UPM-Kymmene Oyj (UPM) Earnings Call Transcript & Summary

Dear audience, welcome to UPM's Quarter 3 2021 Results Webcast. My name is Jussi Pesonen. I am the CEO of UPM. And I'm here, as always, with our CFO, Tapio Korpeinen.

Hello, everyone on the line.

Well, let's get started. Today, we would like to highlight 3 key messages. First, Q3 2021 was financially the best quarter ever for UPM. This was a good achievement in exceptionally volatile global business environment. It also shows we have fully recovered from the slowdown caused by the pandemic last year. Secondly, our transformative growth projects are making good progress. In Uruguay, we have now reached the peak activity as planned with more or less more than 6,000 workers at the construction sites. In the biochemicals, we also are taking significant steps in commercialization of the new world -- new-to-world products. Our cooperation with Coca-Cola Company in the bioMEG products was made public last week. And we launched the UPM BioMotion renewable functional filler product. And then finally, our Biofore strategy is set to create long-term value in the world where the consumers, businesses and governments and regulators are actively looking for more sustainable solutions to mitigate climate change, to safeguard biodiversity or to find answers to the plastic challenges, for example. All in all, dear listeners, UPM is fit for the future. Let's then move on into the result. Our Q3 sales grew by 24%, and comparable EBIT doubled from that of last year, reaching EUR 424 million EBIT. And comparable EBIT margin was 16.8%. The record quarterly earnings was a result of good demand for our products, price increases more than offsetting higher variable costs, timely implemented cost effective and efficiency measures over the past years and the excellent operational efficiency during the quarter. The global economy has been recovering from the deep downturn of last year. China first led the recovery but has recently slowed down to some extent. In Q3, demand for our products were strong, particularly in Europe and North America. Strong demand was visible across the product range, specialty papers, label materials, graphic papers, plywood timber and renewable fuels and energy. In Asia, pulp and fine paper market softened somewhat. However, robust demand continued in Asia for other products such as specialty papers and label materials. We, in UPM implemented price increases in all business areas, variable cost increases across the board on group -- increased across the board. On group level, our price increases more than offset the rise of the variable costs. Energy markets tightened rapidly, as we all know, during the Q3, and there was a significant price of electricity, fuel and CO2 prices. This obviously is benefiting our UPM Energy business, but also resulted in significant additional cost, especially for the communication papers. Ladies and gentlemen, finally, there are bottlenecks and challenges in the global logistics and supply chains. This increases costs, limits flexibility and introduces some unpredictability to the product and raw material markets. It is also representing some challenges for the last investment projects. In this volatile business environment, I'm very happy that we have been achieving a record quarter in earnings and continued a good progress on our transformative projects. Ladies and gentlemen, at this point, I will hand over to Tapio for some further analysis of our results. Tapio, please.

