Stora Enso Oyj (STERV) Earnings Call Transcript & Summary

Hello, and welcome to the Stora Enso Q3 Report 2022. [Operator Instructions] Today, I am pleased to present President and CEO Annica Bresky; and CFO, Seppo Parvi. Please go ahead.

Thank you very much, and welcome, everyone. Our purpose to do good for people and the planet is more important now than ever before. We need to look after our people, the communities in which we operate in and of course, the development of the company. And by replacing fossil-based materials with our renewable products, we can leverage on this opportunity for long-term earnings growth and can, at the same time, contribute positively to mitigating climate change. This is what drives both our underlying performance and our opportunities for growth. Sustainability is deeply embedded in both our business strategy, our corporate culture, and it is supporting our growth. We believe that through innovation and collaboration in our ecosystems we can grow together with our customers and our products and the CO2 they replace, and store can mitigate climate change and realize the renewable future for all. So on top of this, I'm of course, very pleased that we have delivered another strong quarterly performance and that we have executed on our strategic agenda with investments to accelerate and safeguard our long-term growth potential. I will now just give you an overview. This was the best operational EBIT that we have delivered since the early 2000s. And it is an excellent performance, especially in these times of unprecedented market volatility, inflationary pressure, along with also continued logistical constraints. We have been able to mitigate those challenges through pricing, flexibility in logistics as well as energy hedging. And I'm very proud of the organization, so continuing to contribute to our growth journey and for delivering these results. We continue to invest in growth in Renewable Packaging, one of our strategic growth areas and the acquisition of the Dutch company, De Jong Packaging. It's one of these actions that we have taken during the quarter. And of course, we are very excited about this investment. It will help us accelerate our growth in Renewable Packaging, and it will also help us expand our European footprint. We've also decided to go ahead with the conversion of an idle paper machine and convert it into a cost-leading high-quality consumer board machine at our existing site in Oulu in Finland. And I will give you a little bit more detail on the strategic initiatives in a short moment. We are investing in growth in Building Solutions and have recently started up a new cross-laminated timber site, which I will also get back to shortly. Lastly, we're also progressing with the commercialization of the lignin-based product portfolio with a range of products for different end uses. And I will share a few details on what we're working on there as well. Now let's take a closer look at our group performance. Our sales increased by 15%, if we exclude Paper, and this was a 17% increase compared to last year. Operational EBIT increased by nearly 30% with an EBIT margin close to 18% and you can see 5 quarters on this chart. But actually, this was the seventh consecutive quarter of growth in operational EBIT. The operational return on capital employed, excluding Forest, was at 22%, which is well above our target of 13%. So all in all, I'm very pleased with our performance for this quarter. With a EUR 1 billion enterprise value acquisition of De Jong Packaging Group, we are ready to take the next step and enter a new corrugated packaging market, open up -- opening up the Western Europe for us and accelerate our growth in renewable corrugating packaging in countries such as Benelux, Germany and the U.K. We have a potential here of EUR 1 billion in sales, and this acquisition will nearly double the Packaging Solutions division. The market as such in corrugated packaging is fragmented. So this local presence that we have there is key for the sustainable growth that we are targeting. And we find that this is a perfect strategic match for us. De Jong Packaging Group is active in attractive end-use segments that complement our own product setup, in areas such as fresh produce, which in practices trays for fruit and vegetables industry, fast-moving consumer goods and e-commerce. The company has demonstrated a strong growth track record, and it's one of the largest corrugated packaging producers in the Benelux area. We expect to close the transaction beginning of 2023, and we also expect it to be EPS accretive for the first year -- from the first year. This is a big opportunity for us for both driving a strong commercial, but also cost integration benefits over kind of the joint business in current Packaging Solutions and the potential acquisition of the De Jong Packaging Group. We will also be able -- if we find that the feasibility study in Langerbrugge site that's ongoing right now, if that is decided upon, there will also be additional synergies following that potential conversion. Moving on now to how we also accelerate organic growth. We have decided that we can see through the growth in the markets that the plastics are being more and more replaced by Renewable Packaging that we also want to continue growing our footprint with investing in our