Ladies and gentlemen, dear audience, my name is Jussi Pesonen, I'm the CEO of UPM, and I'm here with our CFO, Tapio Korpeinen.
Hello, everybody.
Q3 was a milestone quarter in our strategic transformation. The biggest news in the quarter was obviously the decision to proceed with the highly competitive pulp mill investment in Uruguay. The mill will be one of the lowest cost pulp operations in the world, and as such, is attractive investment to us. The project represents a step change in the scale of our pulp business. More importantly, it represents the step change in UPM's future earnings. UPM is in a unique position as we are proceeding with the execution and preparation of the major future growth prospectus. Over the past years, we have been developing attractive and significant growth opportunities than few other companies in this industry. At the same time, we have been building a strong financial standing, and of course, which is very important to me, is the organizational capabilities to execute all of that.
At the same time, we continue taking actions to ensure our competitiveness in ongoing businesses. On this front, during the quarter, we announced plans to reduce capacity in UPM Communication Papers and further improve efficiency in our functions by setting up a new business service hub in Poland. Today, we have also announced fast paying back energy investment in Germany that will decrease both the CO2 emissions and costs. Ladies and gentlemen, UPM's Q3 actually proceeded well. Good business performance continued. Our EBIT margin was 13.7% and EBITDA margin 18.2%. We succeeded to maintaining our comparable EBIT at the same level as in the previous quarter. Compared with the Q3 last year, our sales decreased 6%, mainly due to lower pulp prices and lower deliveries of the UPM Communication Papers. Our comparable EBIT decreased from that of last year, 19%.
Operating cash flow was strong in Q3 at €500 million. At the end of the Q3, our net debt was again below zero. During this year, our business environment has been impacted by decelerating economy, especially in Europe. Demand growth has continued in most of our businesses, at the same time, it has declined, especially in the Communication Papers. Sales prices decreased during the Q3 in line with our expectations. Also, variable costs are on decrease mode. At this point, ladies and gentlemen, I will actually hand over to Tapio to have more analysis of the Q3 results. Tapio, please.
Okay. Thank you, Jussi. On this page three, you see the earnings bridges year-on-year and then sequentially between third quarter and second quarter this year. As expected, sales prices represented a clear headwind for us in the third quarter, coming mainly from the pulp prices but also from paper prices. As far as paper prices are concerned in UPM Communication Papers, this is the case between the third quarter and second quarter this year. Variable costs decreased. Also, this had a smaller impact than the sales prices, and as you remember, we saw a significant fall in variable cost already in the second quarter. Delivery volumes on UPM level were a positive earnings driver despite the more moderate demand growth rate in the product markets. Fixed costs were well under control when compared to the second quarter.
Fixed cost also decreased due to seasonal reasons and due to the fact that we had a maintenance shutdown at the Kymi pulp mill in the second quarter. In the third quarter we had no significant maintenance shutdowns. Finally, in the third quarter, there was no material contribution from fair value increases of our forest assets, which shows up here in the year-on-year comparison as a negative variance, as in the third quarter, we had more contribution from the forest asset fair value change. Here we have the comparable EBIT by business area. Biorefining earnings decreased primarily due to lower pulp prices. Our average pulp price was down by 16% from the second quarter, 25% lower than the third quarter one year ago. On the positive side, we had operationally a very strong quarter in Biorefining. We achieved new production records both in biofuels and pulp.
In addition, one can mention that in biofuels, we reported the best quarterly financial result ever since the startup of the biorefinery in Lappeenranta. Customer demand for pulp and biofuels continue to be good. We have now been able to realize the full production potential from the debottlenecking investments that we have made over the past few years in pulp. At the same time, we have been also able to optimize the Lappeenranta biorefinery so that its production capacity has increased from the original 100,000 tons to 130,000 tons of renewable diesel and naphtha. Communication Papers delivered a solid result, increasing its earnings both year-on-year and sequentially from the second quarter. Paper prices decreased moderately from the second quarter, but we were able to offset this with lower fixed and variable costs. Lower pulp costs contributed in the third quarter, of course.