Thank you, Jussi. Here, we have our usual slide showing the EBIT bridge between quarters. And on the left-hand side, year-on-year between third quarter this year vis-à-vis last year's third quarter. And as you can see here, clearly, sales prices increased in all business areas and the largest increase being in biorefining. Variable costs increased across a wide range of raw materials, energy and logistics. But for UPM as a whole, price increases were enough to more than offset the rise in variable costs. Delivery volumes increased in most business areas. Fixed costs were slightly higher in the third -- were slightly higher. In the third quarter, we achieved about 80% of the targeted EUR 160 million annualized cost savings. The remaining part will be achieved now in the fourth quarter after the sale of the UPM Shotton Mill in U.K. was completed at the end of the third quarter. On the right-hand side, you'll see the bridge sequentially from the second quarter this year to the third quarter. And again, we were able to increase sales prices in all business areas while variable costs increased in a wide range of raw materials, logistics and particularly in energy. Delivery volumes were slightly up and fixed cost down compared to the second quarter, mainly due to seasonal reasons and due to the maintenance shutdowns that we had in the second quarter. On this slide, you see the comparable EBIT development quarter-by-quarter split by business area. Biorefining reached record quarterly earnings this third quarter, thanks to significantly higher pulp and timber sales prices, thanks to excellent operational efficiency as well. And during the maintenance quarter in Biorefining, we had no maintenance shutdowns. Pulp market continued to be strong in Europe, but softened in Asia. The average pulp price in the third quarter for UPM deliveries was up by 58% year-on-year or up by 12% sequentially from the second quarter. Demand for advanced renewable diesel and naphtha was also strong. And our Lappeenranta biorefinery restarted production in early August after the repairs related to the fire incident earlier. Raflatac continued to be one of our star performers. Demand growth was consistently strong across most markets and end users. And sales grew by 19% from last year. Input costs rose rapidly also for Raflatac during the quarter, but were mitigated by successful margin management. For Specialty Papers, the market situation was twofold. On one hand, demand for release, label and packaging papers continue to be strong in all markets and sales prices increased significantly from the second quarter. But then on the other hand, fine paper demand in Asia slowed down and prices decreased. High input costs and the tight energy market situation in China also affected the results. Communication Papers was loss-making for the quarter. Our paper deliveries grew by 13% from last year, and our operating rates were very high. The average paper price increased by 8% from the second quarter. The cost increases in pulp, recycled fiber and logistics materialized as anticipated. However, the rapidly tightening energy market in Europe resulted in significant additional costs despite the 60% hedging rate for purchased energy. One can say that the market demand for graphic papers in Europe was actually quite good, up from 6% from last year. 3 months ago, when we discussed the results, we compared the second quarter '21 paper demand to the second quarter of 2019. Over that 2-year period, demand for graphic papers in Europe had decreased by 15%. Now if we compare in the same way third quarter 2021 paper demand to the third quarter 2019, the 2-year demand decrease was 13%. And in the mean time, about 5.5 million tonnes of production capacity has been closed down or converted to other purposes, which is significantly more than the demand decline. So that was -- that has obviously effectively balanced the market. Energy delivered excellent earnings with an EBIT margin of 50%. The business benefited from the significantly higher electricity sales prices and also succeeded well in optimizing the output of power generated in the volatile markets. Plywood also achieved record quarterly earnings. Market demand for spruce plywood continued to be strong. And demand for birch plywood continued to recover. Sales prices increased and operational efficiency was high. Operating cash flow for the quarter totaled EUR 318 million. In the third quarter, we did have a small increase in working capital. Whereas last year, we had a significant release of cash from working capital. Over the past 12 months, our free cash flow is only EUR 30 million negative. This, of course, includes the CapEx on the transformative growth projects. It also includes the proceeds from the sale of the short-term newsprint mill in the U.K. worth about EUR 160 million. So our balance sheet continues to be very strong. We only had EUR 667 million of net debt at the end of the third quarter, which means that the net debt-to-EBITDA ratio was 0.38. The cash funds and committed credit facilities totaled EUR 2.5 billion at the end of the third quarter. Our outlook for 2021 is unchanged. All in all, we expect our comparable EBIT to increase both in the second half of 2021 compared to the first half of 2021, an increase clearly in the full year 2021 compared to 2020. In the fourth quarter, our results will be affected by the scheduled maintenance shutdown at our Kymi pulp mill. We expect this to have an approximately EUR 30 million negative impact on Q4 EBIT. As is pointed out here, the tight energy market situation is expected to increase costs during the second half of 2021, and this is particularly the case for Communication Papers. So we expect the fourth quarter to be -- to continue to be challenging for the Communication Papers business. On the other hand, the energy market situation continues to support the Energy business area. And now I'll hand it back to Jussi.