Oulu site. We're investing EUR 1 billion in converting the second idle paper machine in Finland. And this investment will be taken from -- will take from this year up until the full ramp-up and full production starting up in 2025. After successfully converting the first paper line in Oulu, the kraftliner for containerboard, we see an opportunity here to capture additional growth by converting the second paper line into consumer board for folding boxboard and for coated unbleached kraft. And the total capacity of this conversion is 750,000 tonnes per year. The expected annual sales at full capacity is approximately EUR 800 million. And we will use now existing infrastructure, which significantly reduces the risks of conversion and the investment costs, and this is compared to a greenfield expansion. And of course, all the experience that the local teams have in having done the first successful conversion. On the marketplace, this will put us in a very strong position to drive revenue growth and build market share in key segments, for instance, in frozen and chilled food and beverages, mainly in the markets of Europe and North America, where we see the biggest potential for long-term growth. So of course, this is a great opportunity for us going forward. I'm also happy to say that we continue our journey to ramp up the growth in Building Solutions and have recently inaugurated our latest site in Czech Republic for cross-laminated timber production. With this new site, Schwarz Produktion capacity will increase and grow substantially to meet the increasing demand for both sustainable but also cost-efficient and renewable building materials. We've already delivered 15,000 projects in this area. So this will continue to help us in meeting the growing demand on the market. It will also accelerate our position as a global provider of prefabricated modular building segments. And we target annual sales of EUR 70 million with an investment of approximately EUR 80 million. The annual production capacity will be 120,000 cubic meters, and this will increase our total capacity to 410,000 cubes. The CLT site in Zdírec in the Czech Republic is very well located in Stora Enso's European market and the integration with the existing sawmill also bring, of course, additional benefits. For example, in terms of raw material, energy supply and logistics. Lastly, our third area of growth, we are also progressing with the commercialization of lignin-based product portfolio, ramping up on step stone applications, for instance, in the end uses of glue and binders. And here, we see grow opportunities and innovation developments, and we have a lot of collaborations in the areas of furniture and construction, but also ongoing customer trials with binders in asphalt. We're also partnering to progress the commercialization of Lignode, which are further processed products for green batteries. We have here ongoing trials for renewable anode material for batteries. And we target here end uses such as tools and other handheld applications, energy storage systems and EV vehicles. The ongoing customer trials have the target of customizing the Lignode into the different performance specifications customized for these different end uses. And as I've said, we have several partnerships ongoing. We have externally communicated the supplier and customer relationship with Northvolt but also, we have signed a letter of intent with Beyonder, a Norwegian energy storage technology company to deliver Lignode for their development of bio-based batteries. A few words now on the divestment process for the paper site. We continue with the sales process of 4 of our 5 paper sites. And as you have seen, we have divested Maxau paper site and Nymölla paper site. The ongoing ones for the last two, Hylte and Anjala, are proceeding, and this will decrease the Stora Enso annual group sales by -- fully divested by approximately EUR 540 million and reduce the annual paper capacity by just over 1 million tonnes for the site of Maxau and Nymölla, and the total enterprise value for the divestment of those two sites was EUR 360 million. So we will continue to operate both sites until the expected closing of the transactions is finalized early next year. And as I said, the divestment process continues for the remaining two sites, but here, we have no set deadline. And now if we take a look at an overview of our financial targets, we can see that we exceed all long-term group-level targets, which is, of course, very good place to be. Both Packaging Materials and Biomaterials were well above their respective return on operating capital targets. For Packaging Solutions, the target has changed from 25% to 15%, and this is due to the acquisition of De Jong Packaging, changes in the business portfolio with the divestment of the Russian entities and future growth ambitions with new businesses. Forest was just below. Its operational return on operating capital target of 3.5%, but it landed very closely on 3.4% and the Paper division target for -- of cash flow after investing activities to sales ratio improved to 6% from a negative level last -- a year ago. And this was due to improved profitability and good working capital efficiency. And with that, I hand over to you, Seppo, to explain a little bit further how the profitability has been built up for the quarter.

