Dear audience, welcome to UPM's Quarter Three 2022 results webcast. My name is Jussi Pesonen. I am the CEO of UPM, and I'm here with our CFO, Tapio Korpeinen.
Hello to everyone.
Today we do have three main topics to be discussed. First, in UPM, we made a super good quarter. We reached all-time high quarterly result in Q3. The strength of our operating model was on full display. Operating model, in my opinion, is one of the most important factor. As we all know, we made a record quarterly result in five businesses: communication paper business, specialty paper business, Raflatac, energy, and biofuels. Fibers and plywood businesses achieved strong result, and inside of fibers, pulp made also a record quarter. All in all, Q3 was a great success considering the high uncertainty and volatile business environment that we had. Secondly, Q3 was clearly characterized by the energy crisis in Europe. Energy prices and the volatility in the markets reached unprecedented levels.
Market prices, price signals are crucially important both for the energy system as well as a whole and for steering of UPM electricity generation and consumption. The optimization is a significant source of the value creation both in our energy business and in our energy-consuming businesses. Ladies and gentlemen, finally, our transformative growth projects continue to make good progress. The Paso de los Toros pulp mill will grow our pulp business by more than 50% with very competitive cost level. Olkiluoto 3 nuclear power plant will grow our energy business by nearly 50%, offering much-needed CO2-free energy to the markets. Leuna biochemical refinery will open a new sustainable growth business for UPM. In Raflatac, on top of all this, we completed the acquisition of AMC to accelerate growth and expand the product portfolio. Let's start with the Q3 results.
Q3 was a first quarter this year with the normal production in our businesses. No strike, no significant maintenance activity. Our delivery volumes were back on normal, and our operational efficiency was good, and at a very good level. Good demand continued in most of our businesses, and sales prices more than offset the impact of continued increase of variable costs. As a result, business performance was strong in all businesses, and five businesses achieved record quarterly result, as already stated. Our Q3 sales grew by 36% from that of last year, and our comparable EBIT grew by 84%, and reached a margin of almost 23%. Ladies and gentlemen, at this point, I will hand over to Tapio for more analysis of the result, and then I will come back. Tapio, please.
All right. Thanks, Jussi. So here on the left-hand side, you can see the EBIT bridge third quarter, compared to last year's third quarter. Obviously, as you can see here, sales prices had the biggest positive impact. Prices increased in all business areas, and really the biggest impact was in communication papers. Variable cost increased significantly as well, but and across all input cost categories. Price impact from the higher sales prices was clearly offsetting or more than offsetting that. However, as said, this impact was larger than the negative impact of higher variable costs. On the right-hand side of the slide, you can see the EBIT bridge compared with the previous quarter, the second quarter of this year.
Here, the biggest earnings driver was the normalization of our delivery volumes. In the second quarter, volumes were still impacted by the strike in Finland, by the lower inventories after the strike, and large maintenance shutdowns at two of our Finnish pulp mills. In the third quarter, these factors no longer held back our performance. Sales prices and variable costs increased from the second quarter, and you can see also a decrease in fixed cost from the second quarter, which is, again, mainly due to the maintenance shutdowns that we had in the second quarter compared to then lower maintenance activity in the third quarter. Here, you can see the comparable EBIT development by business area.
As you can see, we achieved very strong performance simultaneously in the upstream businesses, like Fibers and Energy, as well as the downstream businesses like Communication Papers, Specialty Papers, and Raflatac. All businesses performed well, both upstream and downstream in the value chain. Energy achieved record earnings benefiting from high electricity market prices, also benefiting from the optimized hydropower generation in the markets that were quite volatile, and also the first notable generation volumes from the Olkiluoto 3 nuclear power plant. Fibers achieved an excellent quarterly result with continued solid demand and power prices that stayed high. Our timber business however was affected by a visible slowdown in the construction markets and end users. Communication Papers has faced a radical rise in input costs, particularly in energy as well as in fiber costs.
These input cost increases have been successfully offset by increases in sales prices. In this highly volatile and uncertain business environment, the business has been very determined in adopting a more agile operating mode. There are no long-term price contracts in place any longer, and the business is very active in optimizing its production vis-a-vis changes in the energy markets. Specialty Papers delivered an all-time high quarterly result despite historically high-priced raw materials. The market for release liners and packaging papers remained very strong. Asian fine paper markets continued to be challenging. Despite that, an all-time high in quarterly results. Favorable market conditions continued for Raflatac. Customer demand for labels remained good, and the business performance was extremely good, reaching again record quarterly result for the third quarter.