However, UPM Communication Papers performance is underpinned by the continuous measures that we have been taking to ensure competitiveness, and this work continues as we have announced. UPM Specialty Papers reported a successful profitability turnaround. Customer demand continued to be good, both in label papers and release liners globally, and in the Asian office paper markets. Lower pulp costs contributed to the result, and our actions to reduce fixed costs showed visible impact as well. UPM Raflatac margins, they are gradually recovering. To stay on this positive track, we will continue various initiatives on margin product mix and cost management. Growth in market demand has continued even in the European market that has been slowing down. Energy reported another excellent quarter thanks to higher electricity market price and successful optimization of hydropower generation. Hydropower volume was low, however, due to the dry conditions in Finland. Plywood faced slowing market demand.
We adjusted to this by negotiating temporary layoffs in our Finnish mills. Jussi already mentioned our strong operating cash flow in the third quarter, which was totaling EUR 500 million. Over the past 12 months, we have generated over EUR 1.6 billion of operating cash flow and over EUR 1.3 billion of free cash flow. Last year, we tied up working capital as our prices for product and raw material inventories were increasing. Now we have been able to release part of that working capital. As a result of the strong cash flow, our balance sheet is back in net cash territory. You may recall that the adoption of the IFRS 16 lease standard in the first quarter increased our net debt by about half billion EUR. Obviously in the second quarter, we paid the dividend of EUR 693 million.
Even after that, our net debt is negative and our financial standing is very strong. This page summarizes our outlook for 2019. We continue to see the same uncertainties in the global economy and business environment that we highlighted already nine months ago. The economic growth continues, but at a slower pace, especially here in Europe. Nevertheless, we expect UPM's business performance to be at a good level in 2019. In the fourth quarter, we expect the average pulp price for UPM businesses to be lower than in the third quarter. This has an impact on Biorefining, but obviously also on the two paper businesses. Biorefining will be also affected by the scheduled maintenance shutdown at the Fray Bentos mill in Uruguay. In Communication Papers, the result is positively impacted by the annual energy-related refunds.
Now I'll hand it back over to Jussi for some comments on our strategic actions.
Thank you, Tapio. Let's start with the Uruguay pulp mill, where we'll actually come to the project status as a third slide of the presentation. As we have discussed this matter earlier in our previous webcast in July, I'm proud to present it again. However, this is an highly attractive and impactful project for UPM, so it's good to repeat the main points of the project. We are building, as stated, a highly competitive pulp mill in central Uruguay, close to the town of Paso de los Toros. The mill will have an annual production capacity of 2.1 million tons of eucalyptus pulp. The mill is scheduled to be starting up in the second half of 2022. The total investment into the mill, port operations, and local facilities is about $3 billion.
The main part of the capital expenditure takes place fairly equally over the years 2020 and 2022, i.e., 2020 and 2021 and 2022. Why is this a good investment? That's something that I want to really actually emphasize here. Firstly, it will provide a significant growth step for UPM's future earnings. We do have growth projects to increase our earnings. With careful planning and preparation, we have secured competitive and sustainable wood supply for the mill, state-of-the-art mill design, and an efficient logistics setup, inbound and outbound, for the mill. As a result, the new mill is expected to be one of the most competitive pulp mills in the whole globe, both in terms of costs and in terms of safety and environmental performance of the whole value chain. We expect its cash cost level to be about EUR 280 per delivered ton of pulp.
This enables attractive returns on investments in various market scenarios. For UPM's pulp business, the project represents a step change. It will grow our pulp capacity by 57% in a sustainable and highly competitive way. Within our pulp product mix, the share of the fast-growing eucalyptus pulp increases significantly, as does the share of plantation-based production. The average production cost will decrease, and average profitability increases, both because of the new low-cost unit, but also because of the synergies within the existing operations in Uruguay. On page nine, you can see what has happened so far in the project and the related infrastructure initiatives. At the mill site, the preparatory work is ongoing. At the Montevideo port, demolition of the old pier and dredging are underway, and resources and recruitments are proceeding as we speak, as you can see from this slide.
The central railway project is moving well, as well forward. Initial works have started already. The financing for the PPP project was finalized early this week. If we are looking at the UPM current projects going forward, we are definitely taking care of the growth, not only Uruguay, but also other focused investments. Chudovo plywood mill expansion was completed in Q3, and thus the project improves our competitiveness as a whole plywood business, as Chudovo is the lowest-cost plywood mill in the system. Our two release liner expansion projects, the paper machine conversion at our Nordland mill in Germany, and then the expansion at the Changshu mill are well proceeding as they were planned. The technical and commercial studies of the biochemicals refinery in Germany and the biofuels refinery in Finland are advancing.