Thank you, Tapio. And like Tapio already highlighted that the first topic that we wanted to highlight today is the financial kind of situation of UPM and how well we did in quarter 3. It was the best ever quarter. And now we are actually turning to the second topic, which is our transformative growth projects. But before that and discussing our strategy and the progress of these transformative projects, I will address one more recent news. As you all know, early in October, the European Commission conducted an unannounced inspection at the premises of several companies active in the wood pulp sector. This included also us in UPM. According to Commission's press release, the commission has concern that the inspected companies may have violated EU antitrust rules. The commission stated that the inspection and inspections are a preliminary step in this investigation. The fact that the commission carries out such inspections does not mean that the companies are guilty of anticompetitive behavior. UPM takes suspected violations and antitrust rules very seriously and has a compliance program and training in place to mitigate the risk of such violation. Ladies and gentlemen, unfortunately, this is all that we can comment at this stage of the investigation. But now ladies and gentlemen, let's move into the second message that we wanted to convey, which is the UPM strategy and transformative growth projects and the kind of progress of those. We are having some pictures, and let's move on. We will now actually discuss about strategy and progress of the transformative growth projects. And this slide is very familiar to you. It is called spearhead of growth in UPM. It is our kind of direction, concrete actions, how we actually are seeking significant earnings growth, and this is how we are changing the positioning of the company in the coming years. This slide is as well very familiar to you, which is illustrating UPM's transformation and the impact of our spearhead of growth initiatives. Over the past decade, we have achieved significant growth in businesses with long-term fundamentals and high barriers to entry. In these growing businesses, our average EBIT margin has been 3x higher than that of declining Communication Paper business. In this development structurally changing -- it is structurally changing our businesses and profitability mix. Going forward, we will continue to take actions to ensure performance in all of our businesses, of course, including Communication Papers. At the same time, we are taking clearly large growth steps. We are having an investment portfolio of more than EUR 3 billion. With the transformative growth projects, we are aiming to achieve even higher margin and attractive returns on investment. I really believe this will further drive our future earnings as well as further improve the positioning of UPM going forward. Next slide is actually where you can see we have been able to drive UPM's earnings and returns structurally higher over time. We have also recovered well from the last year's slowdown. The balance sheet is very strong despite the ongoing large growth investments. From here, the work really continues. With the transformative growth projects, our aim is to continue to grow UPM's earnings and returns as well as further improve the mix of the businesses. 2021 is an intensive year of construction for the transformative growth projects in Paso de los Toros pulp mill in Uruguay and the Leuna biochemicals refinery in Germany. The ongoing pandemic and global logistics debottlenecks and bottlenecks continue to post challenges to large projects like this. So far, we have been able to handle these challenges very well. We continue to implement mitigation actions proactively and ensure the timely progress towards the scheduled start-up times of the projects. In Uruguay, we have now reached the peak activity as planned, with more than 6,000 workers at the construction sites. It is also good to highlight that during the pandemic and during these large investment projects, we have been setting very strict criterias to any other investments, which you can see on those bars, blue and green bars. Thus, our CapEx outside of these 2 transformative projects is lower than typically it would be for the year. But let's move on to the pictures, and we will see the progress in Paso de los Toros in Uruguay. At the pulp mill site in Paso de los Toros, the assembly phase with the mechanical erection continues to progress in many process areas. Part of the civil work have been completed. Commissioning work will proceed in the coming months. So there's a lot of activity, as you can see from these pictures going on. Large-scale cargo transfers of machinery equipment and structures from the UPM [indiscernible] board to the new mill site continues on weekly, almost daily basis. At the pulp mill terminal in