Plywood had a good quarter despite slowing demand in construction end users. Sales prices did increase for most products. Then as part of our other operations reported within that, biofuels achieved a record production and profitability in the strong markets for renewable biofuels. Our strategy is based on proprietary technology and UPM integrated feedstocks, which this proprietary technology enables to support high sustainable renewable fuels. This strategy is now delivering results. As Jussi said, this year in whole and the third quarter also in particular have been characterized by the energy crisis in Europe. Even though electricity prices and price volatility have increased significantly, still the markets as such have continued to function well. On the electricity markets, power generation and consumption have to be always on balance, as you cannot store electricity in large amounts.
There are large variations in the national, or regional electricity needs between different hours of a day, between days, and between seasons. Also on the supply side, wind power, especially renewables, wind and solar in general, represent a big variable and unpredictable component for the energy balance. To maintain that balance in the system at all times, market price signals are crucially important. UPM is an active player on the electricity market. We continuously optimize our electricity consumption towards hours when the prices and society's energy needs are at the lowest. Also on the other side, we increase our hydropower generation when energy needs are the highest. Consequently, we help to balance the electricity market, particularly in Finland. On this side, this slide, you can see how UPM's hydropower optimization and paper mill production optimization work in practice.
The examples shown are for the average day during the month of August this year. As you can see, the variation of our hydropower generation and paper mill electricity consumption within a day can be quite significant. This is beneficial for the electricity system, helping to maintain the balance and to avoid worst price peaks. At the same time, it provides an economic benefit for us both in the energy business and in Communication Papers. Every now and then, something unexpected happens, and further adjustment is needed on the electricity market to maintain balance. Here we have an example from the eighth of September this year. At that point in time, the wind forecast was incorrect, and wind power output turned out to be practically zero.
On the same day, Olkiluoto 3 was a few hours late in ramping up its output in the testing schedule. The electricity system needed either additional generation or less consumption. Or obviously both, to provide the needed up-regulating volume, the market price signals are again crucially important in these kinds of situations. In this case, or in these kind of cases, the Finnish transmission system operator, Fingrid, it does not have this kind of reserve capacity to meet the total need or demand for up-regulation as an example in this instance. The market participants provide the regulating volume which Fingrid asks for based on market prices. UPM is active on the regulating market both with its hydropower plants and its power and its paper mills.
Like in this instance, we were able to, at the same time, increase our output from hydro, but then also to reduce our consumption in our paper mills. Again, this activity is both beneficial for the system and provides an economic benefit for us. These two examples have, I would say, three main points. First of all, market signals, market price signals are crucial for the functioning of the electricity markets on a daily basis, on an hourly basis, very short term for the next 24 hours. UPM, secondly, is very active in optimizing its electricity generation and consumption, again, based on market prices. This helps balance the market and does provide us with value creation opportunities.
The third point being that in an energy-intensive business, such as communication papers, being able to adjust production based on energy market prices is a clear competitive advantage. Let's move to cash flow. As we discussed, in the second quarter release and presentation, also, the third quarter operating cash flow for UPM was affected still by cash outflow related to energy hedges. The rise and volatility in energy futures prices across the forward curve continued in the third quarter. Futures prices, as you can see on this slide, peaked in August and moderated thereafter, ending the third quarter still on a higher level than at the end of, Q2. This resulted in cash outflow of EUR 681 million related to the futures contracts.
This cash flow taking place during the third quarter, or a total of EUR 1.783 billion in the first nine months of 2022. As we discussed three months ago, this cash flow will later be offset by a similar or larger cash inflow, either from the energy hedges if the futures prices come down or from the electricity generation and sales at the time when these hedges mature and the electricity is produced. In the meantime, it does tie up liquidity, and to ensure strong liquidity in all circumstances, we signed committed credit facilities totaling EUR 4.3 billion during the third quarter. All in all, the exceptional energy market situation does indicate strong earnings potential for UPM Energy.