In these two businesses, we are driving the change towards a world that is Beyond Fossils. They represent really exciting business opportunities for UPM in a big, vast, new market. While we are preparing and advancing also the growth projects as we have Uruguay ongoing already, we continue to have a focus to keep our cost competitiveness in the present and current operations. In UPM Communication Papers, we plan to reduce our production capacity by 860,000 tons in less than one year. Today, we have also announced a fast payback power plant investment at the Nordland mill, and with this investment, we will reduce our energy cost by EUR 10 million per year, and we will also reduce our CO2 emissions by 300,000 tons annually. Financially, it is attractive with about three-year payback time. The concept is proven.
We have a similar power plant in our Schongau mill in Germany already in operations. In addition to these asset changes, we continue to continuously improve and take actions in our smart programs in all businesses and all functions. We aim for the further improvements not only in variable costs and commercial strategies and working capital, but also safety, environmental performance. We continuously target efficiencies, that is one of the key topics in UPM: efficiency, quality and efficiency, we are taking actions to secure that high operating rates and efficient production. Also we take care of the fixed cost development, we do have a continuous work in all businesses and all functions to reduce fixed costs. One of the examples of this is the new business center hub in Wrocław, Poland that we announced in September, there are multiple other actions coming as well.
In product development, various things are moving on to maybe name a couple of them, barrier papers in the UPM Specialty Papers business area, renewable films in our UPM Raflatac business, and then renewable plastics made out of the naphtha that is produced in our Biorefining business. Of course, then can kind of furthermore comes when the biochemicals and biofuels opportunities are then on our table. Finally, but not at all, kind of a small thing is the digitalization opportunities. We do have a clear view of taking actions in digitalization, which actually basically improves our efficiencies in the back office, but also when it comes to actually our sales and supply chain as well. Ladies and gentlemen, to kind of summarize the presentation with the spearhead of growth slide, I think that we are well proceeding in all of the planning here.
Of course, the high-value fiber segment, we have made the decision during the third quarter, which was a quite significant decision going forward in UPM. We, as I said, continue to take actions to ensure competitiveness and performance in all of what we do. Final two slides before moving into the Q&A session, we have three still left, is the cash flow kind of reminding all of us of the capital allocation, which I think that is one of the key cornerstones of today's UPM and future UPM is presented here. The first one is five-year cumulative cash flow 2014, 2018, and you can see where we have been allocating capital. That has led to a efficient, high profitable growth investments with EUR 1.9 billion, very strong balance sheet.
As we reported today, we are debtless company with good cash flow. We have been able to pay an attractive dividend. This is not going to change dramatically. We are going to keep our balance sheet strong. We definitely focus on performance of strong cash flow, operating cash flow of the businesses, and with these actions and what we do, we are able to pay attractive dividend and to invest to the growth and especially earnings growth. Obviously, nowadays in UPM, we are proud. Also, this is important part of our future promise and on the road when we want to go to the Beyond Fossils strategy, the top ratings of the responsibility and sustainability are important.
As you can see from this list, we have gained all of that when it comes to Global Compact LEAD or Dow Jones Sustainability Indices or CDP programs and so forth. UPM is actually a top performer on all of that, and that is our key cornerstone of our strategy going forward. Ladies and gentlemen, I would like to summarize my presentation with the summarize slide without not going into the details, maybe saying that I'm happy to continue with this great group that I have in UPM for the next coming years. Ladies and gentlemen, I think that this was the prepared part of the presentation. Now we are ready to answer any of your questions.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad and you'll enter a queue. After you're announced, please ask your question. Our first question comes from the line of Alexander Berglund from Bank of America Merrill Lynch. Please go ahead.
Thank you very much. I have two questions. I'll start with my first one and let you answer that. The first one is on graphic paper. I'm wondering if you're seeing any indication that we are returning towards the trend demand decline. Also if you think that the current announced capacity reductions is enough to stabilize the market into 2020. Then just also into Q4, you mentioned pulp price is lower. What are you seeing on graphic paper price into Q4? Are they down as well on average or is it more flat? That was my first question.
