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

Dear all, welcome to UPM's Second Quarter 2022 Result Webcast. My name is Jussi Pesonen, I am the CEO of UPM. Today, I'm here with -- in a sunny Helsinki with our CFO, Tapio Korpeinen.

Good afternoon, everybody.

And we will now focus on 3 main topics. First, we will discuss, of course, our Q2 results and the full year outlook. We today, reported our best ever second quarter earnings, which is a great achievement taking in consideration that during the first half of the year, we were only having a 1 month of normal full production. But also for the full year 2022, we expect to reach a new record of annual earnings. Markets are tight and volumes will increase. Secondly, as many of you have noted, our operating cash flow was highly unusually moving in Q2. This is related to unprecedented rise in electricity futures prices during Q2, especially in June and the related short-term cash flow impact of energy hedges. Tapio will actually guide us through that discussion later. But if the electricity -- prices of electricity futures will realize, it is a great earnings potential for UPM's Energy business. And thirdly, our main growth projects continue to make good progress, and we will add significant new earnings ramping up as early as next year when it concerns our Paso de los Toros mill and Olkiluoto 3. But let's move on to the next page, and let's start with the Q2 results. As already mentioned, we delivered record quarter earnings and quarterly earnings driven by successful margin management, which is absolutely have been in our focus. We have been extremely good on commercial strategy and also cost control has been good. And the markets are tight, as I already said. All of our businesses reported strong results despite rapid inflation in input costs and challenging supply and logistics chain. In April, we still had a strike impact in our Finnish production units. In May, we ramped up production at our Finnish mills and it was -- it went well. And on -- in May, actually, we carried out 2 large maintenance shutdowns in our 2 Finnish pulp mills. So in June, that was the first month of this year of normal full production. Our Q2 sales grew by 7% from last year and comparable EBIT grew by 26% and the margin reached 15%. 20% EBITDA margin; 15%, the EBIT margin. But ladies and gentlemen, at this point, I will hand over to Tapio for more analysis of the results. Tapio, please.