Montevideo, which you can see on the bottom right, works are progressing as planned, a large part of the pulp terminal area has been already completed. On the bottom left, you can also see the new eucalyptus nursery under construction. So we are having the third nursery coming into our Uruguay platform. Then moving to progress in Leuna. This slide is really showing the images from the biochemicals refinery in Germany. The delivery of the equipment for overground structures is going. And first, heavy-duty transports have arrived. For example, these distillation columns visible on the top of these pictures -- on the top row of the pictures. At the bottom center, you can see the newest testing and development facilities for the renewable functional filler products that we have on site. The hiring process for the operating operators and operating team is ongoing. One topic that we announced this week or last 7 days is the commercialization of the next-generation biochemicals, which is now really starting to take steps in commercial front as well. We are especially excited about the cooperation with Coca-Cola Company, which was made public early this month, as I said. The bioMEG product from the Leuna biorefinery will enable wood-based fully recyclable PET bottles. This cooperation demonstrates how the leading consumer product companies are now keen on finding renewable recyclable alternatives for the fossil raw material. So this is actually really a great achievement. We talk about Coca-Cola, which is using 3 million tonnes of plastics in the bottles, which means that 200,000 bottles per minute that they are using. The target is 100% bio-based bottles. And we have started this cooperation ever since 2017. A lot of interest on that as we speak. On the -- if we then move on to this picture that you have seen as well. UN climate change conference COP26 is coming. And we underline the importance of the renewable products. Undisputedly, the most effective way to mitigate the climate change is to reduce using of fossil raw materials and energy, and that we need to do quite radically actually in the future. UPM is offering alternatives for fossil-based materials, enabling our customers and consumers to make sustainable choices. We just discussed biochemicals. Biofuels is another example, enabling decarbonization of the traffic and aviation. The basic engineering phase continues regarding the potential second biorefinery. Raflatac and Specialty Paper businesses are offering a number of solutions for sustainable packaging, including the plastic challenge that we have in the world. Fiber-based solutions are driver for the pulp demand. So basically, you can understand from this description that UPM is very well positioned on the whole market. Plywood and timber provides low-carbon alternative for steel and cement in construction. So UPM's climate action is based on significant emission reduction, as you can see in the middle. Managing forest sustainably and always harvesting less than what we grow and then innovating climate-positive products, so i.e., finding solutions to replace fossils. With these actions, we fully support the UN business ambition for 1.5 decrease. And the final slide, actually, on this topic is here, shown here some of the most important ESG ratings. In Q3, we again received the highest possible Platinum rating in EcoVadis. This is a wide ESG rating -- ESG rating with a particular focus on supply chain and is thus highly valued by many of our customers. During Q3 as well, we were also recognized as 1 of the world's 37 most sustainable companies by the UN Global Compact. And for investors, perhaps the most widely used rating, MSCI ESG Ratings, which rates UPM in the highest AAA category. Ladies and gentlemen, to summarize my presentation based on these slides, the quarter was strong and UPM has been able to grow earnings, over the years, with a very good operating model efficient focus on what we do, taking care of the commercial front and the asset portfolio very well. So that is where UPM is having a very solid earnings growth, including the transformative investment, as you can see in the middle, in Paso de los Toros and in Leuna, which is in our focus. And then finally, on the right-hand side, this cooperation with Coca-Cola or any of the global brands, we will definitely be able to provide solutions, for example, liquid packages that are biobased. And as this picture is showing, this bottle is 100% plant-based. And that's where UPM is, through our Leuna biochemicals plant, contributing in the future as well. And then the Climate Change Conference in the U.K. 2021, i.e., UPM is well committed to 1.5 degrees Celsius. Ladies and gentlemen, with these words, I will stop here and hand over to the operator. This is the end of the part -- prepared part of the presentations, and we are now ready for Q&A. Thank you.