If I actually start with the trend decline, I think that it is difficult to say what the trend line will be. We tend to believe that it will balance back in some years to come. Obviously when we are looking, the actions that has been taken in this industry to balance the supply demand, I think that it is actually quite well actually going forward. Of course, our 860,000 tons is a big number as such, but if I remember correctly, we are talking about then in Europe, the actions this year, either converting paper capacity to packaging capacity or then closures are approaching 3 million tons for the coming years. Then in the U.S. it is more than 2 million tons. Basically there's quite a lot of happening at that front, and especially these big conversions that we see.
That's absolutely beneficial for the paper makers because it will consolidate as well the industry, not only taking capacity out and balance the market. That's something that will remains to be seen how it goes. Obviously with 860,000 tons, we are taking quite a lot of capacity out on our own system, trying to keep all of the business that we want to keep, and at the same time have the efficiencies. This is a cost game and this is all about reducing our own costs. When it comes to paper prices, I have never, ever actually started to forecast any of the paper prices, and I'm not doing that even today.
Oh, you don't even have any visibility into the fourth quarter?
Sorry, now I didn't actually.
You don't have any visibility into the fourth quarter on pricing?
We do have the visibility for the pricing, but like I said, that we are not guiding prices.
Okay
for the fourth quarter.
Thank you. That's clear. Yes, my second question was more about the opportunities in biofuels. Just if you could give a bit more color on the feasibility studies for Kotka and also biochemicals, and specifically on your feedstock technology. I was wondering if you had any progress on your efforts to use forest residues and the Carinata plant in Uruguay as potential feedstock in the future.
That is exactly the comment on when it comes to biochemicals. Obviously, we do have a concept of solid wood, where we are converting solid wood to a first different sugars and then having a conversion to different molecules. That we have technology that is now ready for going forward. Obviously now we are making more kind of deep analysis of the process and designing the process. Similar to biofuels, yes, the concept is not actually turning only present raw material, which is, in our case, the crude tall oil into the fuels, but having multiple feedstock, Carinata being one of those. That technology is advancing as well. Deep dive in the business case and the process itself is ongoing.
Thank you very much.
The next question comes from the line of Justin Jordan from Exane. Please go ahead.
Thank you, and good afternoon, everyone. Well done on clearly a very resilient Q3 performance against challenging market conditions. I know you sort of loathe to give any sort of outlook, clearly you're talking about lower pulp prices quarter on quarter in Q4 and Q3. Given that we're seeing declining global inventories, do you think we're somewhere near the trough or stabilization in global pulp prices? Can I start with that first, please?
Well, we maybe don't forecast pulp prices here on the web call as usually is the case. Maybe just a comment first on this outlook statement. We are not forecasting pulp prices there either. Just stating, in a sense, the facts as they are given the kind of curve along which the pulp prices have been now coming down during the past three or four months. That means that in practice the average pulp price in the fourth quarter is lower than in the third quarter without taking any view in terms of forecast. I think as you can see from the sort of public sources that at the moment the pulp prices in China seem to be pretty stable, we will see where they will go.
Obviously as we learn more about where the inventories are moving, then that will give some obviously background to that.
Okay, thank you. Just one quick follow-up. You've given some detail on the other spearheads for growth projects already, but can you just give us a bit of an update on the BioVerno naphtha project where you were collaborating with, I believe, Dow and Elopak. Is that something that's still in the laboratory stage or in customer trials or where is that at this point, potentially?
It's actually we have implemented that together with Arla, who has already applied that technology in their milk cartons that have been sold. In that sense, it is a live example of what can be done, a so-called 100% wood-based milk carton. As you know, normally of a milk carton, about 20% is plastic. In this case, it's 100% wood-based.
This is UPM revenue today in Q4?
Yes.
Which division is this sitting in? Sorry.
Biorefining.
Biorefining
part of the output from Lappeenranta.
Thank you.
It's the part of the biofuels business, yes. Yes.
Thank you. That is all I have for now.
The next question comes from the line of Lars Kjellmer from Credit Suisse. Please go ahead.
Thank you. Just to follow up on the previous question, could you give any sort of indicative split of your revenues and operational EBIT from the three sub-sectors within the Biorefining division, i.e., pulp, timber, and biofuels, where we are today?
We have not, Lars, done and that we are not doing. It is a kind of one complete kind of reporting segment. We can tell as we have been repeating that quite many times that the biofuels business has been going extremely well. We are clearly above the nominal capacity of the mill, and the profitability is clearly above UPM average numbers, i.e., the 18% EBITDA margin or 13.5% of EBIT margin.