Okay. Thank you, Jussi. And in this usual slide, on the left-hand side, you can see the second quarter EBIT this year compared to the second quarter last year. And there, obviously, sales price increased in all business areas with the largest impact in Communication Papers. So that is obviously the biggest positive. Overall, sales prices increasing. Variable costs increased significantly as well. But as you can see here, the positive impact of sales prices was larger than the negative impact of higher variable costs. Delivery volumes were clearly lower and fixed cost higher than last year, 2 clear main reasons for this. First, the strike at our Finnish mills still impacted production in April. And our inventories were at a very low level after the first quarter when we had been running down inventories into deliveries. So therefore, in the second quarter, our capabilities to deliver were limited. Then furthermore, as we have already guided earlier. In May, we carried out 2 large planned -- large pulp mill maintenance shutdowns in Kaukas and Pietarsaari mills here in Finland. As Jussi mentioned, the total maintenance impact on the bottom line of these 2 shutdowns was EUR 80 million negative on the EBIT level. And then finally, changes in currencies, including hedging, had a small positive impact on EBIT. On the right-hand side, you see the sequential comparison to the first quarter of this year. Again, sales prices increased in all business areas, and this was clearly outweighing the increases in variable costs. Production was obviously higher than in the first quarter as the strike in Finland ended in late April and the ramp-ups in the mills went smoothly as planned. But again, in first quarter, one must note we delivered significant volumes from inventories. And at the beginning of the second quarter, these inventories were very low. And Obviously, there was a kind of a normal need to get the inventories to a level where the supply starts to function smoothly. So therefore, the increase in delivery volumes in the second quarter from the first quarter was still relatively small. Fixed cost increased from the first quarter to the reasons, let's say, seasonal reasons and then the 2 pulp mill maintenance shutdowns. Then on this slide, you see the EBIT development by business area. In UPM Fibers, market fundamentals were strong in the second quarter, and sales prices increased both for pulp and timber. Production at the Finnish pulp mills started well after the business-specific collective labor agreements were signed in April and the 2 major maintenance shutdowns once again were completed. Nevertheless, the strike in April and the maintenance shutdowns still limited performance in the second quarter. Communication Papers had a strong quarter, second best quarter ever for Communication Papers Demand for graphic papers was good. Average paper price was 14% higher than in the first quarter. This is enough to more than offset the increase in input costs. Delivery volumes still remained lower than in the first quarter, again, as the starting inventories into the second quarter were so low. Specialty Papers improved from the first quarter. Demand and prices of release liner and packaging papers continue to be good Asian fine paper markets were softer in the graphic fine papers, impacted by the COVID lockdowns in China. Sales prices increased, but input costs also still were on the rise. Also here, delivery volumes were lower in the first quarter due to the inventory impacts. Raflatac made last year, its all-time record quarterly result in the second quarter. now performance returned to that strong level, in fact, a new record for Raflatac. Sales volumes during the quarter were limited by raw material availability and then also the discontinuation of sales to the Russian markets. You may remember that in the first quarter, we wrote down the receivables in Russia for Raflatac, which makes the first quarter EBIT look smaller than the underlying performance actually was. In the second quarter, demand for Raflatac's products was healthy and the business manages margins well in the environment of high input cost increases. Energy reported strong quarterly results as energy markets were very volatile, price is high, and therefore, we had opportunities to provide value creation from our hydropower generation. The annual maintenance shutdowns at the Olkiluoto number 1 and 2 power plants took place during the second quarter. And then Plywood's earnings stayed at the near record levels. Plywood markets were tight in all end-use categories. Our deliveries were lower than in the first quarter as we no longer have the volumes from our Chudovo mill in Russia. In other operations, the markets for UPM Biofuels, advanced renewable fuels are very favorable and strong earnings are to be expected once the business can report a full quarter of production once again. So let's move to cash flow then. And let's start with the unusual cash flow from the energy hedges during the second quarter. So in June, prices of energy futures saw an unprecedented price across the forward curve. This is illustrated on this chart. And as you can see, both sort of, absolute change in the short period of time where this took place is something literally unprecedented and the levels reached in terms of euros per megawatt hour, also record high. Here, we are looking at the Finnish price area as for our power generation for the energy business area, this is the relevant market for us. In future contracts, market value changes are settled every day. So this then resulted in extraordinary high cash outflow for our energy hedges totaling EUR 1.032 billion in the second quarter. And here, again, this is related to the hedging activity that we have. And what I want to underline here is that this is only hedging for the upcoming volume of power generated from our existing power assets and from our existing facilities consuming energy. Therefore, this cash flow will later be offset by a similar cash inflow either from the hedges, assuming that the futures price would be coming down or then from the time when actually these volumes go into production, power is generated and sold to the market. So the cash flow will be coming in during the coming quarters. I'll give you a couple of examples of this. So again, if the futures prices would, for some reason, suddenly fall back again, then the same daily margin settlement means that the positive cash flow would come from the futures immediately. If on the other hand, futures prices turned out to be correct or continue to go up, then when we generate the electricity and sell to the market at those prices, we get the positive cash flow in over time to a large extent next year because, of course, during this year as well, but to a large extent next year because, of course, next year, we have the full year's production. And then, let's say, tailing down during the years further in the future. It is, of course, also possible that if the future's prices rise further, there would be some more capital tied into the futures until it is released as already explained. I think the other side of the coin here in a sense is that, obviously, if -- as I think Jussi was indicating already in the beginning, if electricity prices are realizing then in the future at the levels that we are seeing in the futures market today, this would indicate a significant uplift in the bottom line of our Energy business area. You can take a stab at it in your models by putting this sort of sales prices for our energy business area for the coming quarters and years. So all in all, one can say that there is exceptional uncertainty and tightness in the European energy markets and this indicates strong earnings potential for UPM Energy going forward. Furthermore, adding to this, Olkiluoto 3, the nuclear power plant will increase UPM Energy carbon-free electricity generation by nearly 50% at an opportune time. Then perhaps some further comments on cash flow. This slide shows our cash flows during the first half of the year. Operating cash flow was EUR 867 million negative during the first half. The main reason for this and actually the only sort of unusual item is, let's say, the extent of cash flow related to the energy hedges. So again, during the first half of the year, the cash outflow of the energy hedges totaled EUR 1.1 billion. And as I just discussed, this will rather be offset by similar positive cash flow. Otherwise, I would say that cash flow developed as expected, working capital increased by about EUR 360 million. If we exclude the items related to the energy hedges, this mainly comes from inflation when prices for our sold products or for our inputs go up, it means that the value of receivables and value of inventories goes up. But -- then on the other hand, the turnover times of the various working capital items have not increased. So in that sense, let's say, business as usual. Below operating cash flow, you can see that the investments are taking place at the expected rate. We have guided for investments in total of EUR 1.5 billion in the full year of 2022. And so here, we have EUR 710 million into investing cash flow. We expect the Paso de los Toros pulp mill and the Olkiluoto 3 nuclear power plant to start contributing to earnings and cash flows already next year. And the CapEx starts to decrease. And then obviously, the dividend payment took place also during the second quarter. Net debt increased to EUR 2.688 billion at the end of the second quarter. Net debt-to-EBITDA ratio was 1.42 A significant part of the increase in the net debt is temporary due to the cash flow impacts of energy hedges and future energy generation. Our liquidity continues to be robust with EUR 1.5 billion of cash and committed facilities at the end of the second quarter. And on top of that, in July, we strengthened the liquidity further by signing 2 new credit facilities, which totaled EUR 500 million. And then here, we have our outlook statement for 2022. I -- we expect our comparable EBIT to increase both in the full year of 2022 and also in the second half of the year compared to last year. It is good to note that there remains significant uncertainties in the outlook for the rest of the year. Nevertheless, like Jussi already mentioned, we expect to reach a new record for UPM full year earnings. During the first half of the year, our production was significantly affected by the strike in Finland. And as this no longer limits our production, we expect to increase our delivery volumes into the second half of the year. All in all, in the full year results of 2022, the estimated impact of the strike is not material. In the third quarter, we have no significant scheduled maintenance shutdowns. Sales prices and input costs are expected to be higher in the second half than in the first half of the year. We continue to manage margins using all the tools in the toolbox. So I would say that one can say, which I think Jussi was referring into the -- in the beginning as well that in the first half of the year or during the second quarter, we have had a kind of a speed limit on UPM's performance. The strike, the maintenance activity have impacted our volumes and fixed cost in the second quarter as well. Looking back to the third page, these items on volumes. And fixed cost, give you an idea of what the impact of that sort of a speed limit on our bottom line has been in the second quarter. So thinking about our performance and sort of development of bottom line going forward, you can sort of remove that and take a view on prices going forward from here. But at this point, I think I'll hand it back over to Jussi for an update on our strategic various projects.

