Ladies and gentlemen, dear audience, welcome to UPM's second quarter 2023, result webcast. My name is Jussi Pesonen. I am the CEO of UPM. I'm here with, UPM's CFO, Tapio Korpeinen.
Hi to everyone.
Ladies and gentlemen, we will today cover three main topics. First, we will discuss the second quarter results and the outlook. Continued low volumes, significant lower pulp and energy prices, and high maintenance activity resulted in exceptionally low second quarter results. However, we expect deliveries to improve and variable cost to decrease in the second half of 2023. Second topic, we will discuss some of our measures to improve competitiveness. As of today, we have implemented and planned actions in place to reduce our graphic paper capacity by 18% during 2023, and reduce the number of employees by 8% compared to autumn 2022. Targeted fixed cost savings exceeds EUR 100 million. Thirdly, we will obviously discuss progress of our growth projects. Paso de los Toros pulp mill ramp-up is proceeding very well. I will come back to that.
Leuna project is proceeding with some delays due to headwinds of what we have been experienced, and we will come back to that as well. All in all, UPM's transformation continues. The positive long-term drivers and growth prospects for UPM are intact, and they are really exciting. Let's start with the second quarter results. Our second quarter sales were EUR 2.558 billion at the same level as last year. Comparable EBIT was exceptionally low at EUR 140 million. On the other hand, operating cash flow was strong at EUR 459 million. During the first half of the year, the business environment has been exceptional. Political uncertainty, low economic activity, and high inflation were impacting consumers.
At the same time, the extraordinary destocking in various product value chains continued throughout the first half of the year. Consequently, deliveries of our products were well below estimated end-use demand and well below historical low long-term trends. This was very similar to Q1. We saw no meaningful improvement in markets, the market deliveries during Q2, but no meaningful weakening either. Unusually low activity in most pulp-consuming sectors impacted the pulp market. Pulp and energy prices fell from historical heights in second half 2022 to cyclical bottom levels by the end of Q2. This affected profitability of our fibers and energy businesses. In the other businesses, we continued to manage our unit margins successfully. Positively, variable costs started to decrease from Q1.
Q2 results were also impacted by high maintenance activity, with an EBIT impact of EUR 95 million all in all. The current down cycle in our product markets has been exceptionally severe and has lasted longer than what we expected. This is not the normal cyclicality in any of our businesses. On this slide, we again show European self-adhesive label market shipments to illustrate the intensity of the current destocking. As you can see, demand for labels historically has low volatility and healthy long-term growth. In this picture, you can see it very clearly. This is natural as the high share of the label materials demand goes to a daily consumer products and those kind of end uses.
In Q1 2023, market shipments of self-adhesive label materials were down by 33% from that of last year, followed by 31% decline in Q2. This is clearly impacted by significant destocking, even though the underlying end-use demand is estimated to have decreased from that of last year somewhat. Destocking has been impacted other product markets as well, including Specialty Papers, Communication Papers, and pulp. The destocking component is temporary and is expected to phase out gradually during second half of this year, allowing market shipments to recover towards the end, underlying end-use demand. During this kind of a low-volume period, we continued to focus on managing our margins. This has been successful in the Communication Papers, Specialty Papers, Raflatac, and Plywood businesses, and gives us a good position once volume starts to recover.
Meanwhile, variable costs already started to decrease during the second quarter from that of the first quarter. We expect further tailwind from the variable costs in our second half of the year. Ladies and gentlemen, now I will hand over to Tapio for more analysis of the results. Tapio, please.
Okay, thanks, Jussi. Here on the left-hand side, you can see the comparable EBIT bridge from the second quarter compared to the last year second quarter. In this comparison, pulp and energy prices were significantly down, while variable costs increased. Because of timing, the cost of pulp and energy were still higher in the businesses where we are consuming pulp and energy, mainly, of course, the paper businesses. There is a delay before this sort of market price drop is then materializing on the costs of those businesses and coming through on the bottom line. Also, in this wood cost increase was less than half of this component in this comparison.