Got it. When you're looking at your volumes, paper and pulp volumes are, as you pointed out, quite extraordinary record volumes. How do we see that in the sort of face of a comparatively weak market where you've been sending this pulp? Also on the paper side, I thought you indicated in the second quarter that you believe that weakness that we had seen in the quarter was partly relating to some destocking on the customer side, and then sequentially year-over-year, at least your volumes are clearly weaker again in Q3. Has anything changed between the two quarters, and does the market prospect?
Well, maybe on the pulp question, obviously, we have been sending the pulp to our customers. What we have commented earlier as well is that we sell our pulp directly to the customers who are the users of the pulp in tissue making, paper making, and board making. Again, as we have said earlier, they have had, let's say, good sort of demand for their pulp as planned. That's why then obviously also our deliveries have developed well. In that sense, we have not had, let's say, any negative surprises at that end. Maybe continue with what Tapio said of this pulp thing that as we indicated two years ago, that we are splitting our pulp sales to three different segments i.e., hygiene, packaging, and paper.
That has been one of the reasons that we have had a very solid sales and growth mode with those customers. Our Chinese direct customers have been using the pulp as we have been agreeing that with them. I don't know if you, Tapio, have any comment to that on the paper. The paper demand and decline has been going somewhat worse than that of last year. It is a function of destocking and inventory thing, but also that now the economic growth has been going with the lower pace in Europe as well. I don't see there any particular reason on that as well. We'll see how that evolves, if the economic growth will actually go even further down. Paper is not immune to that.
We will follow that as well, where there's a kind of, on the base case, there is a minus 5% trend growth. If the economic growth will be low, it will mean also that the paper demand will move somewhat more down. Especially Germany has been causing also some challenges in these two quarters.
Got it. Just a couple of more questions. You mentioned variable cost coming down. Of course, pulp is part of that. If you can comment other variable costs that have been coming down and what you see for Q4. Also when you're spending more money in expanding the release liner business, but your UPM Raflatac growth isn't particularly strong. What should we read into that? What are the market conditions for the labels business, I suppose, and why you're not really seeing that in the UPM Raflatac business? Then a final detail question. The non-controlling interest was quite big in this particular quarter. What is behind that?
Tapio will come to variable cost. On that maybe I talk about the release liner. Obviously, the global growth has been quite brisk actually. We being number 1 supplier of the release liner, I think that there's a kind of very good odds and a kind of future outlook for the growth of all of that. Raflatac once in a while it goes down and up. It is not the kind of all the market. Release liner is basically for the labeling. Release liner is used also in other products as well, like hygiene and tapes and all kind of things. There's a kind of multiple options to actually sell the new production coming out of the lines.
I'll briefly comment on the variable cost. As I mentioned, we already had in the second quarter a significant positive impact from lower variable cost, half coming from pulp, half coming from other topics. Now in this quarter, a bit less, but coming from pulp. Again, also other sort of areas including, let's say, the raw materials for our labels business in Raflatac. Let's say the wood costs having been on the increase earlier here in Finland, and they are starting to, let's say, slowly trend down and let's say a number of other areas as well. We are seeing lower market prices for our inputs. We are sort of continuing with our, what we call Smart Spend program, looking for our own sort of cost saving actions, sort of separate from whatever is happening with the market prices.
The non-controlling interest topic there that relates to our partner in Uruguay and this figure actually that is now booked in the third quarter is a year-to-date figure because with the investment decision in Uruguay, also the agreement with our partner was updated to include also the new pulp mill and update our partnership overall. That caused some change in our accounting treatment and therefore, this was booked in the third quarter.
Okay. Thank you very much.
The next question comes from the line of Harri-Pekka Tiittanen from Nordea. Please go ahead.
Yes, good afternoon. Maybe if you continue on the Raflatac where the sort of top line has declined a little bit for the second quarter in a row. I mean, if you split it between price and volume, or can you sort of give indication on how the volume side of it is and how the price component acts to this small decline in top line?
Well, if you look at, let's say the markets in general, we have had good markets outside of Europe. We have had, let's say, good volume development also in specials and film-based labels. Here in Europe, what has been a bit softer is some of the end uses for paper-based labels. Even there, let's say, so that now the recent figures from the European market show a modest growth. In that sense, the market is here sort of flat to modestly growing at the moment.