Still continuing on cash flow, this slide shows our cash flow during the first nine months of the year. Operating cash flow was negative EUR 1.068 billion year to date. The main reason for this and the only unusual item is the cash flow related to the energy hedges. During the first nine months, this cash flow of the energy hedges totaled nearly EUR 1.8 billion, and as I just described, this will later be offset by a similar or larger positive cash flow. Working capital increased by about EUR 600 million year to date if we exclude the items related to the energy hedges. This mainly comes from inflation, everything being more valuable, value of receivables, inventories being higher.
Below operating cash flow, you can see that the investments are taking place at the expected rate. We have guided for investments to total EUR 1.5 billion in the full year of 2022. We expect the Paso de los Toros pulp mill and the Olkiluoto 3 nuclear power plant to start contributing to earnings and cash flow already next year, while the CapEx starts to then decrease. Finally, within the second quarter, as we are looking at the first nine months in this slide, in the second quarter, the dividend payment took place. Looking at the financial position of UPM, net debt increased to EUR 3.133 billion at the end of the third quarter, and the net debt to EBITDA ratio was 1.39.
A significant part of the increase in net debt is temporary due to the cash flow impacts of energy hedges and future energy generation. Our liquidity continues to be very strong at EUR 5.2 billion in total in cash and unused credit facilities at the end of the third quarter. Here you can see our outlook for 2022. We expect our comparable EBIT to increase from 2021 during this year. Following the record strong third quarter results 2022 third quarter results, our financial performance is expected to continue above last year's level. It is good to note that there remain significant uncertainties in the outlook. Nevertheless, we expect to reach a new record for UPM's full year earnings in 2022.
In the fourth quarter, we do have two scheduled maintenance shutdowns, one at our Fray Bentos pulp mill in Uruguay and one at the Lappeenranta biorefinery. We estimate that the EBIT impact of these shutdowns will be about EUR 50 million during the fourth quarter. At this point, I'll hand this back over to Jussi for an update on our strategy.
Thank you, Tapio. I guess that, you know, before I focus on those areas that Tapio mentioned, the strategy and the transformative investments, you know, it was a great proof point what Tapio was presenting on the slides five and six of the operating model of UPM. It is not only that the businesses are having the operating model that will cope with the input costs and the prices of the products, but on top of that, UPM is having a very efficient energy actually management in place, which is, as Tapio stated, at the same time it is providing a clear economic benefit for our energy business and especially for our communication paper business, what was actually the case in the third quarter as well.
Basically, it is actually now we have an even wider perspective of the operating model, how it operates in UPM. Let's move on into the focus areas. This is not a big surprise that we are presenting this, but this is something that we repeat that, you know, protecting our profitability is the main task of today, and then at the same time to really make these transformative projects proceeding as they are planned, you know. Given the whole high uncertainty in the business environment, our focus is very clear, and therefore it is visible on our results as well. You know, let's move into the next page.
This is also a very familiar illustration of the transformation of UPM, but it is actually every quarter. It is more a proof point where we are, as you can see the numbers. Through our spearhead of growth, we will grow the businesses where the long-term growth fundamentals are strong and returns are supported by unique competitive advantage or the barrier to entry factors. We have three large growth projects ongoing, underway and nearing their startup phase. These are of course the Paso de los Toros pulp mill in Uruguay, Olkiluoto 3 nuclear power plant in Finland, and Leuna Biochemicals refinery in Germany.
On top of that, we actually just completed the acquisition of Raflatac, which is very important growth step in our Raflatac business, and we will come back to that as well. We have one project in basic engineering phase, namely the Rotterdam Biofuels Refinery, which is proceeding well as well. As we see, our growth is in an intensive phase. At the same time, we continue to take care of the competitiveness and the cash flow generation of the Communication Papers business, which operates in declining market. There I'm really happy how the business has been run. First, let's go into the Raflatac.
Actually, as mentioned, we completed the acquisition of the AMC AG, a label materials company based in Germany, in September. The acquisition will accelerate Raflatac's growth, expand its product offering, and that is maybe the most important part, and then strengthening Raflatac's position in the filmic labels in Central Europe. AMC has two good quality label factories in Germany. It has been consistently growing and profitable in the past years, and in 2021, its sales totaled EUR 110 million. The acquisition is expected to result in good synergies as we have guided. Moving to the Paso de los Toros pulp mill project in Uruguay, it's continuing well.