Thank you, Annica. And I start by looking at the bridge from Q3 last year to the Q3 that we have just reported today. The proactively mitigated increased variable costs to safeguard profitability. Key action there has been to work on the sales prices. And they have been up now EUR 420 million year-on-year. Additionally, net foreign exchange has helped by about some EUR 61 million. That is mainly coming from U.S. dollar euro exchange rate changes moving in our favor. Pulp costs have been up about EUR 116 million. And then on top of that variable cost, like energy and logistics, a bit over EUR 100 million yields and chemicals have given us some EUR 75 million. Then there's been some small positives on depreciation associated and closed units. Then let's move to energy, which is the hot topic today and reducing cost exposure has been one of the key actions this year. We are very happy that we have very high energy sales sufficiency when it comes to Stora Enso. If you look at the total energy, our sales substance rate is 80% excluding Paper and taking into account [indiscernible] impact after it has been started up. And when it comes to electricity, we have reached 97%. This is a strength of Stora Enso and gives us competitive advantage compared to our many competitors, for instance, in Central Europe. Then let's look at the divisions, and I start at Packaging Materials where we had strong quarter, driven by improved containerboard profitability. Sales were up 23% year-on-year driven by higher board prices. We could see further weakening demand in containerboard, as was also mentioned and commented in Q2 report. We have stable demand in consumer board with strong order book, but there is pressure on margins due to increasing variable costs before we are able to increase selling prices, and we are implementing those at the moment. Operational EBIT was up 19% year-on-year, reaching EUR 181 million. This was driven by improved containerboard profitability higher port prices will offset high -- sorry, higher board prices offset higher variable costs. And operational return on capital was at 21.3% level compared to long-term target of 20%. Then I look at the Packaging Solutions. The year-on-year profitability was impacted by the exit from the Russian operations and investments in new businesses as well as lower demand. Sales were flat year-on-year. Higher prices in European corrugated packaging and growth in the new businesses was visible here. And divestments of Russian units and lower deliveries in Europe had a negative effect on the sales line. Operational EBIT was down EUR 7 million year-on-year, affected by exit from Russia as well as higher ramp-up costs in the new businesses. Our return on capital was at 1.7%. Then let's move to Biomaterials, where we had all-time high sales and profitability, supported by continued strong market demand. Sales were up 33% year-on-year, and this was an all-time high quarter and driven by all-time high price levels and strong U.S. dollar. Would ever be the logistical constraints had an effect in the result. Operational EBIT was up 67%, reaching EUR 197 million for the quarter, and this is all-time high result. Higher sales prices have positive foreign exchange rates fully offset higher variable costs that we are facing in the business, and operating return on capital at 28%, clearly above the long-term target of 15%. In Wood Products, we had record high third quarter sales. They were up 3% year-over-year, reaching EUR 520 million, driven mainly by higher sales prices. So good market continued to weaken as seen already in the Q2 and wood demand in Building Solutions continued. Operational EBIT was down EUR 53 million year-on-year at EUR 70 million. This was affected by increased costs, mainly for logistics, electricity and raw materials. Return on capital at 38.4%, clearly above the long-term target of 20%. In the Forest division, stable financial results continued with strong wood demand. Sales were up 6% year-on-year at EUR 581 million. Higher wood prices were driven by strong demand during the quarter and discontinued Russian good imports were largely mitigated by flexible use of own forest assurances wood sourcing network in the Pulpex's area. This is a strength of Stora Enso. Operational EBIT continued at a stable level, reflecting resilient forest performance, an operational return of capital at 3.4% for the cost. Forest asset fair valuation remained stable at EUR 8.1 billion. It was slightly decreased mainly due to foreign exchange rates having an effect there. Fair value is equal to about EUR 10.3 per share. An important note here also that we are 30% self-sufficient of wood supply, taking into account our own forest assets and long-term agreements with the suppliers. Then Paper division, the business turnaround after restructuring is clearly visible. Sales were up 7% year-on-year and higher sales prices in the retained business after closure of Veitsiluoto and Kvarnsveden sites in Q3 '21 was very visible. And could notice that sales on retail businesses increased by 52%. Operational EBIT was up EUR 80 million year-on-year from loss of about EUR 30 million to a gain of EUR 49 million. Higher prices fully mitigated higher variable costs that we have been facing in the business and the structural changes that we have made have reduced fixed costs and volumes. And cash flow to sales ratio of investments was at 6%, just slightly below the targeted level of 7%. Now back to you, Annica on annual guidance, please.