Volumes and fixed costs, uh, both increased, uh, and here it's good to note that the comparison period, uh, last year included the strike in Finland. Sequentially, when comparing to the first quarter of this year, we can see sales prices decreasing in all business areas, and a clear majority of that impact that is illustrated here is coming from pulp and energy prices. This obviously affected profitability in fibers and energy businesses. But here, as you can see, we're starting to benefit from decreasing variable costs, which is coming through in this second quarter comparison to the first quarter. UPM Communication Papers, UPM Specialty Papers, UPM Raflatac, and UPM Plywood succeeded well in margin management, largely offsetting lower sales prices with the decreased variable costs.
Delivery volumes increased from the first quarter, particularly for pulp and energy. Fixed cost higher here, mainly due to the maintenance activity, which was higher in this quarter. Looking at the development by business area, the quarterly development here, the second quarter, EBIT was broadly on the same level as in the first quarter in four businesses: Communication Papers, Specialty Papers, Raflatac, and Plywood. Communication Papers and Plywood performed well, maintaining good unit margins and relatively healthy profits despite low volumes. That is, I would say, a good result also in Communication Papers, considering the fact that the average sales price decreased by about 10% from the first quarter, but maintaining good unit margins.
Raflatac and Specialty Papers succeeded in unit margin management, but results were weak due to continuously low volumes. Comparable EBIT decreased in fibers and energy. In these businesses, volumes increased, but prices declined significantly from comparison periods. The average pulp price decreased by 22% from the 1st quarter, whereas the average electricity price decreased by 30%. Fibers was impacted by the maintenance shutdown at the Kymi mill. Energy had the maintenance shutdowns of the Olkiluoto 1 and 2 units. In other operations, reported in that segment, our biofuels business carried out the turnaround maintenance shutdown, meaning this is a large shutdown that is only taken every four years. We reported a negative EBIT in other operations.
As Jussi mentioned, the total maintenance impact in the second quarter was about EUR 95 million. Cash flow was strong in the second quarter. Operating cash flow was EUR 459 million. And as is shown here, we released EUR 196 million cash from working capital during the quarter, which is a good achievement, again, considering the fact that as Paso de los Toros ramp-up is happening, that has been obviously tying up working capital. Cash flow coming in from the energy futures contracts continued, and now the energy hedges have largely released the cash that flowed out in a sense, to an extraordinary extent during the energy market spike last year. Second quarter free cash flow was EUR 180 million.
Our financial position continues to be very strong. Net debt was EUR 2.557 billion at the end of the second quarter, which is 1.07 times last 12 months EBITDA. Our liquidity was very strong at EUR 6.4 billion. Here we have our outlook for 2023. UPM's full year 2023 comparable EBIT is expected to decrease from last year's 2022 EBIT. Comparable EBIT in the second half of this year is expected to be on a similar level or increase compared to the first half of 2023. Our delivery volumes are expected to increase during the second half compared to the first. Destocking is expected to gradually phase out during the second half, which will enable UPM's deliveries to recover towards the underlying end-use demand.
The production ramp-up of the Paso de los Toros pulp mill and the Olkiluoto 3 nuclear power plant unit will add to our deliveries during the second half of this year. The second half starts with low pulp and energy prices, impacting these businesses. In other businesses of UPM, we continue to manage margins. Variable costs already started to decrease in the second quarter compared to the first, as we just looked at. We expect variable costs to continue decreasing during the second half of the year. In addition, we are implementing measures to reduce fixed and variable costs. Now I'll hand it over back to Jussi for some comments on our growth projects and actions to improve competitiveness.
Thanks, Tapio. Let's start with an update of Paso de los Toros pulp mill. Here we have good news. The production ramp-up is proceeding well. Paso de los Toros startup started production in mid-April, and the shipments, its first customer deliveries was in month of May. The ramp-up is proceeding according to our plan. We have now reached and reaching 70% run rate in July. Of that, we expect the mill to be EBITDA positive in Q3, even with the current bottom of the cycle pulp prices. With a combination of the competitive wood supplies, scale, best available technology, and efficient logistics, the mill is expected to reach highly competitive cash cost level, approximately $280 per delivered ton of pulp once the full production and optimization is done.