The project will grow our pulp business by more than 50% with a very competitive cash cost level of $280 million per delivered ton of pulp. Production at the mill will start by the end of the first quarter of 2023. At the mill site, the machinery installation is nearly completed. The commissioning phase is progressing. The auxiliary boiler and the power boiler have already been commissioned, and the commissioning of the water intake and the treatment process air system, fiber line, and wood handling have already started. A significant milestone in the project was reached when the new pulp terminal, i.e., the Montevideo Harbor, was inaugurated in October, as you can see from the picture. Moving to Leuna. Construction at the biorefinery site in Leuna, Germany is proceeding as planned.
You can see in these pictures how the refinery is taking shape. Production at the refinery is expected to start by the end of 2023. Here we are opening a new growth business for UPM, providing more sustainable solutions for replacing fossil-based materials in many end uses. The key customer interest is innovating Biochemicals production, and it is very inspiring. Finally, the Olkiluoto 3 is in the testing period as we speak, and it continues. Once the whole plant is in commercial production, the unit will grow our energy business almost by 50%, providing much needed emission-free electricity to the market. It will significantly improve Finland's electricity self-sufficiency as well as the climate performance of the Finnish electricity system.
Last but not least, looking at the electricity future prices, it increases the earnings potential of the UPM energy business area. This is only a high-level illustration of the CapEx, which we update you every time. Our estimated CapEx for 2022 is unchanged. It will be around EUR 1.5 billion. As you can see from this picture, the CapEx will start to come down next year. Then finally, ladies and gentlemen, I will actually stop here by saying that UPM long-term transformation is visible in the shareholder value as well. Rarely have there been so many uncertainties in the world, geopolitical and in the global economy as there are today.
The high uncertainty has impacted stock market during the year, but then UPM share price has not been immune, but the company has held up very well when it comes to value. I believe that we are well prepared for the face of uncertainty with the high performing businesses, and agile operating model and strong balance sheet that we have. This year, we expect our annual earnings to reach the new record heights. In addition, our growth projects are nearing their startup phase, adding significant new earnings in the future.
Over the longer term, I am confident that our Biofore strategy is well calibrated to provide what the world needs in the future, competitive zero carbon energy and sustainable and renewable materials for the many, many possible end uses. I think that I will stop here with the summary and we are prepared to go for the questions. The operator.
Thank you much, sir. Ladies and gentlemen, if you'd like to ask an audio question, please press star one on your telephone keypad. Please ensure also your mute function is not activated to allow your question to reach our equipment. If your question has been answered and you wish to remove yourself from a queue, please press star two. Once again, please press star one to ask a question. The first question today will be coming from Andrew Jones, calling from BNP Paribas Exane. Please go ahead. Your line is open.
Thank you. I've got two questions, if I may. Firstly, on the strong performance in energy, clearly just on Olkiluoto 3, we've had some slight delays on its commissioning. Can you just reconfirm at this point, is the UPM board hedging the output from Olkiluoto 3? Then also the second follow-up from that is, assume the board will begin to hedge Olkiluoto 3 outputs in due course when production is more reliable from it as it has done with Olkiluoto 1 and 2. Then my second question is on the area of biofuels. Clearly a very, very strong record of production and profits from that business in Q3. How should we think about that in the context of the board currently evaluating the decision on the potential Rotterdam Biofuels Refinery?
Would that presumably make that project much more appealing in terms of the trends profile going forward? Thank you.
If Tapio talks about the Olkiluoto delay, I might actually start with the biofuels. Of course, yeah, the Q3 was a record quarter for the biofuels.
It is a great pleasure to see how the operation is moving on in Lappeenranta. You know, we are doing record production. We are making record profitability of it. When it comes to Rotterdam, the basic engineering is proceeding as planned. Of course, then when that is done, we are coming to a kind of phase where you need to think about timing on investment. I would not invest there today with very high uncertainty of the raw material prices, whether it's steel prices are up and components and construction. The timing can change quite rapidly as well. The timing is crucially important when to invest that you are not overpaying on the investment.
Basically, the basic engineering is moving on, and when it is done, we are entering the typical UPM phase where we are then actually drawing the conclusions of the basic engineering and the timing is very important when to take the FID decision based on those analyses.