Thank you, Seppo. And if we look at the annual guidance, we reiterate that we are going to be above operational EBIT levels compared to last year. And higher than EUR 1.528 billion. And then a few words now, if we take the outlook for the fourth quarter. As you've seen, we entered the fourth quarter with a good profitability and good margins. And taking a look now division by division, we can see that ahead of us, that Packaging Materials division is expected to have an impact on profitability and deteriorated profitability due to primarily maintenance, plant maintenance, we have maintenance at 4 of our sites, including the 2 largest ones. We also see escalated cost inflation in energy impacting going forward in the quarter. Of course, our demand in the areas of consumer board is strong. We have a strong order book, and we are fully booked. But as you might be aware, the contracts in the consumer board business are typically fixed on long term. And with the escalation that we have seen now on energy costs primarily, it takes some time before we can fully mitigate them by price increases in the consumer board area. And this means that we, of course, renegotiate every time a contract expires, but there is a lag time before we can fully mitigate. Last quarter, we talked about the normalization of containerboard, and that continues. Contracts in containerboard are more short term in their way of being set up. And hence, that gives us flexibility for renegotiations more often. So here, we are able to more directly, and in a shorter time frame, mitigate cost escalations. Demand for corrugated packaging is expected to stay stable, which is very good. And also here, we are able to mitigate inflationary pressures in a good way. Moving over to pulp. We can see some early signs of normalization in pricing from the recent extremely high levels. But overall, I would say that pulp demand is still very strong. we see that we expect the demand to be flat. I cannot see any significant increases in global market pulp inventories, which is normally a sign of kind of imbalanced supply/demand situation. So even if we see some slight signs of softening, I would just say that it is still a very good prognosis for the coming quarter. In Wood Products, there is a continued market decline in traditional sawn goods. We could see that already in quarter 2. We have a good order book for Building Solutions, but we expect here also the demand to weaken going forward. And this is, of course, due to the uncertainty among construction developers and a softer construction market in general. We have a possibility here to export to other markets. We are a global supplier in the U.S., in Japan and Australia. So of course, we adapt our mix where we see we have the best opportunities. In Forest division, wood demand is expected to stay on par with the previous quarter. And we can see that if we look at the different kind of wood assortment that there is a strong demand for pulpwood, which is, of course, reflected as a result of the continued good demand in pulp production. But on the sawlog side, its lower levels, of course, due to the weakened sawn wood market. In the Paper division, we have a solid demand outlook. It's supported by seasonality, but also a good order book. This is also a division just as Packaging Materials that is impacted by higher energy costs. And also in Paper division, we have maintenance work for the coming quarter. I would also like to highlight, as Seppo said, that we have high energy self-sufficiency and the impacts from higher energy costs in Packaging Materials and Paper will be partly recognized as income in segment Other. This is due to Stora Enso's ownership of the energy company, Pohjolan Voima. Moving now over to our Capital Markets Day, I would just like to give you an overview of our 2030 ambitions. And for those of you who participated in September, the highlights include, for instance, an increase in group sales by 30%, excluding inflation versus 2021. We also target 15% operational EBIT margin over the cycle. For the growth businesses, we see that packaging through the actions that we are taking strategically. We represent more than 60% of group sales. Currently, we have -- it's about 45%, more than 40% of Wood Product sales will come from Building Solutions. And we also see that we will increase or have an ambition to increase our operational EBITDA in Wood Products by 75% over the cycle. We target new revenue streams of EUR 1 billion from Biomaterial's innovation, and we also have the ambition to develop more energy production, wind power generation from our group's own forest land to a level of 5 to 10 terawatt hours. Through the actions that we take by divesting paper, but also increasing packaging, we also see that our market pulp exposure will be significantly reduced. And through our actions of divestment of paper, this will lead automatically to a less cyclicality in earnings. We estimate that it will be reduced by half compared to the years 2016 to 2021. So all in all, this is what we see that with the strategic agenda that we're driving, what Stora Enso will look like in 2030. So to summarize, before I let you in to ask all the questions, we have delivered a strong quarterly performance, both financially and strategically. We have been executing on our strategic initiatives for long-term growth in our key strategic areas of Renewable Packaging, building solutions and Biomaterials innovations. The acquisition of De Jong Packaging Group will advance our strategic direction and accelerate our revenue growth. We will build market share in Renewable Packaging in Western Europe and open up new markets for us there. We are accelerating growth also in our packaging by investing in conversion for growing end-use segments in the food section through our investment project in Oulu. And we are continuously positioning ourselves to leverage and accelerate our growth in renewable materials. And I believe that Stora Enso is gradually becoming a stronger and better positioned company for the future. And with that, I'll let you in for Q&A session.