The mill will grow our pulp business by more than 50% in highly competitive way and in highly competitive area. The most of our pulp capacity is now in Uruguay, more or less 60%, where the plantation-based business platform is not only highly competitive, but also offers future growth opportunities in various biomaterials in the long run. Another milestone during Q2 is that the Olkiluoto-3 nuclear power plant unit started regular commercial electricity production in May, increasing our CO2-free electricity output by nearly 50%. In the long term, UPM's competitive and agile energy business platform will open growth opportunities in synthetic fuels and materials. Our biochemicals investment project in Leuna, Germany, is proceeding and obtained the operating permit in May.
However, the project has been negatively impacted of the overall geopolitical situation and material and resource availability and prices. Building a first-of-its-kind biorefinery under these circumstances and making required adjustments has been demanding and has caused rescheduling and delays in the project. The completion of the investment project is now expected to take place by the end of 2024, and total investment is estimated to be EUR 1.180 billion. The project continues with full speed. The civil construction on the site will be completed during Q3, i.e., this quarter, and commissioning will start in main departments or process departments, and it will be implemented in phases starting in fourth quarter of this year. We have full confidence in a profitable biochemicals business and the technologies that what we have been using in Leuna.
Learnings from the first project will be benefiting our future scaling up of the business. On the commercial side, we have successfully created collaboration and partnerships with different type of distributors and customers and co- global brands. Interest for our renewable products replacing fossil materials has been proven to be high. In here, the Leuna biorefinery is progressing, as you can see from these six different spit pictures. In UPM, we need to ensure our competitiveness and we need to protect our profits. Let's start with the UPM Communication Papers. UPM Communication Papers continue to adjust its capacity and costs to meet the profitable customer demand in line with the long-term market outlook.
We closed down two paper machines by the end of second quarter, i.e., the Schongau PM6 in Germany and the Steyrermühl PM4 in Austria, with total capacity of 485,000 tons. Today, we have announced the planned closure of the Plattling mill in Germany by the end of this year, with capacity of 595,000 tons. Together, these closures would reduce capacity by almost 1.1 million tons, or in a different way of putting it, 18% of UPM's total paper capacity. The annual fixed cost savings would be totaling approximately EUR 100 million. That is not all. In UPM, we already have utilized our unique opportunity and operating model to enable a consistent and timely actions to ensure our competitiveness.
We started this journey already September last year by setting targets for each business and each functions to manage our margins and to take care of our variable and fixed costs. As I said, UPM's operating model is in this continuation, consists active activity across businesses and functions. We have decided all kind of decisions and actions to restructure, take temporary layoffs, flexible working hours, and all kind of things on top of what in UPM is doing in the paper business. Decisions, actions since autumn 2020 is already done and decided to reduce number of employees by approximately 1,000 people, excluding exit from Russia, which was, if I remember correctly, 800 people. This is not including the planned closure of Plattling, which is then approximately 400 additional.
The positive long-term drivers and growth prospects for UPM are intact. They are really exciting. We continue to work on long-term growth, and our focus is focus area remains unchanged. We have completed major growth step in fibers and energy businesses as Paso de los Toros is ramping up and Olkiluoto number three is in regular commercial production. Next growth step will most likely be on the right and left wings of the picture, starting and scaling up the biochemicals business, completing the basic engineering of the Rotterdam biofuels, and looking into a growth options and timing of the next steps in Raflatac and Specialty Papers.
In fibers, we will continue to develop our competitive business platform to enable further growth later, i.e., meaning we will grow our raw material and focus on our raw material security for the future. This slide is showing the CapEx estimate for this year. Our CapEx is estimated to be on roughly EUR 950 million level, significantly down from that of last year, as we can see from here in this picture. Even if we do not have official CapEx guidance yet for 2024, We will come back to that in our third quarter reporting. The CapEx will continue to decrease from that of this year, and we expect that to be on a level of depreciations of 2024. That is a kind of rough estimate as we speak.
Ladies and gentlemen, our transformation continues. Our biggest investment, in investment, the Paso de los Toros pulp mill, is now ramping up nicely, and coming from the investment phase to contribute and contribution phase. Leuna, even if further delays, is making progress, and we will continue to prepare next steps in our journey. Meanwhile, as discussed today, we continue to take care of the competitiveness, cash flow, and our communication paper business profitability. I'm not going to read this again. You know, I guess that this is pretty clear to summarize that, you know, there has been a strong downturn in the markets, pushing the Q2 results to exceptional low levels. Delivery volumes impacted by destocking in various product value chains. Pulp and energy prices decreased.