We have been able to manage our margin quite well.
Yep. Yes, that probably kind of is the reason also for your comment on the UPM Specialty Papers that basically while you are seeing stronger customer demand. Just thinking if there's sort of volume upside in the UPM Specialty Papers, because volumes are still down also compared to last year. If you are saying that the demand is improving or there's a bit of improvement in customer demand, could there be a case for a kind of a top line turning to a positive territory?
Yeah, UPM Specialty Papers is of course now actually hosting two main investments, growth investments, one in China actually. That will actually increase our Asian capacity of making specialties and then the Nordland. Obviously that will turn, of course, these two into the growth mode.
Okay.
When you're sort of looking at this comparison figures, one thing that you kind of can note is that when we have been increasing the release liner share in the mix vis-à-vis fine paper, graphic fine paper, then the volume in terms of tons is less, but the value is more. That also obviously has a bit of an impact on this ton-based volume figures as such.
Makes sense. Maybe the last question also a bit on the arithmetics here. On the biomaterials, you mentioned that there is 16% decline in the prices. The previous quarter, the decline was only marginal. Now we actually the market price is moving more or less 10% per quarter. There's quite a big deviation to what you are saying and kind of reporting compared to what the underlying market has been doing. Is there anything you can say about that and what it might mean for the future sort of realized price mix for you if we are seeing about the similar sort of decline in market prices for Q4?
Well, like I said, this kind of a guidance that we gave is no forecast. Obviously, there is many moving parts. We have the market mix between Europe and Asia. We have the mix between hardwood and softwood.
Some movement on currencies as well. In that sense, that's the sum of all those moving parts.
Yes, fair enough. Many thanks. Thank you.
Thank you.
The next question comes from the line of Mikael Doepel from UBS. Please go ahead.
Just firstly on pulp, given the high deliveries we're seeing there, has there been any change to your net long position in pulp?
No, not that I'm aware. It is, what, 700,000 tons, that is the figure. I don't actually even follow that much. Efficiencies and margins are important. No, I don't think that it has changed anything.
Okay. In terms of the European graphic paper market, we already talked about that. We've seen quite steep declines in demand. You mentioned some closures in the market by yourself and some other competitors, but a lot of those are also out in the future, not happening really right now. If you just look a couple of months out, do you see that the markets are reasonably balanced, or would we need to get some further closures now in the short term for that to be the case?
Time will show. Obviously I don't have a split that out of that 3 million tons or it was, if I remember correctly, 3.2 million tons, and then what goes out in what time scale. It's something that is absolutely doing the right thing. We do not start to forecast whether it is enough or not. Obviously it is a great actually trend that people are moving their assets into a packaging or any other products. It will consolidate and also balance the market as well. There will be fewer competitors in the market as well. Basically the cost curve will get deeper actually, and steeper and that is a positive thing. Not that I have a view on whether that is for the next couple of months or even next quarter enough or not.
We take our actions when we see the action needed to be taken and time is all.
Okay
Well, you can take it as a positive factor that a significant amount of those shutdowns are in the future because you can see how our Communication Papers business is performing at the moment in the current conditions. These future exits that are yet to come, they will obviously then impact the outlook for the coming quarters.
Okay. Just the final question on the Chinese market. We've seen some good recovery in the UPM Specialty Papers division in the last couple of quarters, and one thing driving that you mentioned is the good demand in Asia. We also heard of some switching or let's say a conversion from recycled container board into the uncoated wood free markets in China now driven by the strong demand due to the 70th anniversary and so on. How should we read that? Is that just an indication for the market being strong and demand being good, or is this making the markets more crowded from your point of view?
First of all, the fine paper market in Asia and especially in China has been strong. We have been benefiting out of that, but one of the positive thing is for us that now when we are expanding our specialty paper capacity in Jiangsu, maturity or competition that are having a swing machine tend to run in the fine paper side rather than making specialties and therefore it makes room for expanding our operations in that side as well. Quite solid, a good demand in Asia at this point of time.
How do you see prices developing there now?
That is something that we don't forecast again. We can go this round and round, but we do not forecast the prices for the future.
All right. Fair enough.
Thank you.
Thank you.
Yeah, thanks.