Yes. Thank you, Tapio. I might actually comment that what you said about the speed limit. I think that it was well spent. Having that speed limit, now we prepared ourselves for the future with having 7 CLAs, which is definitely a fundamentally better position for the cost competitive operations here in Finland coming in the future. And of course, maintenance shutdowns that we have had in 2 pulp mills is just that we are having a solid run for the coming quarters and months. But this slide, I want to use it everywhere. I use it internally. I use this externally, giving, especially the high uncertainty of the business environment, our focus continues to be very clear. if I put this in 2 boxes, it is kind of protecting our performance, which is ensuring our performance, where commercial success and cost control are, of course, the fundamental key topics to be handled, i.e., the margin management. But also on that, ensuring performance, we have been taking other actions as I'm going to present that later, which is the sale of Steyrermuhl Paper mill and also the acquisition of the AMC in Raflatac. So plentiful of actions to prepare and for the full run. And the second, very clear focus of UPM organization is the transformative growth projects where we have, of course, the Paso de los Toros coming on stream early next year, Leuna on track. And then, of course, the Olkiluoto 3, which is not mentioned that many times. And also like the gray mill there means that we are preparing of the next steps, i.e., the biofuels project in Rotterdam. So that's why I use this. This is actually very core to how we run the company, how we are focusing our activities. Next page is actually familiar to you and it illustrates well our transformation. And through our spearhead of growth we will grow in businesses where the long-term growth fundamentals are strong and returns are supported by unique competitive advantage of us or entry barriers that are very important for us. This growth is in an intensive phase as we know, A lot of things are happening. I will show you some nice pictures and report what happens in Uruguay as well as in other big projects. But at the same time, we continue to take care of the competitiveness of the cash flow generation of the UPM Communication Paper business as you can see from the result that once again, we have been successful on our kind of long-term strategy, proactive actions, taking timely actions to keep the competitiveness there and, of course, the margin management is key core of it. Let's start with the Communication Papers. Obviously, in June, we announced yet another step in proactive -- proactively securing our competitiveness of the Communication Papers. We will sell Steyrermuhl mill with 320,000 tonnes of newsprint capacity and sawmill to HEINZEL GROUP for conversion to the packaging materials. This once again is a proactive, timely action to take care of our future cash flows and long-term development. In May, we also announced an acquisition of AMC AG to accelerate growth in very well-performing Raflatac business. So Raflatac, as you remember, is one of the spearhead of growth businesses for UPM, even if this is EUR 100 million -- EUR 110 million sales, but it's a very important step in our product strategy, but also regional kind of position in the business. The transaction will strengthen Raflatac's position in filmic labels. And in Central Europe, it will also add new attractive self-adhesive label products to Raflatac product portfolio. Finally, we expect a very good synergies out of the business. And when then the synergies will be there. Then I would like to move to our big transformative investments that we have and Paso de los Toros is the first one. And I will talk to you of first, the pulp mill itself and then the port or harbor operations. The continuation of the project has gone very well, as you can see from these pictures, but it is something that we are very comfortable with of the timetable and cost that we have been guiding you, i.e., the pulp mill will be up and running by the end of the first quarter of next year and proceeding well. More than 90% of the construction activity has been done and a lot of erection and instrumentation is now ongoing on the mill. Some commissioning has already started. Our auxiliary boilers, we have been commissioning those and some other parts of the process as well. $3.47 billion is the budget for the mill, and it is actually holding nicely. Port is almost ready. In Port, we are a bit ahead of the schedule as well and below the budget and by the end of this quarter, it is actually ready for operations already. So that is going to be the lowest cost port harbor operations to deliver pulp from Latin America to the global market. Railway also is proceeding as planned even if it's not our project, it's the PPP project by the government, and it has been lately proceeding and going as their plan has been there. So basically, good, really good progress in Paso de los Toros as we speak. And as we have been guiding you that $280 per tonne is the cash cost, and we can stick with that number easily. Lot of progress in Leuna, and you can see it from these pictures, construction at the biorefinery site in Leuna in Germany has proceeded well. And the commercial activities in various products and application areas have continued also to advance. The environmental benefit of the biorefinery and the UPM Biochemicals portfolio have been publicly acknowledged with several nominations as we can see. the excellent thing of this mill is that the raw material is not fossil. It is not gas, coal or oil, but it is solid wood, which is actually giving us a really good benefit going to the future, not only to environmental and sustainability factors, but also when it comes to security, raw material and the price of the raw material. Meanwhile, the detailed commercial and basic engineering study for possible next-generation biofuels refinery in Rotterdam, in Netherlands also continues to make progress as we speak. Moving to the Energy business area. As you know, Olkiluoto 3, the nuclear power station plant is finally in its testing phase ahead of the scheduled start of the commercial electricity production in December, heading there in December this year, UPM participates in the project with 31% share. So we are a 31% share owner of the Olkiluoto 3. Olkiluoto 3 will grow UPM's energy, carbon-free electricity generation by nearly 50% when this unit is up and running. Our CapEx is presented here. There's no change. Total CapEx usage for this year, like Tapio earlier said, is EUR 1.5 billion, which is including EUR 1.3 billion on transformative growth projects in Uruguay and Germany. And operational investments -- investment needs are consistently on a low level. Finally, to conclude our presentation, UPM's long-term transformation is visible also in this picture, which I like to highlight here in shareholder value rarely have there been so many uncertainties in this world and care politics and in the global economy as we are having it today. Happy with that, UPM is having a strong balance sheet. We are having the kind of outlook in our own hands in a way at least we are having a lot of low-cost capacity coming on stream, i.e., the Paso de los Toros and Olkiluoto 3, where the cash cost level is low. I believe that we are well prepared to face this. All these uncertainties of our businesses. And let's have these focus areas, i.e., the performance, protecting our performance and also delivering in our projects. As said, this year, we are expecting our annual earnings to reach a new record high. This is something that, especially today, happy to announce that we are having a forest and underlying energy webcast on 12th of September. And hopefully, if this cash flow issue didn't highlight how significant business energy business is in within UPM, I hope that on these 2 -- on that day, on September, that will be more clear and there will be a lot of more information. And then I will, ladies and gentlemen, summarize my presentation by stating that the record earnings in Q2 and happy with that, especially having this exceptional business environment that is around us. UPM expects also, as I have said, and Tapio repeated record annual earnings for the full year of 2022, our projects are well online. The unprecedented rise of energy futures prices indicate strong earnings potential for UPM Energy. And we might be the only first industry company to benefit of this energy market in a scale that nobody else is doing. With these words, I will -- I think that it is the end of the prepared part of the presentation. Dear operator, we are ready for the Q&A session.