[Operator Instructions] Our first question comes from the line of Cole Hathorn from Jefferies.

Just two from my side. Firstly, on you're calling out your ownership in PVO and the energy stake. Could you give us an idea of what that means? How much of a -- how much access do you have to the Olkiluoto 3 nuclear power plant? Is it about 1 terawatt hour your -- roughly your share? And then if we think about long term, you called out your ambitions to 2030, 30% sales growth, 15% EBIT margin. You're looking at kind of EUR 2 billion of EBIT. Are you kind of comfortable over that time frame where consensus is next year, EUR 1.3 billion going up there to a 6% EBIT CAGR. Is that how you think about the business from kind of next year's base going up to 2030 offering kind of a 6% per annum EBIT growth. Is that the right metric to be thinking about for long-term view?

If I start by commenting on our ownership in Pohjolan Voima Olkiluoto 3, before then handing over to Annica to take the rest of your question. So we own 15.6% of PBO, which gives us indirectly then about 8.9% of Olkiluoto 3 nuclear reactors. And that is also about this 9% of Olkiluoto 3 out of these 1,600 megawatt.

And if we look at the strategic agenda, we see that the pipeline of projects that we have announced right now and the opportunities that we have will get us to the level of 15% EBIT over the cycle and then growing our business, as I outlined. The divestment of paper, of course, will make sure that we increase the resilience of the company, also in kind of a less strong macroeconomic environment. And I believe that with the actions that we have in our portfolio that we will be able to live up to these ambitions within this time frame, as you stated.

Our next question comes from the line of Justin Jordan from BNP Exane.

I've got two different questions. Firstly, on Slide 20, your very detailed outlook guidance. Thank you so much for the details here. I just want to drill down a little bit specifically on consumer board. Clearly, [indiscernible] demand is very stable, which is reassuring. But just on your comment on the sort of timeline between cost inflation and recouping that through price rises. Are you more cautious on your pricing power going forward relative to history here? Or should we think about this as just a time lag issue? And then secondly, just on clearly the news on the extra billion of CapEx, I guess, really a question for Seppo. How should we think about the phasing of that in '23 to '25? Should the bulk of the CapEx be in '23 and '24 with the residual small amount in '25. And then just one final thing to CapEx. Can you just help us understand the EUR 63 million of interest charge in Q3? It's a little bit higher than a normal quarter. Are there any one-offs in there? Or is this just symptomatic of rising interest rates?