Yes, just to your question on Olkiluoto 3, there has been, like you said, some additional delay to continuing the test program in Olkiluoto 3 and also to the start of the sort of regular operations. Teollisuuden Voima (TVO) on their website maintains good information on that. Sort of in addition to their sort of notices to the exchange, you can follow the updates there.
As far as hedging is concerned, like we have said earlier, given the uncertainty on the Olkiluoto Three volumes, we have not earlier hedged any of those. All the hedging that has been done that is in place is in relation to the old, in a sense, existing capacity. As far as Olkiluoto Three is concerned, before we would start hedging any of the volumes, then we will wait to see, in a sense, then the sort of outcome of the test runs and therefore the, let's say, sort of stable outlook as far as those volumes are concerned. No hedging at this point in time yet.
Great. Thank you both.
Thank you, sir. We'll now go to Lars Kjellberg calling from Credit Suisse. Please go ahead.
Thank you for taking my questions. Just coming back to a bit about the uncertainties. Clearly, you are operating really well, as many companies are in the paper business. It seems as if there's clearly some companies, including UPM, that is cost-advantaged. But when we're looking at the uncertainties now in terms of macro outlook, consumer potentially being out of wallet, where do you sort of see any material changes to the outlook? You called out wood products being one of them, where construction activity has come down. Raflatac seems to still be doing really well, but we're also seeing packaging companies talking about lower volumes. So just a bit curious how we should think about record profitability in a weak market and how we should think about sustaining this extraordinary good operating profit for you.
One specific question on pulp, you called out sort of strong demand and you're back on operations again, and yet your pulp deliveries in the quarter were down almost 10,000 tons versus a year ago. Is that due to you still building inventory or why did we not produce more pulp or ship more pulp in the quarter?
Well, let's say on the outlook, of course, macro outlook impacts our businesses as well as others. Like you said, in the construction sector, we have seen some first signs of kind of the cycle turning, even if in again, the plywood business actually, the sort of logistics related end uses like obviously LNG tanker projects but also vehicle flooring continue to be strong. Raflatac perhaps compared to some other kind of segments of the packaging business, we are operating in a sort of specific niche or specific niches in the packaging materials space, so driven by actually a multiple of different sort of end use drivers.
Of course, e-commerce being one, private consumption of personal care and sort of daily hygiene products another, but then also a number of sort of special end use segments, medicals, and so on. Perhaps this kind of diversification of end uses gives us a little bit different sort of outlook and therefore stability to the market than perhaps for the more commodity kind of packaging materials. Pulp, obviously, pulp demand in the globe and Asian markets. China is affected by let's say how the Chinese economy develops. Of course, some uncertainties there possibly in the future. At the same time, the U.S. market seems to be quite, the U.S. economy quite really so resilient, so to speak.
On your volume question, let's say, it's always, let's say, a kind of a number of factors that sort of explain the difference between two quarters, whether it's this current quarter or the comparison quarter. It's inventory effects and also the fact that in the third quarter last year, we had quite strong production.
Maybe lastly I will continue with the margin management in that respect that, you know, typically when there has been a rising costs, and then we haven't had any agility to react on the rising costs, you know, because of the long-term deals. We do not have, like in Communication Papers or no other businesses, long-term deals anymore. The margin management is really crucially important. I believe strongly that with this operating model, we can have the agility to react also when the market turns. We will, of course, we'll see then later on.
The operating model of UPM is now proven to be very efficient, and especially now when the cost has been rising, then we have been able to really react on the rising costs quite nicely as the result is showing that.
If I may just have a really quick follow-up. On the one cost item that, of course, stands out to you versus maybe some of the European continental companies is wood. I'm not sure, I may have missed out when you talked about the potential Rotterdam business, but securing raw material as an uncertainty, it feels as if there's now, you know, competition coming from wood, from the energy sector, which is now starting to spread up to the Nordic as pushing wood costs. Is that starting to have a meaningful impact on you? Is that what you meant when you talked about Rotterdam and securing raw material? Was that more about the equipment side of steel, etc., that you talked about? Just to be clear.