[Operator Instructions] Our first question comes from the line of Justin Jordan at Exane.

I've got 2 quick questions. Firstly, just relating to the energy futures and hedging on Slide 5 and 6. If we take the gloriously kind of assumption that energy prices stay stable from here, which I know is the least likely thing, but let's just assume that was the case. Can you let us -- can you help us understand just how this $1.1 billion would unwind? What sort of time line should we be thinking about for this to unwind? Is this over several years or several months? And how that would play out over, let's say, the remainder of 2022, 2023? And then secondly, if you can just remind us -- just on a routine basis, I know clearly UPM Energy has extensive hedging, but can you remind us just for modeling purposes, what proportion of the energy output is routinely hedged over what time period? And then on a slightly related area, my second question is all about gas and gas supply and gas security of supply over, let's just call it the second 6 months of 2022. Clearly, there is uncertainty regarding [ North Stream ] and its potential transmission over several months. How could that impact UPM? And I'm thinking particularly about UPM's Communication Paper business in Germany? And what sort of plans and thoughts do you have in place if the situation deteriorates?

Well, if I take the first couple of questions, Justin, that you had there. And obviously, they are related in a sense that -- maybe starting from the second one, as we have discussed or described earlier, we are as most energy companies or players are doing, we are sort of looking at our production portfolio going forward across several years and start sort of building our hedging position over the time of several years. So it means that we have a certain volume of our future output sold forward or futures in a sense, sold against it and that we sort of do over time. Typically, the sort of hedging ratio in a sense, the amount hedged is higher for the closest quarters and sort of tails down. One can say, there is volume available in the market over 3, 4 years out, but liquidity is lower. And again, as we do this over time than the, let's say, at any point in time, the further years, the hedging ratio is lower. The other point, which I mentioned already, which is important to note here is that we only -- when looking at these volumes, we consider the volumes in a sense that certain in a sense that as far as the capacity is concerned, meaning the existing portfolio, so we have not been hedging against the future volumes coming from Olkiluoto 3 because those are not certain yet. And we never sort of hedge 100% of the existing production because we want to leave room, let's say, for the shorter term optimization of our sales and, of course, any sort of normal variation in output depending on hydro conditions and so on and so forth. So that's kind of the overall framework, and we don't have a kind of set path, but we take a view of the markets depending on how we think the fundamentals are reflected on the futures prices and so on. So what that means then to your first question is that just because of the fact that typically then the hedge ratio in a sense is higher for the closer quarters, than, let's say, as you put it there is. So let's assume that everything is frozen as far as prices are concerned from the end of second quarter, then let's say, the significant part of cash flow would be kind of reversing already during this year related to these hedges and, let's say, somewhat larger part, obviously, during next year, given that we have the sort of full year hours to generate capacity next year and then a smaller part to the years beyond that. And again, obviously, that's concerning the hedge outflows. Then on top of that, we will have the -- and inflows. And then on top of that, we will have the cash inflows coming from the part of the volumes that are not hedged. And obviously, these kinds of prices, we will be seeing in the future, the cash flow will be very robust. And then when it comes to, let's say, gas supplies, of course, and [ North Stream ], perhaps Jussi will comment on that.