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

Just a clarification on the CapEx around the major projects. I imagine this is just a timing effect in that CapEx shifting into 2022, but just a little bit of color of why the CapEx is shifting from 2021 to 2022 is the first question. And the second is on the Energy division. You've given a useful slide, Slide 31 in your deck, around your consumption of energy and your production of energy. I'd just like a little bit of color around your Energy division and how you hedge your energy production in that division. And then finally, on the Specialty Paper division. Any color you can give on the trends that you're seeing in China fine paper?

If I take the CapEx, at least at the beginning, and then Tapio talks about energy and then we come back to the Specialty Papers later on. The CapEx, if you take the picture where we are having the CapEx spend, you can see that it is a timing issue. That is correct. And when we have been -- during this pandemic and the logistics kind of -- the bottlenecks we have been actually scheduling some of the things, and we have been doing things parallelly to really actually keep the timetable as we are targeting. That is the reason for at least a -- partly reason for the CapEx allocation in different years. So nothing in particular. Yes, the CapEx is the same. It is a timing issue, and the progress of the project is going well.

Yes. And if I'll address the question around energy, and maybe we can also look at the slide while I maybe talk about it. So well, just as a reminder, of course, we have power generation when it comes to electricity in the energy business area, but we do have combined heat and power plants in our industrial operations as well, pulp and paper. So here, as is shown in the UPM Energy business area, we have the nuclear and hydro capacity, 99% CO2-free, low cost, which is why also the margins were as good as they were in this past quarter. In terms of hedging, then we hedge and make hedging decisions, in a sense, separately for the power generation portfolio out of UPM Energy. And then on the other hand, for the main consumers, and the main one here is Communication Papers for the consumption portfolio of electricity and fuels as well, where that is possible. And we do that, let's say, we build the hedge position on both ends over several years. Obviously then, also within the liquidity available in the further years of the market, so it's sort of built typically, let's say, over 3 and 4 years' time. And maybe the last point being there that then, obviously, we do take sort of a view again at what pace it does make sense to sort of build up our hedging position, depending -- or given, let's say, where the sort of forward or futures market prices lie. Obviously, also 1.2 -- remember, keep in mind here is that when it comes to UPM Energy, we trade in the Finnish price area. Our power plants are here in Finland when it comes to consumption. Then obviously, we have power consumption in different regions and -- but significant regions, obviously, for Communication Papers, Finland, but then also Germany.

And maybe this worth of maybe repeating what we already stated of the Specialty Paper market in China. First of all, the market situation, as stated -- as Tapio stated, is twofold. The demand for release and specialties is very strong in Europe. And also, it is actually good actually in Asia. But on the other hand, fine paper demand in Asia slowed down and prices decreased. High input costs are tight-- and the tight energy market situation in China affects the result as well. But it is very much dictated by the economy and how the Chinese economy will then play out in the future.

Our next question comes from the line of Robin Santavirta of Carnegie.

So 3 questions I have. First of all, related to the Communication Papers division. Now in the past few Q4 quarters, you have reported energy refunds, which have boosted your earnings Q-on-Q. Do you expect a similar situation, energy refunds to be booked in Q4 this year? Also related to Communication Papers, we're seeing some of the producers are adding energy-related surges on the price in the middle of the contract period. Are you planning to do so? Or do you wait until 1st of January? So that's on Communication Paper. Then related to Leuna, how big part of the volumes that you have said to produce in Leuna will this collaboration with Coca-Cola now represent? And I guess we're closing in on Leuna. You're already sort of signing up some clients. I guess you have some kind of view of profitability. Could the Leuna plant reach the same kind of profitability as the Lappeenranta biofuels production? And finally, in China, what are you seeing in terms of production and in terms of sales in your categories?

Robin, there were 5 questions, but...

Sorry.

You were -- exactly. First of all, this is the answer that in the Communication Papers, we do have that similar pattern when it comes to these energy refunds. But obviously, you need to understand that and you see to yourself what is the electricity cost as we speak today, which will affect negatively on the paper business. When it comes to prices, that is something that we don't disclose beforehand. We do what is necessary to do in our own businesses, and we'll report those then later. Leuna Coca-Cola volumes, unfortunately, this is something as well that we cannot disclose. There will be a lot of customers that we are working with to sign contracts for the future. And finally, your question about the profitability, that is also somewhat too early to discuss. And the last one was something that I don't remember. It was related to China.

Related to China, your own production. And then also what are you seeing in terms of sales to pulp, paper and labor material customers.

Broadly, actually, first of all, our -- first of all, when it comes to Specialty Papers, i.e., the volumes that we produce in release and specialties, it is actually having a very good order book and goes forward. Of course, this lack of electricity is also affecting us, but it has been -- we have been able to really, once again, utilize our own energy and electricity production more efficiently and optimize that. So therefore, that is limiting the effect of the production in China. And when it concerns other raw materials, it is very much kind of related to this electric -- lack of electricity. Demand is solid, but it has slowed down. If you remember, early this year, everybody was pointing that China is the first to get out of this pandemic. And now it has been slowing down somewhat.