Yeah. I guess that, you know, when we talk about the Rotterdam, you know, typically, you know, you make the investment when the typical cost of, you know, the machinery will actually be not, you know, on the highest. You know, if you think about the steel prices today and all kind of prices, energy, construction, and what have you, they are on the high level. Should you make the final investment decision on that moment? Not necessarily, at least in UPM. We definitely think the timing is very crucial that, you know, we do have an outlook actually for a competitive pricing of the machinery.
We were lucky with the Uruguay in that respect that you know we made the decision in summer 2019 and made all the major deals in several months after that decision in summer 2019. Definitely we were benefiting out of that quite greatly that we were able to have a right timing it you know. Of course we didn't know anything about the COVID coming.
Yeah. Cost and availability, is that becoming an increasing topic heading into 2023, or how should we think about that?
I couldn't follow you. Now at least I don't know if, Tapio, you could.
Yeah. Could you repeat that question?
Because it is a bit bad line.
Yeah, wood costs and availability has been called out by some as a topic in Europe. Again, as the energy sector is competing for alternative fuels to highly priced fossil fuels.
Wood cost, of course, is, you know, predominantly, you know, Finnish issue. You know, we are having in few months' time more than 3 million tons of capacity on pulp making in Uruguay where the wood cost is stable and the cost of the operations will be efficient. Of course it is going to be a challenge here in Scandinavia where you have the challenge of wood going, the biomass going also to the energy production. That is something that we are prepared well. Of course, even the strike that we had earlier this year has helped us in that respect that we do have good reserves as we speak.
Of course it is something that to follow that, you know, how the cost of wood for the production of the Finnish assets, in our case is increasing.
Okay. Thank you.
Thank you much, sir. We'll now move to Robin Santavirta calling from Carnegie. Please go ahead.
Yes, thank you very much. Now, first of all, related to Raflatac, very strong quarter in Q3 with earnings almost 50% up from the past few or the average of the past few quarters. What are the key reasons for Raflatac's strong performance in Q3, and is this sustainable going forward? The second question I have is related to the slide you have, number five and especially number six. Should we read this as I understand that the hydropower works sort of on the balancing market. That is easy to understand.
Is it so that in communication papers as well, you have been able to sort of sell some of your secured power on the balancing market when the prices have been very high, I guess up to EUR 5,000 million per megawatt power?
If I start with Raflatac, you know, it is a combination of many things. First of all, in Raflatac, we have changed quite dramatically our operating model where once again, you know, the costs and you know, commercial decisions are combined all the time when making the decisions. It is once again coming back to kind of a operating model. Of course it is a good actually solid growth in the business. Demand has been good, you know, and we have been able to really take care of the costs, i.e. fixed costs and variable costs on top of that. It is, there's nothing actually extraordinary.
I feel very comfortable with Raflatac now that it is operating above or double digit, you know, EBIT margin as it has been for several quarters already. Margin management is crucially important.
Maybe I'll comment on the energy balancing. Basically, like those slides, they sort of illustrate two different types of situations. As you know, we have the 24-hour day ahead market, which is the first slide basically. Whether you are buying or selling electricity, you put in your bids for purchases or sale of electricity for the next 24 hours. There, of course, depending on your view in a sense, whether you're consuming or buying, how the sort of next 24 hours energy balance will behave, depending on weather and wind and all the factors. In a sense, you can optimize your consumption.
Consume more if you think that the nighttime prices are going to be very low, run your mechanical power plants full and fill in your tanks. During the day, consume less of electricity, produce less mechanical pulp as an example, and run the paper machines on the pulp that is in the tanks. You can not only, in a sense, take a view on the day. That flexibility to some extent is even, let's say, more than 24 hours at our paper mills. The other side of the equation works for the power generation of the hydro assets that can be regulated. That's in a sense the sort of 24-hour ahead view.
What happens on top of that is that, during the day, there is the intraday market where there's normally always some trade to be done. Also some special situations like, the illustration from the, beginning of September where you get, even up to EUR 5,000 million per megawatt hour prices. There, of course, what is needed is, either someone to produce more or someone to produce less, someone to consume less, to balance the market if you have a situation where, actually there is a kind of a error in forecasts or some other factor that causes a sort of a short-term imbalance in the market.