Thank you for the questions. I can start then with the consumer board. And you're right, it is a timing issue because we have a strong demand. We see that the end uses in consumer board in liquid and in food packaging are end uses that are resilient, and we have full order books. So this has to do with the contractual structure of the business as such. The contracts range from 1 year to 3 years. And of course, when we have had this kind of very short-term high shocks of energy increased prices, it is difficult to compensate immediately. But as the contracts expire and we have some contracts in Q4 expiring and moving on in Q1 and so on, we, of course, take the necessary discussions with the customers. So it's not a question of pricing power. We are one of the largest players here on the market and have a strong market share. So it's more a timing issue.

And then when it comes to capital expenditure relating to over these billion euros. So you are right that '23, 2024 are the heavy years and CapEx is then, say, from EUR 400 million to EUR 500 million a year. And then there are some left towards them for the years after, depending on the payment scale. So some small down payments this year, depending a bit when we sign the contracts now that we have made the decision of the investment. Then your question on financial costs, yes, it includes about 20 -- EUR 23 million of write-off of Russian-related loan receivables related to our exit from Russia.

Our next question comes from the line of Linus Larsson of SEB.

A question on your maintenance guidance, say, on a group level, you will have less maintenance impact, EUR 25 million in Q4 and Q3, but you also say that you will have higher maintenance impact sequentially in the Packaging Materials division. So do I get my math right here saying that it's probably in by materials that you see the decline -- the corresponding decline in CapEx, Q4 -- sorry, maintenance in Q4 on Q3? And does that implicitly suggest that you're expecting higher Biomaterials profits Q4 on Q3?

Well, I don't comment profitability by division as such. But yes, you are right that this means that dominant with the maintenance cost will be now in Packaging Materials in Q4.

And can you also, maybe in that context, explain the cost overrun in the third quarter. Where was that in which division or even which mill?

Well, we had some boiler issues in Paper division, and that's mainly where it's coming from.

Okay. So how big were the maintenance costs in paper in the third quarter?

We don't comment more specifically maintenance cost, but that was the main reason.

Our next question comes from the line of Harri Taittonen from Nordea.

Just drilling a little bit on the cash use outlook and going through my old notes seeing that at least you've indicated earlier that maintenance CapEx is somewhere around EUR 200 million, EUR 250 million. And I'm just wondering how valid that is still after the exits and changes in the asset base. And then if we think of that timing of the Oulu investment, if it's going to be something like, as you say, EUR 400 million, EUR 500 million a year. I mean is their sort of -- I know that you don't want to guide CapEx for next year, but still conceptually, will you reserve some budget for other potential projects in addition to the maintenance and all of that we should be aware of?

First of all, the maintenance CapEx, yes, the EUR 200 million, ERU 250 million is correct, look at the history. It has been around roughly 2% of the turnover per year as a rule of Tallinn to estimate if you wish. And in principle, no change in that. Obviously, because of cost inflation, there are some -- they have been somewhat up temporary now, and we have to see our cost inflation moves going forward. When it comes to CapEx guidance as such, we will come with more detailed CapEx guidance for next year in connection to Q4 reporting. So we will tell more there. But obviously, depending on the opportunities, we have the strong balance sheet, net debt-to-EBITDA at 0.8 and getting stronger with good cash flow. So we have space in the balance sheet. So depending on the opportunities and what we see, we will then separately issues around traditional CapEx, if any, for other projects.

Right. Okay. So basically, we are looking at -- so the EUR 200 million to EUR 250 million plus EUR 400 million to EUR 500 million and then plus whatever you -- then the additional...

That typically happen on top of the maintenance of the development projects adding some capital in our next development projects that we are running on top of this kind of major projects like Oulu conversion now.

Our next question comes from the line of Lars Kjellberg from Credit Suisse.