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

I'd like to continue on the energy side, Olkiluoto 3 is in -- started or will be starting up during next year. I wonder if you could share with us how you expect that to impact your group net balance of electricity and maybe also how you see EBIT contribution at current pricing.

Maybe if I comment on that. So again, like we had on that slide that we looked at earlier, we will have additional electricity coming to our portfolio from Olkiluoto 3. So obviously, our sort of long position will grow also -- actually, in a smaller scale, but still start-up in Paso de los Toros will bring us some renewable electricity generation as well. So in our kind of the group sort of balance, we will be having a larger sort of net balance of power generation vis-à-vis consumption. And let's say -- earlier, I've said that this kind of impact on EBIT is not, let's say, material on UPM level, of course, but now we have seen quite different prices than usual. So we will see how that continues into next year. But I would say that, again, unless we only continue going up in the power markets, then it's still valid on the UPM level that the contribution is not material next year.

Have you hedged the Olkiluoto 3 volumes?

Well, I won't, let's say, maybe go into details. But obviously, when it comes to both consumption and power generation, then you have to be kind of estimating what is the uncertainty on the volume so that you don't sort of end up being in an overhedged situation.

Okay. And then on a more general group level, one slide, #4, that you showed is quite helpful. There we can see that in the third compared to the second quarter price improvement outpaced variable cost increases. Do you expect that to be the case in the fourth compared to the third quarter as well?

That we are not commenting, unfortunately.

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

Just a couple of short ones for me. In terms of the shifting of the CapEx, could you give us any sense of more precise timing or the startup of Paso de los Toros? You've obviously said second half of '22, but if you could share any further light on that, that would be helpful. And also what you're seeing in the Raflatac business going forward. You talked about continued strong order books, but it seems a part of the strong growth in that business have been related to e-commerce. So can you see -- is there still a continuation of that strong business driver and/or is there any change in those business drivers and if you at all have been impacted by the sort of supply chain disruptions we've seen generally in moving goods and labels? And the final one, if you could give us any sense of the timber contribution to the Biorefining earnings because, of course, those prices have been exceptional, especially then year-to-date and/or in the quarter. Those are my questions.

Yes. Lars, I will start with the first one. Of course, the kind of clear what we have been announcing that the latter part of the second half of the next year will be the start-up. As we speak, we are in the most intensive phase of the project, and we have been quite successful on mitigating all the challenges that obviously there has been in the, in the whole globe. We have seen many, many projects that have had challenges. We have had quite a success on that. And we will actually come back to the kind of more detailed, more narrow time for the start-up in our annual accounts kind of meeting, which is in end of January. Raflatac issue is, yes, this one driver is this e-commerce, but Raflatac is driven by many other things as well. A lot of hygiene products that are in place, a lot of labeling, which is like information on food or any of the stuff that we use in our everyday life and many other things. So basically, Raflatac, we feel that, that is having a very good solid outlook, even if the pandemic is now over and even if the e-commerce would somehow ease or slow down, which I don't believe. I think that in e-commerce the step-change is now real and will continue as well. So very good kind of solid mega trends that are really supporting the growth of the labeling business. And then I hand over Timber issue to Tapio.

Yes. Well, of course, Timber business made a positive contribution to the Biorefining bottom line, to say the least, in a sense that the business was doing quite well. But then you have to remember the fact that it is a business consisting of four sawmills in Finland. So it is a small business performing very well, vast majority of the bottom line is coming from pulp and biofuels.

Just a very short follow-up, if I may, Jussi. The issue of supply constraints or logistics bottlenecks, has that at all impacted Raflatac specifically and/or kind of other part of your business?

