ivar Vatne
Yes. So, we expect in the area of minus 2.5%. If you look that at the material net sales, that should be in the area of SEK250 million quarter-over-quarter as a negative impact.
Linus Larsson
Fantastic. Then I got you right. And then maybe – yes, I don’t know if you want to go into that. But you said something like – I think Christoph, you said that costs are at its peak now. And I don’t know if you mean like a very general context or do you actually expect Q2 compared to Q1 to have lower input costs or flat input costs, or how do you see that?
Christoph Michalski
I think that was more a general statement because we see different pictures in the U.S. than in Europe. And as you know, a lot of the input costs, especially chemicals, etcetera, will be driven by energy cost, okay. So, I trust you have a good crystal ball as I. So, let’s – I think we are now in a situation where energy hopefully will be more stable, but who knows. So, more a general comment when we look at Europe and North America.
Linus Larsson
Okay. And if you then take specifically wood costs, you elaborated a bit on the Baltics and new sources and so forth and you have a bit of visibility there. So, do you expect – when do you expect that to peak if you look specifically on the wood cost?
Christoph Michalski
Ivar, do you want to take that?
Ivar Vatne
Yes. As I said, I think hardwood now we start actually to see signs that we are might on commitment and we should probably already build some help on hardwood end of this quarter and also going into next quarter. Now softwood is the big piece and that is the majority of the pulp will be sourced from, and it’s a bit more tricky to say. We know that on kind of Q1, most of Q4, we will get a hurt due to the announcement that has been made in the market over the last recent months. But as I just I guess can repeat, I think there is more and more signs in the industry that volume is softening down. Production will be taken down through curtailment and slow steam and everything else equal, that should put quite a bit less pressure on the market and a clear indication that we might see a pricing before the summer onwards. But I don’t want to give a number on that estimate.
Linus Larsson
No, that’s fair. That’s very helpful. Thank you very much for that. And then just finally, on your dividend and maybe if you could clarify your dividend policy, and I really don’t mean to be what you call it in Germany, [Foreign Language] or anything like that. But I think you have stated that your dividend policy is minimum 50% of net profit and now you are paying 41%. Could you just reiterate is this over the cycle or what’s the clear message in terms of dividend policy, please?
Christoph Michalski
Okay. So, I think first of all, this is clearly a Board question and the Board came to the conclusion that in view of the projects we are having, the good performance we are having that we should increase our dividend by 30%, which I think is a fantastic increase. And on top of that, pay a special dividend as you – of SEK2. So, overall, I mean we are at 40%. As you know, despite having had this dividend policy for many, many years, Billerud over time, has paid in a range above and below 50%. And I think it is always the intention to be close to that number. But at the end of the day, it’s a Board decision and the Board, I think very wisely said, hey, we won a very good increase of the ordinary dividend, and we want to pay a special dividend because of this extraordinary and very special year we had in 2022.
Linus Larsson
Okay. Thank you.
Operator
Thank you. We will now go to our next question. One moment please. And the next question comes from the line of Martin Melbye from ABG SC. Please go ahead. Your line is open.
Martin Melbye
Good morning. My questions have been answered now. But on the volume side, could you explain that in the same fashion as you did on price and input costs quarter-over-quarter for Q4 and then also Q1, please?
Ivar Vatne
Now, we can start with Q4 versus Q3 and you can say that we are definitely at least 60,000 tons short versus what we had thought going into that quarter. It hits both regions. So, this is not a Europe versus U.S. item. And I can say that it’s the inventory adjustment that hit us, you can say, both may be harder and faster than we might have expected and a clear slowdown in some of the categories. So, it’s a bit difficult to pinpoint exactly how much falls into what bucket of that, but those two are clearly the biggest drivers. Yes, we have had some challenges I mentioned on the production in some of the board mills that might have been up to 15,000 tons, we could have sold more. It’s a bit of an opportunity of course, if you use it like that, in particular for liquid packaging. But you can say we had a quarter definitely where we were not truly happy with our volume performance. I don’t probably want to give a volume guidance per se on Q1, but I can say that we expect a lot of the drivers to continue and probably a bit worsened going into Q1. So, definitely we expect a lower volume performance in Q1 versus what we saw in Q4. And I think again, it’s a continuation of still an inventory adjustment in many of our customers, and the sentiment has gone worse in terms of the demand over Q4.
Martin Melbye
Thank you. Two more questions. You had – you mentioned a one-off that will not be repeated when you talked on Slide 13, what was that? And the last question on liquid packaging board, what was the price increase? And is this relevant for your entire volume, please?