Paso de los Toros, as already many times mentioned, is proceeding according to a plan, and so forth and so forth. Our positive outlook for the future is, and transformation will continue in UPM. This was the prepared part of the presentation, and now we are ready for Q&A session.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Justin Jordan from Davy. Please go ahead.
Thank you. Good afternoon, everyone. I've got two separate questions. firstly, I suppose I have to say well done to everyone involved in the successful ramp-up of the Social Action Responsibility in Paso de los Toros. Just moving to another spearhead, can you give us some more color on the challenges you faced in Leuna? does this impact the 14% return that you expect from the project, given you've seen the CapEx increase by over EUR 400 million? Secondly, just on your guidance of second half EBIT being similar or higher than the EUR 470 million comparable EBIT in H1, appreciate it's dependent upon easing destocking phasing out in H2. Have you seen any evidence of destocking phasing out as yet in areas like Raflatac or other business units to support that guidance as yet?
Thank you.
If I take first the Leuna, obviously, as I mentioned in my presentation, that, you know, the kind of resourcing, construction, raw material prices have been exceptionally high, and especially during this COVID times, it has been those kind of topics. Of course, we do have had some difficulties with some of the suppliers, but that is quite normal in all projects. Those have been the major reasons for the deviation of the original plan. Of course, the commissioning is already starting and has already started in some of the areas of the project.
Pretty confident on the business case and of course, the 14% of return of capital employed target is not the not at the same time floor and the ceiling. It is, of course, the kind of minimum that we want to see, and we are still very confident that the business overall, you know, going forward when we are expanding the business as well, easily is actually achieving that target. Remains to be seen, of course, this delay and increased budget is obviously causing some challenge for the first plant. You know, overall, the business is looking very good.
Maybe on the sort of commercial development side, one can say that the results have been quite promising so far, like I think Jussi was referring earlier. In that sense, if anything, things look better than perhaps when we were first looking at the business case. To your second question around the destocking, any evidence, obviously, like also Jussi was commenting already earlier, not enough to translate into deliveries during the second quarter of this year. We have seen when it comes to the order intake, for instance, in Raflatac, a kind of a steady sequential improvement, whether we look at the Q2 compared to Q1 or let's say, on a monthly basis. The recovery is happening.
We do have that evidence from the order intake, then remains to be seen in a sense, when it is to the point that then we start seeing the same in the deliveries. At the same time also, we can say that what we can see with the immediate customers of ours in various businesses, that any sort of excess that they may have been holding has started to be depleted. Visibility to the further stages is obviously more limited. Those kinds of signs in any case give us, in a sense, the sort of basis to say what we are saying, that we believe that the kind of recovery will happen during the second half.
Thank you, Jussi and Tapio.
The next question comes from Robin Santavirta from Carnegie. Please go ahead.
Thank you very much, and hello, everybody. Now, I have two questions as well. First, on the Leuna delay, what about the further expansion in biochemicals? I understand sort of previously, you said you want to see Leuna, well up and running and working before you can take decision to further expand in biochemicals. Is this sort of delay now also delaying potential further capacity expansion in biochemicals? That's the first one. The second one I have is related to wood raw material costs in Finland, especially, gone up quite significantly, the pulpwood prices. What is the latest that you can see in the market, and how should we expect this market to develop in H2 and in 2024? Those 2 things.
... If I start with the Leuna and then Tapio talks about the raw material cost, the Leuna delay doesn't have a necessarily direct impact on either or the biofuels, kind of, basic engineering that we are having or even the biochemicals preparation. We have separate teams, as I have said to you earlier, in also in biochemicals that is preparing for the next growth project. Of course, we would like to see that it works and all the technologies are working as we expect them to work, where we have a high confidence.
Basically, I wouldn't actually say that it would delay anything, at least the preparation with the separate, you know, kind of project teams is very clear that we do actually run with the full speed, you know, all of the preparations when it comes to biochemicals and fuels.