As an example, we will look to find additional output from our hydro assets, as was done on that example there. Also we can not consume in our paper mills the amount that we have in the previous days' bidding bought, and get paid for that. In fact, on a day like what we have described there on several of those hours of that total flexibility needed to balance the Finnish market, about half came from us. Combination of production of additional hydropower and then the demand flexibility from the paper mills.
I understand. Thank you very much for that useful detail. Final question, short one. Uruguay, how long does it take from start until you reach $280 million a ton?
Yeah. The cash cost level. Of course, it is actually. We are actually ramping up. You know, the pulp mill ramp up is actually pretty fast. You know, within one year you are on the nominal capacity easily. Basically if things goes like planned, you know, it is ramping up quite quickly and $280 milion is very much, you know, from the beginning already when it come to cash cost, because of fixed wood price and, you know, all of the things. Of course it is taking some time to ramp it up into the full production.
All right. Thank you very much.
Thank you much, sir. We'll now move to Linus Larsson calling from SEB. Please go ahead.
Thank you very much. A question on CapEx. Looking on your slide 17, it looks as if CapEx for 2023 will be in the region of EUR 800 million. Is that rightly understood? If you could please break that down, how much is expected to go to Leuna, base maintenance CapEx and other?
Linus, I guess that it goes like, you know, it is a ballpark type of number, you know. We have not guided yet. But of course, you know, we do have the normal CapEx which is in the nature of +300 million and then the rest goes for the growth projects, you know, i.e., the Leuna and some of course related to Paso de los Toros.
Right. Thank you. Then just coming back to the Rotterdam project and thank you very much for the comments so far. Could you just maybe add some commentary on the feedstock discussions that you have? How I understand there may be different options, but what's your current thinking of choice of feedstock or feedstocks?
It has not changed. It will be mainly UPM-integrated feedstocks. Plus on top of that we definitely go for some feedstock which is coming from the market. No change on that topic at this point of time.
When you say, which integrated feedstocks are you contemplating right now?
All kinds of, you know, related ones. One typical is of course the crude tall oil which is a residual of the pulping process. We do have these oily crops as well that we can plant in like a winter crop and then of course some other related, you know, kind of residuals that we have in our processes. I don't want to go into further details on that, but you know, they are very much related to UPM residuals and that kind of materials.
Great. Okay, thanks. No, no change there really?
Not really.
Just overall variable costs, the outlook for the fourth quarter, we've touched upon it, but how do you see maybe on a group level variable costs including wood, chemicals, energy and so forth?
Well, I would say looking, let's say, a bit forward beyond sort of fourth quarter even, I would say we are in a high-cost environment. On the other hand we do see some first signs of some of the, let's say, inputs starting to sort of normalize, perhaps the worst bottlenecks in a sense being behind us or so on. Obviously, whether it's logistics availability and cost, oil prices have come down somewhat from the peaks, which will then impact some of the sort of inputs, for instance, for our Raflatac business eventually.
Perhaps early to sort of call an age of deflation by any means here coming, but we are perhaps starting to see in a sense the first signs of this kind of a cost cycle starting to turn as well eventually. Of course we have specific areas, like we have talked a lot about energy, particularly here in Europe, which is also driven by events in a sense which cannot be forecasted.
Okay. That's helpful. Thank you.
Thank you very much, sir. We'll now move on to Harri Taittonen calling from Nordea. Please go ahead.
Yes. Good afternoon. Continuing from Linus' question on the page three bridge and just, I mean, the variable cost indeed seems quite manageable that what you show there on the QoQ bridge. I mean, if you give some color on the split or particularly how the energy cost increased, how big a role it played there, and how did you end up being affected by the higher sort of natural gas prices in the continental European paper production? Because I guess that was sort of one worry before the result was pre-announced.
We don't have any sort of further breakdown or detail to sort of give on that. Of course, still we have been having some benefit of whether it's gas or electricity on the consuming side, some benefit of hedges that have been put in place earlier. That has kind of given some protection still against the increases. Again, I would say, of course, like you can see still on this page three, both prices and variable costs were sort of helping us. We have been able to manage the margins.
Sure. Yeah. Okay. Well, two quick questions. One, you already explained quite a bit on the electricity, but one of your peers, West of Finland, mentioned about additional kind of revenue potential coming from sort of a downright sort of stabilization fee or compensation for stabilizing the grid. I mean, is that something that you was already benefiting there, or is it something that could be a sort of additional source of revenue or sort of a value for your electricity? That's one question. The other one was the plywood, because apparently isn't it so that quite a bit of the supply for the European markets is out in the plywood business because of the EU sanctions against Russia, and is that sort of a. How do you see that?