Maybe you can also say something. But first of all, yes, it is actually Germany where the kind of the dependency is high in gas. Of course, we have been taking a lot of actions already to mitigate the dependency on gas supply in Germany. Luckily, we have also even longer term already invested into the bioboilers like in Schongau mill, we actually have been building bioboilers. Then it is not known to us that what will be the order, what is the kind of order when -- if there will be lack of gas that you know how what's our position on it. Of course, we are generating some kind of combined heat and power as well in our mills to the societies as well. So let's just see how it goes if there will be a kind of -- and how it goes. But that is Justin at least sure that if that happens, it is not concerning only UPM Paper business, but it is the whole forest industry and the other paper companies as well. The markets are now tight, and they will be even tighter market if this realizes.

Our next question comes from the line of Cole Hathorn at Jefferies.

Just a follow-up on the Raflatac business. It's been exceptionally strong over the last quarters and particularly into 2Q. Was there any availability problem getting release liner or any items from your Specialty paper because the performance is really good when you would imagine that there'd be some raw material availability considering you were restrained on your delivery volumes. So, just wondering if any color on volumes in the Raflatac division that you could provide. And then secondly, on the Specialty Paper division, the packaging materials and your release liner and Raflatac paper business has been very strong. You've talked about this as being a growth area for UPM. Do you see future opportunities to expand your portfolio on the capacity side and there any outlook on a longer-term basis would be useful.

Yes. If I take this to -- yes, as Tapio already mentioned, that we did have actually restrictions on raw material supply that was actually restricting Raflatac deliveries in Q2 as well. So yes, that was the case because of the lack of supply of the raw materials. Raflatac is doing well, and the basis is some years going backwards when we changed the whole way of managing the whole business and therefore, this is the result of quite a huge change in how we operate in Raflatac. So it is not just this COVID and the war-related issues that has boosted Raflatac's business. There's a plentiful of other things that we have been doing in Raflatac. And happy to see that it is continuing on a high level. And as Tapio said, that we had in first quarter, the write-downs -- write-offs of the business in Russia. All in all, was it EUR 30 million-or-so. So basically, even if you add that on that number that we reported in Q1, it would have been on the same level, EUR 63 million level. So very good performance. And very much related to what we are doing internally. Spec papers, yes, it is a spearhead of growth. We have opportunities to grow the business. Globally, it is a business where the demand growth is more than GDP growth on average, we are talking about 3%, 4% growth trend growth on that business. We do have the opportunity to actually make conversions as well ourselves or think about the acquisitions or even new machines. But when these plans and decisions are made, then we report on that. But there's plentiful opportunities. And as a global player, you have actually opportunities not only in 1 region or 1 country but in many locations within UPM system.

And if you just allow 1 follow-up on the pulp division. I mean you've talked about the maintenance and the delivery impact. I'm just wondering if you could give any color on your pulpwood costs and any of the variable cost sides, if that has an impact on the performance in the second quarter? Or should we be thinking it is predominantly maintenance and delivery volume impact?

I would say, limited or no impact in the second quarter because, again, let's say, Fray Bentos is performing very well. Their costs are under our control, wood coming from our own plantations in Finland, obviously, we have had wood available as the mills were not running for the first months of the year. So in that sense, no impact from that in the second quarter either.

Our next question comes from the line of Johannes Grunselius of DNB Markets.

Yes. It's Johannes here. I think I have 2 or possibly 3 questions. My first one is a bit of a modeling question, how we should look at OL3 when it starts producing here in December. Could you guide us for what kind of OpEx per megawatt or something that we should think about going forward here?

Well, we have not given figures on the sort of OpEx per megawatt, what is the cost. Generally speaking, what we have described earlier is that, of course, given, let's say, this Mankala structure that we have here in Finland, so we are buying electricity from this associated companies at full cost. And of course, say for the existing portfolio, the part of the forecast that is related to depreciation, capital charges is lower. So Olkiluoto 3 cost will be somewhat higher. But again, obviously, again with these sort of levels that we are seeing in the market today, there will be very good margin also on the Olkiluoto 3 volumes.