I just wanted to talk a bit about cost inflation. I mean energy isn't necessarily a new topic, why do we specifically call that out now? The other component that you mentioned was also about wood availability and we've seen some quite material moves in wood costs, especially pulpwood, where it seems as if the energy sector is now competing for the same wood source. So if you can shed any light on what are the new buckets of cost inflation? And how we should think about wood costs going forward? And when these market prices -- higher market prices will start to come through in your P&L given your inventory in such outstanding timber? Then if I may, just on Oulu, can you elaborate a bit what you're doing? I mean this is a conversion yet, we could spending EUR 1 billion. So what buckets we're spending in and also the time frame, which suggest it's a seriously major project as opposed to simple conversion. So if you don't mind just sharing a few details what you're doing and why the cost is so high and taking 2 years to do?

Yes, I can start with Oulu, and then you, Seppo, might go into the cost questions on wood and energy. But compared to the first conversion, that was just a machine conversion. What we're doing now is that we're also building a BCTMP, a pulp line to kind of accommodate for the 750,000 tonnes of production. So it's double the size compared to what we did before. And then it's also making the full site kind of a state-of-the-art mega site. It will lead to 1,350,000 tonnes capacity. So this is, of course, taking the synergies of the infrastructure that is there compared to a greenfield such a machine of that size would require more than double the investment cost. So considering that, this is kind of a very investment tonne per cost-efficient investment. We will have a new pulp line, as I said, but also do energy solution with a boiler, and we will make sure to have wastewater treatment that is state-of-the-art for the environmental effective and reduce CO2 for the full site. So that is the difference. And then if you, Seppo, will comment on energy and wood?

Yes. First of all, about the wood. Of course, you have to remember that we have a big forest on ourselves, and we have a pretty high self-sufficiency with the wood sourcing or wood suppliers such at 30% and having the forest in Sweden, have some power plantations in Latin America as well as our ownership in Tornator in Finland. And so they are mostly from our strong supply network in the politics. I would think that it's fair to say that I think it's wood cost inflation starts to be over, and that should be helpful in that sense. So I think we have been able to mitigate quite well the effect of the Russian wood of -- missing the Russian exports compared to past that we used to have in Finland. When it comes to cost effect of energy, chemicals, wood and other I think for the FX in the input material. So I think we have been showing during the past quarters in Q3 as well that we are able to mitigate there by managing our selling prices. We're obviously working on recipes as well in order to optimize the cost structure and that we also to mitigate the cost pressures that there are.

And I can also say the reason why you asked specifically why we mentioned the energy cost right now is to make it clear that some divisions like Packaging Material and Paper, they are bigger consumers of energy. And if we look at Packaging Materials in the next quarter, we want to help you and guide you in terms of that consumer board business, as we said, takes more time in order to fully mitigate for that cost inflation that has been in energy side. And just to remind you also that we, of course, the divisions they pay market pricing for the energy, and we recognize the revenue in the segment Other as kind of the group.

Just one clarifying point, if I may, just on the wood cost. We have cost in from official sources that wood prices both in Finland and particularly in Sweden are rising quite rapidly. So my question was really -- and that's to when you buy wood in the marketplace. When should we start to see that? In the past, you talked about 3 to 6 months before we actually start to see that through your P&L. Is that still the same sort of inventory you have at standing timber that it will take a bit of time for these sort of market prices to come through in your respective paper and pulp divisions?

Yes, that's there. There is some something about the cycle there. Yes, 3 to 6 months is typical time lag there.

Our next question comes from the line of Andrew Jones from UBS.

I just wanted to ask about the FBB market. I mean you're clearly committed to adding large amounts of capacity. Net Board have also been talking about adding 800,000 tonnes in a project, I guess long dated, but they clearly have designs of the market. And from reading summary, Board sounds like there's a large amount of capacity being added in China in the next year. I'm wondering, firstly, if you see any threats to your markets from sort of that additional capacity coming out of China? Or will that be absorbed within the region? And given the additions from your peers and in Asia, will the market be able to absorb that additional capacity? And how do you see that playing out? What are your assumptions on growth rates? Do you see it taking share of rival products? I mean, could you just frame how that material is going to hit them and going to be absorbed by the market?