Ivar Vatne
Yes. I can start with the first, and then I will let Christoph answer the liquid packaging part. Now, the item we talked about on the board was SEK145 million and you can say that is a function we had in pretty much all of our board mills and also a bit outside of that into your paper. Some – well, troublesome incidents, there is as Christoph mentioned, no big correlation and not a major one, but we just had overall, a pretty disappointing efficiency performance in the mills. That incurs extra cost that they need to take out, take-in more external technician service, etcetera. It also incurred quite an extra over time in the mills to sort these unforeseen issues out. So, you see that aggregated number and everything else equal, we do not obviously plan to have this in Q1, and that means that items should go away. Christoph, do you want to comment on the liquid packaging side?
Christoph Michalski
Well, I cannot really comment, but we increased prices across all our customer base and I think that’s all I can say about that. And that will help us in quarter one and hopefully in the rest of the year. And I think there were appropriate reasonable price increases.
Martin Melbye
Thank you.
Operator
[Operator Instructions] And your next question comes from the line of [indiscernible] from Dagens Industri. Please go ahead. Your line is open.
Unidentified Analyst
Thank you. Good morning and congratulations on a very strong full year. I have a question regarding the conversion plans for North America. If at all possible, can you share any insights from the pre-feasibility study and/or give an update on how the U.S. board market has evolved since the acquisition? In other words, how the environment in which the strategic decision was made has changed? Thank you.
Christoph Michalski
Okay. Good morning. Yes. Our conversion plan, look, we are in the middle of the prefeasibility. We are getting more and more information. And the only thing I can really say is there is no red flags which is what we are always worried about when we start the studies. So, all of the key items in the due diligence have been confirmed. Now clearly, the work continues. You are aware that some of the costs and some of the timings of delivery have changed since the beginning of the war. And therefore, the team is working through that. We have basically planned to finalize this by the end of quarter two. So, we hope to have either in quarter two already or in early quarter three, the discussion with our Board. And if then we come to a positive decision, we will clearly make a statement where we then have probably an indicative approach to numbers and definitely a timeline in which we want to realize that project. When it comes to the cartonboard market, I think I will just give you a general perspective. I think our announcement to buying Verso had made noise in the market in the U.S. I think you have heard about the announcement from SAPI [ph]. You heard about the announcement of more imports from maybe from Europe, out of Europe into the U.S., which tells us we are definitely on the right track. We have an incredibly good first-mover advantage because we are already exporting the same product that we will produce in the U.S. to the U.S. now. With the acquisition of Verso business, Billerud North America is now able to set up a proper professional route to market, which was clearly a little bit more simpler initially. And we have started to have very good discussions with potential and existing customers, which are very keen on our development in Escanaba. So, I think I will stop there. Ivar, do you want to add anything to it?
Ivar Vatne
No. I think it was a very good perspective.
Christoph Michalski
Okay. So, that’s how we see it. And it’s a growing market. So, we are very confident that we are on the right track.
Unidentified Analyst
Okay. Thank you.
Operator
Thank you. We will now go to our next question. And the next question comes from the line of Johannes Grunselius from DNB. Please go ahead. Your line is open.
Johannes Grunselius
Yes. Hi everyone. Most of my questions have been answered, but I have two more. Just to make – I mean just to clarify that I understand it correctly. Are you sort of looking at the coated wood free prices in the U.S. as stable for this quarter, for the first quarter? And is that what you project stability in those very high prices for coming quarters? That’s my first question.
Ivar Vatne
Yes. Hi, good morning Johannes. Yes, the answer is exactly that. That’s the view we have. It’s more difficult to say going on from Q2 and onwards. So, that I do not really want to speculate too much on at this stage. But the situation is still stable. All the indication we have so far is that we will have another quarter now in Q1 with a pretty flat pricing picture.
Johannes Grunselius
Okay. That’s helpful to know. I mean I am just surprised about it since we have seen indications of more imports, very low inventory levels starting to normalize and that kind of stuff. So – but still, you don’t see the weakness in prices?
Ivar Vatne
No. As I said, we forecast for this quarter a flat situation more difficult to go further on. So, that I won’t speculate.
Johannes Grunselius
Yes. Good. Then I have – I mean if you can quickly comment on the new cost initiative because I think that’s quite significant for you as an organization and company. I mean are you targeting mainly the fixed costs or is it also kind of improvements on the revenue side. Could you give some color on that, please?