Maybe if I continue on the wood cost, and maybe perhaps some sort of comments on variable cost also in general, but kind of referring back to this slide number four, where we have the year-on-year and sequential comparison there. Again, if we look at the second quarter figures compared to one year ago, costs were up. As I said, of this bar here shown on this slide, then less than half, in a sense, accounts for the increase in wood cost, and that obviously primarily coming from Finland, as you were indicating. In the second quarter compared to first quarter, variable costs were already a tailwind for us or a tailwind showing through.
Actually, as we discussed this, at the point in time of our first quarter release, then I said that we expect to see a positive impact from variable costs, in this second quarter, as we already knew at that time that we were purchasing various inputs at a lower price than previously. Obviously, it takes some time before it kind of translates to the bottom line. The time lag is the longest, as we have discussed in the past, in wood. What we are seeing in the Finnish market is that the costs are starting to stabilize.
We have had some news even here in the sort of newspapers today that some of these research organizations are expecting market prices to start coming down already during this second half in Finland, in the Finnish wood market. How significant that will be, that remains to be seen. Obviously, again, there is that delay, maybe six months before it will impact. It won't impact, in a sense, our wood cost here in Finland this year, yet in terms of the result, I would say that the kind of stabilization is happening. Of course, like Jussi was pointing out, 60% of our pulp business is in Uruguay, where wood cost is very well under control.
Maybe a last point, I would make here is that we would expect a positive contribution on this slide when we look at it, next quarter and the quarter after that, or in the next release and the release after that, and would expect that the kind of positive impact would be, somewhat higher, better, compared to this second quarter sequentially.
Thank you very much for that detail. Thanks.
The next question comes from Charlie Muir-Sands from BNP Paribas Exane. Please go ahead.
Yes. Good afternoon, gentlemen. Thank you for taking my questions. I've three quick ones, please. Firstly, on Leuna, can you just confirm that in terms of raw materials availability, there's no concerns in that regard, it's purely a sort of engineering construction delay and cost increase? Secondly, you mentioned some startup costs in Paso de los Toros, and I wondered if they're material, whether you could quantify what they were in the second quarter, and would you expect the same quantum to recur in the third quarter or not? The last question relates to CapEx.
I just wanted to clarify your comment. I appreciate you said no formal guidance yet on CapEx for 2024. Did you mean to imply that you would envisage CapEx being in line with depreciation next year, accepting, obviously, that depreciation will be higher than this year's level? Thanks.
I guess that these are pretty simple to answer. First, Charlie, that you know, it is not related to raw material costs or raw material availability at all. The materials that I was referring was more or less, you know, steel and metal prices. Startup costs, we do not see any startup cost anymore in Q3, so they were only on Q2. We do not have guidance for that. The CapEx, as I said, is expected to be on the depreciation level of 2024, which is around EUR 600 million.
Great. Thanks.
The next question comes from Samu Wilhelmsson from Nordea Markets. Please go ahead.
Yes, thank you for taking my question, and thank you for the good presentation. My, my question is kind of, you've mentioned, several times in report and during this presentation, about the current bottom of the cycle pulp prices. Could you elaborate that a bit more? 'Cause what we've understood is that the pulp inventory volumes are at the record high, and they've been increasing, during early on the summer. Is there any some indication or evidence that makes you think that the we might have seen the bottom of the cycle pulp prices at the moment? Thanks.
Well, let's say we have seen, obviously, as far as inventories are concerned, still high inventory levels here in Europe. Volumes have been moving in China, so let's say, even if some increase there as well, more still, let's say, normal level of inventory. The evidence that we have seen is that, what you can read, obviously, in the public domain, which is that in China, in hardwood pulp, the four first sort of small $20, $30 increases in pulp price have gone through. That actually is indicating, let's say, some stabilization there.
Pulp prices, obviously, in Europe still have come down because they have been in a higher level than in China, but the kind of the price difference, in a sense, meaningfully between China and Europe is starting to be sort of neutralized, if you put it that way. We know that downtime, both, temporary downtime and permanent shutdowns, are taking place in the northern hemisphere, which, obviously is due to the fact that, those mills are generating negative cash flow, at the levels we are seeing in the pulp business at the prices where, we are kind of, arriving at at the moment.