The next question comes from the line of Linus Larsson from SEB. Please go ahead.
Thank you. Hello, everyone. May I just follow up on variable costs and specifically on wood, if you can say what type of sequential development you recorded in the third quarter and what you expect for the fourth quarter, please?
All we can say is that, as you know, if you have followed the market information here in Finland, we saw an increase in the wood prices during last year, but then the market has moderated from that. That is slowly coming through. Modest decline in the wood cost.
You have already seen somewhat of a decline in your own P&L. Is that right?
To some extent, yes. Let's say it's still yet to come because, obviously, there is a lag how quickly it will come through from, let's say, the deals to be done, wood to be purchased, harvested, and consumed.
Let's say flattish so far, but then yet to come.
In your case, what's that lag before it materializes in your P&L?
With wood, it can be up to six months.
Okay. Then you mentioned these energy refunds coming in the fourth quarter within Communication Papers. Did you also specify how much that would be?
No, we haven't given a figure on that. We have had, in a sense, the same in the fourth quarter figures for UPM Communication Papers in the past years as well. This year, perhaps somewhat higher because it's partly impacted by the CO2 price, which has been elevated.
How much was it in Q4 of 2018?
Haven't given a figure on that.
Okay. Maybe just one final follow-up just on pulp. That was an impressive volume number, obviously. The debottleneckings that you have been making are showing through. How much more is there to go? What's your updated nominal capacity, for instance, for that division?
Well, let's say in terms of any debottlenecking investments or the impact of the investments that we have done that is kind of fully reached at the moment. Nothing further than normal sort of optimization as such.
Okay. Great. Thank you very much.
The next question comes from the line of Robin Santavirta from Carnegie. Please go ahead.
Thank you. A lot of questions on the input cost declining, but just to get sort of the full picture here on the selling price input and fixed cost variance. You must have sort of quite a good view on both selling prices and your cost base for quite some time ahead. How confident are you that you can keep up sort of the margins of roughly these levels going into next year? Would that be a too optimistic view?
Of course, we do take all the actions to support that the high margins are kept as far as possible and obviously doing everyday work on that as well. That how we will operate and therefore like we had in our presentation as well, kind of action plans that it is not only the growth investments that we are focusing but also putting a lot of emphasis on current business and going concern. That's a kind of maybe a strong point of UPM that when we do have this operating model with six businesses the costs and the top line are close to the management teams of each businesses, and therefore it is everyday work, everyday focus that we are trying to achieve the maximum margin that we can. So far, it has played quite well for us.
Yes, definitely. In terms of the biochemicals project, what is roughly speaking, the CapEx sort of number that we should be looking at? What is the plan? What is some kind of timeline would be good to have? Is it within 12 months you sort of plan to announce it, or will it go into 2021?
We will come back to the CapEx when we do have the decision. Of course, we do have a kind of internal figure as a frame for that, but we will come back to that when it is then realizing. Obviously, we are trying to work as hard as possible to get those decisions into our decision-making tables. I don't want to say that whether it is in 12 months or longer, it might be shorter or at that frame. Of course, we are doing our work today that they could be decided as soon as possible.
All right, thanks. Finally, you will become one of the largest pulp producers globally. Obviously you have studied really closely the market now before setting up this Uruguay project. When we look at pulp deliveries globally, they're basically not growing for two years. Is that a good proxy of the end usage of pulp? Is it a proxy of something else?
Pulp, actually, if you are looking at the latest statistics, yes, this year is still 0.6% down as deliveries globally. If I remember correctly, after the first quarter, we were talking about 2.8% down in the first quarter deliveries, now it was 0.6%. Basically, the latter part of the year has been going to the right direction. I think that when there's a lot of investment in the packaging and so forth, the proxy for packaging rates to grow, I think that it means directly a proxy for good demand for pulp as well. We do have a very solid view on that trend growth of around 3% going forward. That is actually supported by, if you are looking hygiene, packaging, and any other materials that are requiring pulp as a kind of proxy.
Considering that less there will be mechanical pulp-based production and papers, less there will be recycled fibers available on that front as well. Pulp is having quite solid growth prospects for the future.
All right, good. Thank you very much.
Thank you.
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Ladies and gentlemen, I think that we are having the end of the conference call. Thank you for joining us today, and have a very nice autumn day. Thank you. Bye.