Okay. But -- I got you, you say somewhat higher OpEx but then for the Energy business as we have today.

Also, what is good to note is that while the commercial full operations start in December, let's say, during the test run, Olkiluoto 3 does generate meaningful electricity like in the month of April when the test runs were able to proceed at 60% level. The output of the Olkiluoto 3 plant was at the scale of the whole Loviisa power plant with 2 reactors. So even during the test run, there will be some meaningful volumes coming.

Okay. Good to know. And that goes into my second question. How one should look at this sort of ramp-up phase for OL3, but I assume it's kind of full volumes as of December. That's the planning, right?

Yes, in principle. So you can look at TVO's website. They actually have quite a good sort of disclosure in terms of what is to be expected from the test runs. And then obviously, when the full operation comes near, then they have to communicate on that.

Right, right. My second question is on Paso de los Toros. If you could help us a little bit on the ramp-up phase on sort of in 2023 when you will be up and running, how we should look at that? And also a question on Paso de los Toros because I think you said that you'll see that you're comfortable about your OpEx account guidance that you have had for a long time here. We know it's huge cost inflation, most areas in the world. So how come you can still stick to this guidance?

No, that is -- if I start that with that, and let's talk about this $280 per tonne, obviously, we have been -- when the whole project was done, we were fixing the parts of the cost i.e., how to generate electricity to the grid. You know how to -- what is the cost of wood because it is like Tapio already mentioned in Uruguay, the cost is -- wood is coming from our own forests. We know it. So it's fixed. Then the transportation. When it comes to railroad, it is pretty much kind of fixed and low-cost harbor operations is in our own hands will be the lowest fixed kind of level of costs. Of course, you do have still salary inflation there. You have the ocean ship when it comes to fuels and this and that. But that is the reason why we are so comfortable with the number of $280 per tonne. It's a different, too. If you compare that the pulp mill here in Finland, where the pulpwood prices are something that you don't know what will be the pulpwood prices in the coming years, which is a significant variable cost item in the pulp mill. Lot of chemicals is produced locally there in the mill side. So that is the reason why we have the kind of high confidence on the cost level.

Okay. And then finally on how one should look at the volumes sort of any indications or color on the operating rates or so for the first quarter.

Not actually guided that, but of course, it is a proven technology then I would expect that it is actually starting quickly. This is the experience that we have had in the pulp mills towards the nominal capacity but we have not put any number on it, obviously, which is great in UPM Paso de los Toros case is that the similar mill is only 150 to 200 kilometers away from Paso de los Toros. So we are having an excellent opportunity to utilize the knowledge and people to actually get the mill quickly up and running and to the full speed. We have not guided exact numbers, but it is a bit pulp mix are today like that when it's not as Olkiluoto 3, but kind of pretty quickly, we are reaching quite good level of production. Of course, you are then having this kind of maintenance shutdowns more often than -- that what we -- in UPM, have 18 months kind of time span of big maintenance shutdowns during the start-up period you are having more of this kind of project related shutdowns to fix some of the issues and change. But we'll see and most probably closer do we get to the start-up, we might actually have some more information about the kind of actual start-up.

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

So related to natural gas, I was wondering if you have -- and especially if we go into allocation mode in Continental Europe, I was wondering if you have any major risk when it comes to suppliers and supplies and when it comes to customers. I think the obvious thing that we discussed before is your sort of direct exposure to the European paper production. But what about sort of clients, for example, in pulp, tissue producers, what about chemicals, et cetera. Any sort of major risk there that you identify?

Pulp is definitely not there. Pulp is typically -- pulp doesn't need any of these, whether it's gas or any other fossil raw materials. Only little -- but of course, then chemicals is one of the topic that there might be some kind of restrictions as well. I don't know that it's something that -- we don't know, obviously, this. But as a UPM, we are having a global sourcing, and we do source a lot of materials also elsewhere than only in Central Europe.

And how is it with pulp customers, the tissue producers, the paperboard, paper producers in Europe, would that then be sort of at risk? Or is it too early to say?

No, that is something that we don't know. Of course, it is something very impossible to say exactly how it goes. But of course, it doesn't take the demand out anyway. So if there will be hiccups, the markets will be tighter, and there is a need for delivery anyway. But not that I have at least anything more in this topic.

I understand. And 2 other questions, quick one maybe for Tapio inventories now in Finland. Are they normal? And the second question, maybe you will see Energy business, obviously, now in Finland, a great support for you. But long term, strategically, is this really a business that you want to have given that you're sort of -- is it then even an offset when you produce paper in Europe and not so much in Finland. So could we see any strategic boost when it comes to the energy business in the midterm?

