Comments by the President and CEO Christoph Michalski:
Since the beginning of March, there has been a blastomycosis infection outbreak that has impacted the Escanaba mill and we are all deeply saddened that a person who worked as a contractor at the mill has died from the disease. Since first notified by the local public health department, we are cooperating with all available health resources and have taken their recommended actions. On 13 April we proactively decided to temporarily idle the Escanaba mill for up to three weeks as a precaution and to perform additional cleaning of the facilities. Our top priority is the health and safety of our employees and contractors.
The first quarter organic and currency-neutral net sales grew by 6% compared to the corresponding period last year, mainly because of higher sales prices. Our sales volumes were negatively impacted by customers’ destocking due to an inventory-build in the downstream value chain, as well as lower demand for some product categories.
The Group’s first quarter result and EBITDA margin was dampened by temporary elevated costs for raw materials in combination with the challenging market conditions with slower demand. The regions Europe and North America continued to show different margin profiles mainly due to historically high wood prices in Europe.
From the start of 2023 we have implemented price increases in our liquid packaging board, which in the first quarter could not offset the increasing wood costs. The market conditions for our other product categories have been challenging during the first months of 2023. We have adjusted by taking market-related production downtime in several mills. In the first quarter, prices increased for speciality paper and were resilient for graphic paper, while market prices for kraft liner, sack paper and pulp have decreased in recent months.
For the second quarter, we expect the challenging market conditions to continue. The destocking will continue in the second quarter, but we expect the destocking cycle to end in the second half of the year. There is a downside risk to prices and sales mix. On the cost side, we anticipate that the inflation will start to ease in the second quarter. Chemical prices are on the way down, following the drop in energy prices, and from May we have new logistics contracts with better price terms.
To protect our profitability, we are working with price and mix management and are adjusting our production accordingly. We have imposed a strict cost control throughout the organisation. We have also started to execute on our three-year efficiency enhancement programme, that was launched in January and which encompasses a number of initiatives across Commercial, Operations and Procurement & Wood Supply functions in our European operations. The results from this programme are promising, and in the first quarter it delivered a positive effect of SEK 95 million.
In parallel with overcoming short-term challenges, we continue to execute on our strategic growth agenda. The pre-feasibility study about the conversion of at least one paper machine in Escanaba to a board machine is in its final stage, and the size, phasing and expected returns of the investment will be announced in due course.
As part of the project in Escanaba, we plan to drastically reduce the mill’s fossil CO2 emissions. We have set ourselves the ambition to deliver clean energy and make the Escanaba mill sustainable for the future. The State of Michigan has approved a sizable investment support for the mill transformation, to be paid pro rata subsequently to our investments provided that certain project milestones and conditions are fulfilled. On top of this, we are in the process of applying for federal investment support, within the framework of President Biden’s Clean Energy Plan, for this business transformation.
The current challenging market situation is temporary. We have a brighter view of market conditions and our financial performance for the second half of the year.