Those are the reasons why we think that we are in this sort of a bottom-of-the-cycle territory at the moment, and then we will see how the pulp cycle, price cycle then evolves during the coming months.
To add on that, you know, that we have already heard as well that some of the integrated pulp paperboard manufacturers in China has been stopping the pulp facilities and being buying pulp from the market. At least, you know, it is actually indicating that the cash cost level is pretty tight.
All right. Appreciate the call. Thank you very much.
The next question comes from Lars Kjellberg from Credit Suisse. Please go ahead.
Thank you for taking my question. I just want to go back to Leuna trying to understand what you're talking about. You said that the plant will generally be ready and start commissioning in phases toward the end of the current year, but kind of the real startup is really not until end of 2024. Just to try and understand what that really means, and then indeed, to sort of commission the mill or the plant. The other one is on guidance for this year and the second half, specifically. Tailwinds from variable costs, improving deliveries is another topic.
You would, of course, have now the new pulp mill profitable and EBITDA positive in H2, and yet we're not expecting any sequential improvement in second half profitability. I just want to try to understand how to square the tailwinds and the new pulp mill, et cetera, with no change in H2 EBIT.
If I start with the Leuna, the new investment cost guidance is including, of course, the commissioning. The commissioning in this kind of facility is different to what it is in the paper mill or in pulp mill, and therefore, you know, section by section, we are commissioning these separate processes, and there are quite several of them. Then finally, by the end of 2024, the kind of all are put together, and then they are operating. This is the sequence there. There will be a longer period of the commissioning, compared that to the pulp mill.
Pulp mill is, you know, something that, you know, you just, like in our case, we ended the instrumentation erection actually in February this year. Finally we were starting up in month time, actually. This is not the case in this kind of facilities as the chemical plants are. That's the nature, and the investment cost of EUR 1.180 is including all of the commissioning costs as well.
Got you. They're gonna be capitalized as operating costs then. To your point, it's part of the CapEx itself?
Yeah.
There's no operational cost that would be incurred in 2024 until you probably start up.
There is, of course, you know, there are people, and there are fixed costs as well that are already in the operational costs as well as it is, has been this year as well.
Okay. Gotcha. Thank you.
... Maybe on the guidance, I think, Lars, you sort of summarized well the reasons why the guidance is that, sequentially we will see similar or improved second half.
Well, what I'm trying to understand, though, is why it doesn't actually improve more materially considering as Paso de los Toros told us, turning EBITDA positive as opposed to startups and tailwinds from cost. It's seems as if there's an up to that as opposed to the down bet.
Well, let's say, of course, we are living uncertain times, very big sort of moving parts that we have seen in the business during the sort of last six to 12 months, as we all know. I think, again, the sort of direction of travel, what we are indicating here is that, we again expect the profitability to be similar or improve.
Gotcha. Thank you.
Basically, you know, like Tapio was talking about that, you know, from quarter one to quarter two, you know, still the prices of pulp and energy went down.
Sure. Very good. Thank you.
The next question comes from Ephrem Ravi from Citigroup. Please go ahead.
Two quick questions. Firstly, energy, the prices have decreased to around EUR 42 per megawatt hour in the second quarter. Is there any way to see what the mix effect of OL3 coming in on that number going forward? Again, I suppose that the Finnish market will have excess supply of power, so, you know, that should also kind of impact power pricing going forward as someone who's not familiar with the Finnish power market.
Secondly, again, in the event that the cash flow is negative, and there's no particular improvement in the in the EBIT in the second half, do you still kind of, intend to pay out the 1.5 EUR per share dividend if net debt to EBITDA goes about 2 times?
Maybe if I start from the most important question, which was the last one. Obviously, we have the decision of annual general meeting to pay a dividend, and it is not a kind of decision that would be conditional to net debt to EBITDA or any kind of a metric like that. As we have said, the dividend, second half of the dividend will be paid in the beginning of November. I think as I've pointed out, the financial standing of the company is very strong, so no risk to that that I would see. Then on the energy business, we have not been sort of giving information on a unit-by-unit basis, not for OL3 either.