If I start with that Energy, of course, the Energy business is something that I have been asked tens of times over the last 10 years that is it part of UPM? Of course it is, it is something that is coming from the history that we have, the Energy business, we have been taking care of the Energy business. We have been really running it efficiently, and we have been building a huge good business out of it, which I think that now starts to be highlighted by these markets that the energy is not cheap, energy is scarce but also what we need to consider when going forward is that can energy be a vehicle for the hydrogen economy. So this is something that we have said already earlier this year that the hydrogen economy is very much dependent on energy and CO2 free energy, which UPM is having a lot hydro and nuclear power. And then we do have a lot of CO2 coming out of the pipes of our pulp mills. So basically, suddenly, we are having a very lucrative idea of long-term considering of the hydrogen economy. So before just taking any steps on the energy business, we need to we need to actually think about also the future opportunities of different new businesses.

And maybe I'll comment on the inventory question. I think inventories, of course, in a sense, we are working to normalize to the extent that we can get the supply chain oiled up in a sense, working more normally. But the fact of the matter, of course, is that we have been now in the spring, summer time selling into an empty pipeline, the customers, whether it's paper, graphic paper, whether it's specialty papers, whether it's Raflatac materials, whether it's pulp, the customers have been looking to get material to their inventories. So the pipeline has been very empty and basically sucking everything that it can. So in that sense, the inventory levels are relatively low still. And let's say, as I said, we are sort of boiling up the pipeline going to the customers.

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

My first question is on communication papers and if you could help us with an update on pricing going into the third quarter and maybe also, in general, on pricing dynamics, which have been somewhat more complex than usually with different kinds of surcharges in the industry, et cetera? Are we now starting from a clean slate at midyear and maybe most importantly, if you could give some kind of guidance as to what kind of price change we should expect for the division in Q3 and Q2, please?

No, Linus, I guess that we -- I have never ever made any guidance for the prices for the future. But if you just look at the curves that are published of the past, you have seen a huge price increases in the business. And then I would actually say that to us, it is, clearly, the focus is in margin management, whether the costs are going up, then, of course, we are managing the margin or whether the costs are going down, we are managing the margin. So it is purely margin management to us and price is one factor on it. We'll see how the kind of world economy will develop.

And how -- could you, in any way, took us through how you've negotiated with your customers, like in terms of validities, for instance, should we expect that the majority of your publication paper contracts are on, say, 1 quarter contract or what's the typical contract that you've closed?

Roll -- so to that actually, 1 quarter or less.

Okay. Okay. And then I don't know if it's possible to talk a bit more about fibers. You've already very clearly said and explained how the Fibers division was negatively impacted by the strike at the beginning of the quarter and the 2 big maintenance shuts in May. If you were to comment specifically on June performance, what could you say then? And also just coming back to the previous question on the inventory situation, if you talk about pulp mill inventories. What's the situation there? Is that a constraint still into the third quarter, please.

Well, I would say -- let's say, overall, when it comes to the mill operations, of course, as said, Fray Bentos is running very well in June also partners were operating well, I would say, overall. And then, let's say, of course, we have been then already from the Finnish mills during the month of May, but particularly then given the maintenance shutdowns during the month of June. So just starting to fill up the pipeline. So inventory levels -- mill inventories and, let's say, our part of the inventories are still low, but let's say, from a kind of again, efficiency of deliveries point of view, it's improving. That's obviously what we have been working here.

And Linus, you have seen other kind of troublesome events also in other companies as well when it comes to production. Our production in June was actually already on back on track.

Yes. Okay. Good. Good to hear. And then just again, a follow-up on the wood cost situation. It sounds like you haven't seen much in the second quarter. But in the fibers division, you do have quite a significant Nordic hardwood, pulpwood exposure. Are you seeing that sort of cost inflation coming through in the third quarter? Or is it rather even later than that?

Well, let's say, of course, what we are now doing with the Finnish mills overall is basically sort of adjusting to the new mix of wood available from Finland. So in that sense, the mix of output from the Finnish mills will change somewhat as well more softwood, which is sourced here locally as there are natural restrictions in terms of how much birds there is growing in the Finnish forest, so that way we are sort of managing to sort of, let's say, mitigate sort of pressures on the cost side, there is, let's say, you can see from the market figures, there is some movement on the sort of market prices in Finland. But again, also looking at the pulp prices, the margins for the pulp business are very good.

And it is to our strategy anyway. We are building a 2 million to 2.1 million tonne hardwood pulp mill in Uruguay. So basically going more towards softwood in Finland, this suits us well.

Yes, that makes sense. And what -- just a final, if I may, what mix are you aiming for then in the Finnish pulp production in terms of softwood vis-a-vis hardwood?

That we do not actually -- we have not guided that.

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

Well, maybe to continue on the Linus' question on Communication Papers. I mean, there's usually the sort of demand sensitivity to prices, and we have discussed this before that is there a risk of high prices starting to have an impact on demand going forward? And related to this, I mean, just if you have some color to give on the customer patterns. I mean is there -- how is paper printed media used together with digital advertising? Is there what sort of trends or kind of developments are you seeing there from kind of customer behavioral point of view?