It has not actually really. We are a global operator. We have a very good, actually, position in Chinese and Asian markets from China and the European business as well. Basically, we have been able to actually kind of serve our customers very well. And so it has not actually -- of course, sometimes the primary routes -- prime routes has to be changed into the secondary routes, but not really that now it would have been a kind of a corporate level issue.

Our next question comes from the line of Johannes Grunselius from Kepler Cheuvreux.

It's Johannes here. Two questions. My first question is on your Plywood business, which did very well in the third quarter. Could you give maybe some background to this and if you think that this level is sustainable for the coming quarters? That's the first question. And then if you maybe could indicate if Leuna will start it's commercial production more at the end of the second half of next year or is it more tilted to the first half of the second year. And also, I remember you have talked about the plans of putting Leuna and Lappeenranta into a new business division that you will report in the external reporting. Is this still the planning? That's my question.

Very good. If I start with Plywood. Obviously, we do have 3 clear segments that we are in construction, transportation and LNG tanker materials -- insulation materials. And basically, the portfolio of our products are really well actually kind of meeting the needs of the global green growth. Construction is still strongly going on and transportation, especially the transportation segment, which is typically the flooring of the lorries and trucks, is now moving on quite nicely. And then the LNG tanker business is very solid, and we do actually have a very good market position on that. So basically, plywood is having a good -- once again good, very solid outlook for the coming years as well after the pandemic and very really comfortable with the business. What we have been doing over the years that we have changed the kind of portfolio of where we operate, we do have low-cost countries that we operate in Estonia and Russia plus in Finland, where we have the high quality and efficiency as well. So solid outlook for the business. Leuna, almost the same answer, that we are in the middle of the activities. And we will come back to that timetable early next year when we do have more -- even more visibility than today, but progressing. And then the bio kind of starting new innovations, whether it's biochemicals, biofuels or any other, yes, that consideration moves on. And when the time is right, we will actually move to that direction.

Our next question comes from the line of Mikael Doepel of UBS.

A couple of questions still here. Firstly, in terms of the European graphic paper markets, do you see demand continuing to recover there currently? And would you say that the markets, in general, are tight enough to give producers sufficient pricing power to cover the cost inflation? Or do we still need more closures for that to happen? That would be my first question.

No, as we all have seen and you read it from the trade press that the demand for graphic papers has been strong in Europe. And that is the case if you just compare Q3 '19 to Q3 '21. So 2-year time, what is the decline of the demand? It is 13%. Similarly, if you compare Q2 '19 and Q2 '21, the decline has been 15%, i.e., per year, 6.5% and 7.5%. And that is actually quite actual story that even if last year, Q2, the demand went -- 2020 went down 32%. Overall, the demand of the papers has continued on that 5%-plus trend decline. But at the same time, the industry has closed capacity much more to 5.5 million tonnes into the last 2 years, if I remember correctly. So the markets are having a good balance. The operating rates are high.

Okay. No, that's helpful. And then secondly, I just wanted to ask you on the sawn timber market. There was a question about this earlier, about the earnings contribution. But if you think about the business overall, what are you seeing there right now? Do you see a continued good demand, continued price increases? Or how would you characterize the current market environment for your sawn timber operations?

Well, I would say that, let's say, the market is sort of -- I think the general expectation for sawn timber markets is that the market is kind of stabilizing and maybe starting to sort of normalize. The hottest point in the cycle, perhaps, is past us, but demand continues to be good. And as I said also, let's say, when it comes to Plywood, which is in the wood products business, construction-related, but logistic-related as well, and their sort of demand continues to be good and outlook is very strong. So demand side, we think that the market is good, perhaps, as far as the pricing is concerned that sort of the hottest point in the cycle is perhaps starting to be behind us.

Right, right. Okay. That's clear. And then finally, a similar question on the pulp markets and what you see there overall right now and perhaps more specifically also on Europe given the quite wide price spread we have currently to China. What's your take on that?