What we saw in the second half, of course, was an exceptional month of May during the flooding season in Finland, when we saw negative meaningful negative power prices in the Finnish market. In June, let's say, power prices recovered again. The Finnish market, in a sense, will have some volatility going forward as well, because like you said, Finland will be a net exporter of electricity when we have, let's say, strong hydrological conditions and windy days. When there is no wind, we will import electricity, and that will cause obviously then possibly some volatility during the coming months and quarters as well.
Towards the sort of, fall and winter, the expectation still is for prices to sort of, come seasonally up and, not to discuss the geopolitical uncertainties.
Thank you.
The next question comes from Linus Larsson from SEB. Please go ahead.
Thank you very much. Good afternoon, gentlemen. My first question relates to your production planning. How are you looking at Q3 compared to Q2? You said that the maintenance impact on a group level was EUR 95 million in the second quarter. What do you expect for the third quarter? Also, maintenance stops aside, what do you expect in terms of... What are you planning for in terms of market-related downtime in your various production areas, Q3 compared to Q2? Are you seeing increased market related downtime or decreased market-related downtime? Thank you.
Let's say on the question on maintenance costs, we have the Kaukas shutdown, that is about EUR 40 million. Compared to the EUR 95 in the 2Q, the timing of that actually will be more in towards the 4Q. Let's say, market downtime, we will see in a sense what is needed to manage inventories. We have been taking curtailment in plywood business, in specialty papers, in communication papers, even in the Finnish pulp production. We will do it as as is then required to keep the inventories in a in a sort of reasonable or good level. Beforehand, no kind of guidance that we will obviously give on that.
Managing the margin is very important part of the decision-making of various businesses.
In related to this, in Communication Papers, you announced a big restructuring, a mill closure today. That's kind of a step change, and it's nothing unique, you do that continuously. Do you think if you look at a single quarter like the third in isolation, will you manage margins as well as you have been doing in, say, the second quarter in Communication Papers specifically?
That is the plan.
From when do you expect to see the benefits of that most recent restructuring?
That is actually coming when. The most recent, of course, now we are having two paper machines that have been shut down by the end of the quarter. Basically, those volumes have been now moved to another mills. The fixed costs are gone, and the efficiency are improving in the other mills. Then basically, the plan of closing Plattling is only the plan as we speak. When the decision, final decisions will be done by the end of the year, then it is actually starting to contribute when the mill is then finally then in the situation what is decided then.
Great. Just one quick final on Paso de los Toros. It's ramping up nicely, as you say, and fully optimized. You are targeting $280 per ton production cost. When, when do you expect that to occur? When are all the pieces in place for that very competitive cost position?
Linus, as you remember, that we have been guiding that the whole Uruguay platform will be 280 USD per ton cash cost level. Obviously, Fray Bentos will start to benefit immediately, you know, the kind of towards that, that target for the synergies that we are having. Of course, it takes time, you know, when we are on the nominal capacity, and we have been trimming all the possible, you know, kind of efficiency points into a good situation. By the end of the year, we are on nominal capacity, but it doesn't mean that, you know, we are at that moment already on that cash cost level. Of course, working on it in every day, actually trying to minimize the operating cash costs.
Great. Thanks a lot for those answers.
The next question comes from Martin Melbye from ABG. Please go ahead.
Thank you. In order to get the numbers right on fibers, you stated that you'll have EBITDA breakeven in Q3. What is the EBIT improvement quarter-over-quarter from Paso de los Toros, including depreciation?
We don't give those details.
Could you state, what was the EBIT loss in Q2?
No.
No, we haven't.
From Paso de los Toros?
No.
Okay. Thank you.
The next question comes from Harri Taittonen from Nordea. Please go ahead.
Yes, good afternoon. Yeah, thanks for taking the questions. Well, on the specialty papers, it looks like the average price came down quite a bit on a sequential basis. I mean, did you get? What was it sort of the specialty component or the fine paper component or sort of FX thing? Also on the same note and the same division, it's a very pulp-intensive sort of cost base for that division, and I suppose you will be getting an increasingly positive impact in Q3 than in Q2, because pulp prices sort of came down and you have a lag there. If you can sort of comment on the specialty paper division, both on the price side and the cost point of view.