There's a lot of kind of new studies that we do in UPM, we are maybe the company that still makes those quite -- in a detailed level, of course, there are trends that are supporting also printed version of Communication as well. But of course, yes, that's a question that if the prices are high, what will be the -- how does it affect on demand. I have to say that nowadays, I don't, any more, think about it anyway. I will only manage the margin. This business in UPM is a cash flow business, and it needs to generate good free cash flow in all circumstances. If the demand will go a percent downwards from a trend level from that what it has been in the past for the reason that prices are on that level that it generates cash flow, then it goes that way. It is not anymore -- it is not a growth business. If this would be a growth business for UPM or for the business, then you would then you would kind of take care of that. But in this situation, the margins and the free cash flow generation is really crucial to us.

Yes, yes, sounds fair. Well, 2 quick questions. I mean one is about the Asian Paper market now after the lockdowns. I mean what are you seeing there? And the other sort of question was still going back to the energy derivatives. And just wondering why the item was so concentrated for the second quarter because electricity prices did rise already earlier, and we did not sort of see smaller numbers, but -- so this came a bit sort of surprisingly sort of a big number at one go. So just wondering what the background for that is.

I can take the Asia first, and say that look at the curve that Tapio was presenting at the meanwhile. But Asia market, of course, the specialty paper market and release liner market for us is strong. It is tight. It is -- it has been, during the lockdown, tightened. It is still tight, good business in Asia markets. Of course, then the fine paper business that we have in Asia has been having somewhat more challenges. But on the other hand, our share of the Asian -- total Asian Fine Paper business is 1% or 2% market share. Therefore, we definitely feel that we can make good returns and good profits on that business as well. But that has been more kind of softer due to situation in China.

Yes. And maybe looking at this slide here, of course, I would sort of point out a couple of things here. as a kind of a point of reference, the average actual price of electricity across the whole year last year in the Finnish market in the wholesale market was EUR 72 per megawatt hour, which was all-time record. Previous record was, I think, in 2010 more than EUR 60. So last year's all-time record was 72 here, perhaps the scale is a little bit confusing looking at the very short-term curves. But if you look at where next year's annual product '23 is that would indicate higher annual price than what we had last year -- well, 50 here, actually, it's been going up since the end of June further. So let's say, not only the change, but also the level is something that we have not seen before and what did not happen during the first quarter either. So that's obviously why this is not something that has been seen before. The other point here is that when prices -- of course, we have had this cash flow topics in a sense, in a smaller scale inflows and outflows in the past whether prices are going up or down, when it's happening in a kind of longer period of time, the sort of cash flow impacts are not as significant, because on the other hand, when you go to the generation, you get the inflows as well. But now when it happens in 30 days, to this extent, then you get this sort of issues. And you will see it in the figures when the energy companies, the bigger players as well report on this.

Yes. Okay. That explains it well. Going forward, I mean, if there is say item of the say EUR 200 million, EUR 300 million? Would you be kind of reporting or commenting those separately in the coming quarters? I mean just so that we can know a little bit like what happens to that position? Or what's -- what will be the kind of policy on communicating this item?

Well, let's say, perhaps there is no kind of rule as such for this specifically, but of course, always we will report what is relevant. So to understand what is happening on the cash flows, then we'll give you the needed disclosure.

Our last question comes from the line of Saul Casadio of M&G.

It's just a clarification on -- again, on the same point, the energy hedges. I just wanted to clarify but understand that nature of the outflow in Q2, was that a sort of a cash call on the hedge? Or did you decide to reset the strike to try to better understand the nature of that and how it will be recouped in the coming quarters?

Well, I'd say, our kind of approach here is straightforward. So again, this is a very simple hedging through the clearing houses in the Nordic area through NASDAQ, we are buying for our consumption and selling for our power generation futures. And again, hedging against expected power volumes from our existing capacity. So therefore -- well, then also what happens when you are, let's say, selling futures through the exchanges that -- there's an initial margin that is posted and then there is the daily settlement of the variation margin. And we have sort of given some color in our report on that. Part of this is coming from the initial margin, but larger part is coming from that daily settlement. So again, either through movement of the futures markets, then we will see the sort of cash in and outflows during the coming quarters from the existing portfolio of futures that have been sold -- and then, let's say, latest when we go to production, then at that point in time, do we get the cash inflow from the power sold to the market.

Okay. And so just to clarify, you have not -- so basically, it's just, say, a margin call and there's no resetting of any strike. So the contracts are running as they have been underwritten initially?

Yes, we have sold futures to the exchange and then there have been margin growth against that.

Very good ladies and gentlemen. Thank you for being with us. And maybe if one topic has been highlighted is that UPM is having a kind of -- one of the main business is Energy business, which is totally different to any other forest industry company. And therefore, we are having a huge benefit ahead of us and opportunity in that business as well. Thank you for joining us, and have a nice day.