Supply, demand, and outlook for the next few quarters.
I will start with the plywood and Tapio will continue with the energy. Plywood, yeah, that is correct, Harry, that the birch plywood business is having a very good supply-demand balance as we speak. Obviously, the main segments that we have in birch plywood is, of course, the LNG tankers where you have seen that there's a huge fleet to be built in the next coming two years, which is actually great to see that, you know, we have a really big market share on that business. Then the vehicle flooring is another one. Remains to be seen how the recession or slowdown of the economy will affect on that. Those are the major big kind of segments on birch plywood.
What has been great for UPM is that we have been able to compensate those losses that, you know, our Chudovo mill, which is now stopped. We have been able to ramp up our Finnish mills based on that we are now having continuous run which means that we can compensate a lot of that those lost volumes in birch plywood that was produced in Russia. And that is where actually the market is. Of course, the softness comes from the softwood, i.e., the spruce plywood where the construction industry is down, which is actually similar to timber business that, you know, there the softness is coming. Basically there as well, we are having a very good cost position.
Okay.
If I comment on the stabilizing the grid, I'm not sure if I quote correctly the reference to a peer. Maybe one point-
Yeah
The point that we need to sort of illustrate with this slide concerning the 8th of September is that Fingrid, the system operator here in Finland, for managing the energy balance, has already for years basically turned to the markets and to the market players to buy that kind of capacity or capability to balance the grid. Of course, let's say in a more normal situation it works through the intraday market, then we have this sort of specific tight situations like this September example where then Fingrid puts out their basically special tender when they need volume to balance the market.
On top of that, the sort of stability reserves has been a kind of a regular part of the market during some years already, where even shorter, within hours or minutes, or now in the future, even within seconds, they buy flexibility to then manage the balance and the frequency in the grid with, for which purpose, for instance, UPM has put in operation already a super capacitor here in Finland that can give those, let's say, less than sort of a minute kind of flexibility to the market.
Okay. Thank you.
Thank you, sir. We'll now go on to Cole Hathorn calling from Jefferies. Please go ahead.
Afternoon, thanks for taking my question. Just looking into the biofuels business, could you maybe give some color on how you see that business developing into Q4 and then into 2023? I mean, the profitability levels are extremely high, and I understand you're calling out high prices, but I'd just like to understand that feedstock. Is all your feedstock internal, so your own crude tall oil, so you know, your costs remain stable but prices are high, that's why you get such good profitability levels? Thank you.
Basically, the crude tall oil is whatever is the source, you know, it is in our case as well priced based on the market prices. Basically, if it's the internal source of, you know, it will be market price anyway. What we have seen lately, the increase of the crude tall oil prices has been occurring. Basically, you know, that is actually very clear in UPM case that, you know, even if it's coming from internal sources or external sources, the business itself is based on market prices. That's how we run the business. Of course, we are not unfortunately giving any guidance for the profitability going forward.
Of course, we are trying to manage the margin again, where we sell, what are the markets and trying to be very efficient on sourcing.
Thank you. Just following up on communication paper, you see you mentioned about managing the margin, and you've talked about the energy management doing well on the production side. If we start to see cost deflation, how do you see that impacting your communication paper business? Should we see, you know, prices coming down, but you're effectively managing the profitability and margin levels with price and other costs coming down? Thank you.
That is what we are aiming actually. Like I said, that typically we have been very challenged when the input costs have been rising rapidly, you know, and we have had in UPM as well in the industry, you know, long-term price agreements. Now, we do not have long-term price agreements, you know, and of course, you know, if there will be changes in the input costs and operational costs, you know, of course, and how the market will develop, you know, we are trying to manage that with a very flexible way of operating to generate good margin even if the market turns. We'll see.
You know, this is where we have learned a lot, you know, during the last couple of years.
Thank you.
Thank you, sir. As we have no further questions, I turn the call back over to the organizers for any additional or closing remarks. Thank you.
Thank you. Hey, ladies and gentlemen, nice to have you in with this one hour. All the best and have a nice day. Thank you.