Ivar Vatne
Yes, I think it’s a fair point. And you can say we are also setting up the program now with all the building blocks, and we will definitely have more examples to share along the way. But I think you should look at the nature of this program is not to go after pure cost per se, but more going after the potential of the company in particular items that sits between functions. And I know that maybe it sounds very fluffy. So, I can be a bit more concrete. I mean I talked about the optimization that we know is a cost, and we want to take that down. And that is also something it requires a lot of collaboration between operations and sales or commercial team. We also have items where we go into the recipe optimization. Clearly, that has implication on the property of our products. And that again, requirements from both supply and operation and commercial combined. I think also streamlining even better so when we know what runs on product lines on our machines and minimize downtime, it is not something one function can do per se. All of these items I mentioned will have impact on either variable cost, also just in terms of driving net sales per ton or more efficiency. So, I think that’s the best thing I can say at the moment. We will come back further down the line with even more examples when we see actual stuffing in for the year, etcetera.
Johannes Grunselius
Yes, that’s helpful. And your target, I mean that is to have SEK400 million kicking in at the end of the year as a run rate improvement, right?
Ivar Vatne
No, good prediction. We expect a year-over-year. So, you can say that we expect 23% versus 22% to deliver a SEK400 million net impact.
Johannes Grunselius
Okay. That’s good to know. Okay. Thank you very much.
Operator
Thank you. And we will now to our next question. One moment please. And your next 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. Just a clarification on the product area board. Should we be right in thinking the costs were higher. Liquid packaging board, you weren’t able to raise the prices. But now as you go into Q1, you should get a bit more of a pricing benefit and you don’t have that one-off. So, sequentially, should we be in a better position in that product area board in Q1 versus 4Q is the first question? And the second question, could you give some color on the second speciality kraft markets in Europe, pricing is holding up. What is the reason for that? Has demand been okay or is the cost curve moved up for a lot of the high-cost producers that is keeping the prices up in sack kraft in that market? Just any color you could provide would be helpful. Thank you.
Ivar Vatne
Right. So, good morning Cole. As I said, I think for product area board, right, you will get a bit of a mixed bag. You will get some help from pricing on liquid packaging, as we just mentioned. I also, I think answered Linus that net for the whole area, given containerboard and cartonboard is coming down quite sharply. The whole product area will come down quarter-over-quarter when you look at the kind of net pricing impact. You do get, as you mentioned, SEK145 million help, if that is clearly what we are expecting given we do not foresee to bring some of those challenges into. So, there will be some pluses and minuses there. I can confirm that one. Now, in terms of the sack and speciality, I think I can maybe start with this back piece. And you do see a lot of the similarities for the brown and white sack. I mean market is definitely softening and slowing down quite a bit. I think we still see customers sitting on pretty good level of inventory. I think there is also a sentiment now that economic activity is slowing down. So, the order book is certainly weak when we look at that pipeline right now. Clearly, that means that we see clear signs in the industry that all players now is chasing volume across the board and activating new customers, etcetera. So, I think it’s fair to say we would see slower volume and also price erosion in that quarter. And I think that’s probably accelerating now in Q1 versus what we see in Q4. I think on the kraft paper, it’s maybe a little bit different. I think MG is holding up a bit better. But I think also we see on the MF, pretty similar signs that we had on sack that the slowness is definitely a bit more aggressive than what we see in Q4. I think also it’s clear that we have suggested that is still active, and that also is in the Middle East area, quite aggressive. We have had that as a region before that we used. And clearly, that is not a really good region for us anymore, given now it seems to be quite flooded products in that. So, we activate also other channels and regions. Do you have anything to add, Christoph, on your side?
Christoph Michalski
Yes. I think my view – you know my view, my view tends to be much more longer term. And I think the fundamentals of the company, nothing has changed. I think we have a very stable approach to where we go with that strategy I would say. And I think we would now live a softer quarter as we had in quarter four. We go in the softer quarter in quarter one. And then basically, my expectation is that the market will recover as soon as the stock level is through. And then let’s hope for the best for the economic development, which I believe has already improved a little bit when it comes to the expectation compared to what we discussed in November and December about the future outlook. So, I think we will have a very reasonable year in 2023 as well. And I think with that, we will close the call, and I will hand over to you, operator. Thank you very much for your time and your attention, and I am looking forward to talk to you in the coming days or in our next quarter one report somewhere in April. Thank you.
Operator
Thank you. This does conclude our conference for today. Thanks for participating. You may now disconnect.
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