Yes, well, as you said, in a sense, it's a kind of a mix of several factors because both obviously fine paper in China and then the label paper business for us and competitors is let's say, business based on chemical pulp. When pulp prices have been coming down, then it does have an impact on the paper price as well. Let's say that sort of price movement has been happening, but then the game is about defending the margins when we get the benefit on the cost side as well.
Yes, on the Leuna CapEx, I mean, the estimate has been raised by EUR 430 million. How much that will be in 2024? Is some of it already included in this year's CapEx estimate? Just kind of trying to figure out how much there is kind of space for other CapEx within your sort of indicative guidance for next year.
That is something that, like I said, that we have not officially-
Yeah
... guided yet. Of course, there will be room for other investments as well. It is not going to be not only Leuna in 2024.
Sure. Okay. Two really quick questions. I mean, one is that I was surprised to see the depreciations come up just, well, less than I thought for the fiber division. Is there and overall, is there, is there going to be kind of a run rate increase still in depreciation charge when we move on to Q3? The other one, quick one is that have you already started hedging OL3 electricity prices?
Well, on the depreciation, the kind of full run rate depreciation coming from the Paso de los Toros plant will be, let's say, in round figures, about EUR 40 million per quarter. That was not yet fully in the second quarter, so that explains the difference in a sense to a large extent that you were asking about. In terms of, let's say, hedging in the energy business as a whole, of course, there's still some uncertainty in the Olkiluoto 3 volumes. We are, let's say, hedging going forward in a sense, as the market liquidity allows also in a sense, implementing part of the hedging or risk management through bilateral contracts.
Okay. Okay. Thank you.
Ladies and gentlemen, I guess that this was the quarterly report of UPM.
The next question comes from Ramachandra Kamath from Barclays.
Okay.
Please go ahead.
Hello? Hello?
Yes, go ahead.
Thanks for taking my questions. I have a couple of, please. With pulp inventory days at elevated levels and destocking continuing in all the product lines, do you see any sign of higher cost capacity closure? How long it would take to balance the market in your view? Yeah, that's my first.
Well, like we already discussed earlier here, that we have seen, in a sense, obviously temporary curtailment from perhaps the higher cost producers, but, let's say fairly broadly, but then also permanent closures that have been announced. In that sense, yes, we have seen those actions taken by the producers, and time will then tell, as said, how the sort of price cycle then evolves from here.
Okay. and on the OL3, I mean, the previous on the hedging part, I understood if it is correct, to my understanding, the volume for from OL3 was not hedged earlier, but does this have any impact on 2Q results? As the full production, full commercial production are added in the future, do you plan to hedge this completely, or what would be your overall hedging position, as a group?
Well, I'd say the way we look at hedging, generally speaking, is, of course, we kind of build our position over several years. Again, like we have informed earlier, when Olkiluoto-3 was still in the commissioning phase, none of the Olkiluoto-3 volumes were hedged as they were uncertain. Now we start to look at the, let's say, total capacity, total production portfolio, like we have seen or done in the past, but now including Olkiluoto-3 volumes as well. Time will tell, in a sense, how we sort of take a view and build up the hedge position during the coming quarters and years, including both, like I said, futures contracts and bilateral contracts.
Okay. Possibly the last one, if I can sneak in. In the previous quarter, presentation, you have this buyback under your distribution as well as capital allocation policy. If at all you are considering it, what would be the parameter you would consider before taking a decision on buyback?
Well, what we have said is that buybacks is one of the tools in our toolbox, as you sort of refer. Obviously, then it's a question of what is our kind of cash flow profile going forward during the time perhaps where the cash outflow is less to these CapEx projects, and obviously, then whether we think it's a good investment to actually invest into the company shares. Again, that is something that I'm sure the board will sort of consider then in the future. At the moment, obviously, we are still in the phase of ramping up the, and finishing the projects that we have in hand, and let's say, then also, looking to improve performance in the second half of the year.
Okay, that's helpful. Thank you.
Now I try again. Thank you for joining us this afternoon. Thank you. Bye now.