Well, let's say, obviously, we won't sort of comment or forecast prices going forward. But we have, in the short term, of course, now had the -- like Jussi was describing earlier, the sort of somewhat of a slowdown in the sort of Chinese economy overall and then that the concern is around the energy situation perhaps impacting the operations for paperboard, tissue in China. So it remains to be seen. We have, let's say, short-term uncertainty as far as China is concerned. Logistics bottlenecks remain. So therefore, the strong demand for pulp in Europe, that has continued and seems to continue, not only graphic papers, but in the tissue sector, packaging here in Europe that has been sort of supporting the European price level so far. But then obviously, we'll have to see during the coming weeks and months, whether there's sort of a price differential can -- how long it can sort of stay in place.

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

I've got 3 very separate questions. Firstly, for Tapio on the energy, Slide 31 in your deck. Thanks for the clarification on the hedging of the electricity purchases. Can I just clarify just on the electricity sales within the Energy division? Are they also similarly hedged? Or are they predominantly spot? Secondly, just on the [indiscernible] growth on Slide 30. You talked to us again about the basic engineering studies being conducted for the potential second biorefinery or potentially even second and third at [ Costa ] and Notre Dame. Just mindful of the fact that, clearly, we're seeing global logistic issues and then they have an impact on 2021 CapEx, should that potentially also impact the Board decision on that potential biorefinery projects, whatever that is in 2022? And then thirdly, probably one for Jussi on fore strategy. Clearly, you've given detailed explanation again as you have on Slide 16 about UPM's fore strategy. Your Chairman Bjorn has been quite vocal in some of the press recently about his views of, I suppose, the EU Fit for 55 and EU's new forest strategy, which seems to prioritize forest [indiscernible] over their use for supplying, frankly, the wood product industry. I don't know if there is any sort of formal UPM view on that.

I don't know if there was a question for energy, but if I actually start to talk about the spearhead of growth and especially the question was around the biofuels, the work continues as we speak. And obviously then, when the work is done actually and then we do actually have the -- all the needed parameters in place, we definitely then are having an ability to start to think about the kind of processes to make final investment decisions. But of course, we need to understand as well that you raised yourself this Fit for 55, the -- whether it's taxonomy or whether it is forest strategy or whether it is, the RED Directive, especially when it concerns fuel business, all of these regulations and the clarity of what will happen in details on these regulatory kind of framework is very important part of the decision-making. And as far as I know that it is a quite a slow process. Moving from that to the forest strategy. Obviously, it is where I have seen a lot of concern, especially that it's like the [indiscernible] is in details that the forest strategy is taking a view on a very specific items. There are plenty of them, and we should not actually, at the European level, do that for the reason that there's no one common forest in Europe. It is -- there are Finnish forests. There are Swedish forest. There are Dutch forests. There are U.K. forests. There are different type of forest in the whole Europe. And the best knowledge of how to actually treat the forest, how to manage forest, how to use the raw material from forest is locally, i.e., in the member states. And hopefully, that will be the -- eventually the kind of solution that it is respected that, that Finnish authorities -- forest owners knows best how to treat forest. Keeping in mind that we are having a good growth of forest today and the biodiversity is important angle on this matter as well. So basically, there is a good solution, but it is something that is a bit complex as we speak today. But basically, I feel that things are now moving into the right direction, but we need to still see those detailed proposals of the commission as well.

And maybe there was a clarification as for the energy hedging. So yes, we are -- for the Energy business area here in Finland, there we are looking at hedging the sales of electricity in the Finnish price area or, let's say, the power generation portfolio. And as said, that is what the energy business is focusing on hedging it's position into the future on the sales side. And then on the consumption side, again, the consuming businesses they decide on their hedging. And of course, again, there, you have to look at where the electricity is consumed, whether it's -- or energy for that matter, whether it's in the Finnish price area, in Finland or Germany and so on.

Ladies and gentlemen, thank you for your attention. This has been an excellent day for UPM, the best ever quarter in profitability in a very kind of uncertain global market. So happy with that, and we continue to work to be even better than today. Thank you for joining us today. Thank you. Bye.