Yes. I can start with China. First of all, the growth in China for these grades is 5% to 6% annually. It's a big market, but it's also local market. So the capacity increases that you hear in China is predominantly for the domestic market serving China. Also, the cost of folding boxboard produced in China is higher because many of the units or most of the units are unintegrated. So they buy market pulp on market price. So the cost from folding boxboard -- producing folding boxboard in China is much higher than it is producing in Europe and often doesn't trouble well, if I may put it like that. So if we look at kind of the size of this market of folding boxboard and also the CUK market, which is also growing very healthily. It's expected to grow with more than 11 million tonnes globally, and it will approach 57 million tonnes until 2030. And the potential that we see here also with plastic substitution is additional to this. So we do not see an issue for us as building one of, if not Europe's most cost-efficient site in Oulu to be able to capture this opportunity and continue growing here. These are the segments that are growing fastest and have good margins and having a cost-leading position is something that we're capturing with this investment. So no, I'm not concerned about the Chinese capacity increases.

And sorry, just to clarify about 57 million tonnes you mentioned. Are you talking about just FBB? Or are you talking about FBB...

The consumer board market. The consumer board market. Yes, and this machine is going to be very flexible. So we're going to be able to produce line solid boxboard and CUK and it will also help us to restructure the product portfolio within the other assets of Packaging Materials. So streamlining the production in the other units of Packaging Material. So it will bring up also production efficiencies for the rest of the sites.

[Operator Instructions] Our next question comes from the line of Sindre Sørbye from Artic Asset Management.

Just regarding your somewhat cautious outlook for Packaging Materials. Looking at historical figure, Q4 is always significantly lower in the terms of EBIT than third quarter, is it just the, let's say, a regular kind of seasonality we're talking about here? And as a follow-up to that, can you give us an indication of how large proportion of your liquid packaging board contracts that are up for renewal for 2023 onwards?

No, I will not comment on the contracts, how much percentage that is. For Packaging Materials, you're right, there is always a seasonality. But this year, also on top of that, we have both the big sites of [indiscernible] and then [indiscernible] forest as maintenance sites. So on top of that, as I said, the very rapid escalation of energy prices, which, of course, takes some time to mitigate. But all in all, you're right, there is always a seasonality in Q4. And this year, major maintenance planned shuts are happening in Q4. Some other years, it might vary between Q3 and Q4.

Our next question comes from the line of Henri Parkkinen from OP Financial Group.

It's Henri Parkkinen from OP Financial Group. Just coming back to this Olkiluoto 3 and referring your presentation and this page number 12 where you presented your sales efficiency without Paper and including Olkiluoto 3 and just naming about this electricity. What is the situation if you compare it in Scandinavia? And on the other hand, in Continental Europe, I assume that self-sufficiency in electricity is a little bit different on those two areas? That's the first part of my question.

Yes. I can comment on that. Of course, our position with high self-sufficiency and good hedging and -- is a competitive advantage for us compared to many Central European or Southern European players who are suffering. Also, of course, the sites that are very competitive and are in good cost quartiles compared to some other sites that might have been converted also. Old paper sites converted into packaging grades and now facing big challenges due to the escalated cost situation. So I expect going forward that we will also see this effect on [indiscernible].

Okay. And my -- second part of my question is, I don't know if you want to comment this, but have you already made some forward hedges regarding your expected volumes from Olkiluoto 3.

We don't comment most basically on the hedging, but you have to remember that we are not 100% self-sufficient posters in Finland. So we will be able to reduce our exposure. As you can see also on the graph on Page 12, we can reduce our exposure to market prices this additional volume.

There are no further questions at this time. So I hand the word back to Annica Bresky. Please go ahead.

Thank you, everyone, for a lot of good questions, and I wish you all a nice weekend and see you hopefully in quarter 4.