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

Dear audience, welcome to UPM's Quarter 3 2022 Results Webcast. My name is Jussi Pesonen, I am the CEO of UPM. And I'm here with our CFO, Tapio Korpeinen.

Hello to everyone.

Today, we do have 3 main topics to be discussed. First, in UPM, we made a super good quarter. We reached all-time high quarterly result in Q3. The strength of our operating model was on full display. So operating model, in my opinion, is one of the most important factor. As we all know, we made a record quarterly result in 5 businesses, Communication Paper business, Specialty Paper business, Raflatac, Energy and Biofuels. Fibers and Plywood businesses achieved strong results and inside of Fibers, pulp made also a record quarter. All in all, Q3 was a great success considering the high uncertainty and volatile business environment that we had. Secondly, Q3 was clearly characterized by the energy crisis in Europe, energy crisis and the volatility in the market reached unprecedented levels. Market prices -- price signals are crucially important, both for the energy system as well as whole and for steering of UPM electricity generation and consumption. The optimization is a significant source of the value creation, both in our energy business and in our energy consuming businesses. Ladies and gentlemen, finally, our transformative growth projects continue to make good progress. The Paso de los Toros pulp mill will grow our pulp business by more than 50% with very competitive cost level. Olkiluoto nuclear power plant will grow our energy business by nearly 50%, offering much-needed CO2-free energy to the markets. And then Leuna biochemicals refinery will open a new sustainable growth business for UPM. In Raflatac, on top of all this, we completed the acquisition of AMC to accelerate growth and expand the product portfolio. Let's start with the Q3 results. Q3 was a first quarter this year with the normal production in our businesses, no strike, no significant maintenance activity. So our delivery volumes were back on normal and our operational efficiency was good and a very good level. Good demand continued in most of our businesses and sales prices more than offset the impact of continued increase of variable costs. As a result, business performance was strong in all businesses and 5 businesses achieved record quarterly result, as already stated. Our Q3 sales grew by 36% from that of last year. And our comparable EBIT grew by 84% and reached a margin of almost 23%. But ladies and gentlemen, at this point, I will hand over to Tapio for more analysis of the result, and then I will come back. Tapio, please.

All right. Thanks, Jussi. So here, on the left-hand side, you can see the EBIT bridge third quarter compared to last year's third quarter. And obviously, as you can see here, sales prices had the biggest positive impact, prices increased in all business areas and really the biggest impact was in Communication Papers. Variable costs increased significantly as well, but -- and across all input cost categories, but price impact from the higher sales prices was clearly offsetting or more than offsetting that. However, as said, this impact was larger than the negative impact of higher variable costs. On the right-hand side of the slide, you can see the EBIT bridge compared with the previous quarter, the second quarter of this year. And here, the biggest earnings driver was the normalization of our delivery volumes. In the second quarter, volumes were still impacted by the strike in Finland, by the lower inventories after the strike and large maintenance shutdowns at 2 of our Finnish pulp mills. In the third quarter, these factors no longer held back our performance. Sales prices and variable costs increased from the second quarter. And you can see also a decrease in fixed costs from the second quarter, which is again mainly coming due from the maintenance shutdowns that we had in the second quarter compared to then lower maintenance activity in the third quarter. Here, you can see the comparable EBIT development by business area. And as you can see, we achieved very strong performance simultaneously in the upstream businesses like fibers and energy, as well as the downstream businesses like Communication Papers, Specialty Papers and Raflatac. So all businesses performed well, both upstream and downstream in the value chain. Energy achieved record earnings benefiting from high electricity market prices, also benefiting from the optimized hydropower generation in the markets that were quite volatile and also the first notable generation volumes from the Olkiluoto 3 nuclear power plant. Fibers achieved an excellent quarterly results with continued solid demand and pulp prices that stayed high. Our timber business, however, was affected by a visible slowdown in the construction markets and end users. Communication Papers faced a radical rise in input costs, particularly in energy as well as in fiber costs. But these input cost increases have been successfully offset by increases in sales prices. In this highly volatile and uncertain business environment, the business has been very determined in adopting a more agile operating mode. There are no long-term price contracts in place any longer. And the business is very active in optimizing its production vis-a-vis changes in the energy market. Specialty Papers delivered an all-time high quarterly results, despite historically high priced raw materials. The market for release liners and packaging papers remained very strong. Asian fine paper markets continued to be challenging, but despite that, all-time high in quarterly results. Favorable market conditions continued for Raflatac, customer demand for label remained good, and the business performance was extremely good, reaching, again, record quarterly result for the third quarter. Plywood had a good quarter despite slowing demand in construction end uses. Sales prices did increase for most products. And then as part of our other operations reported within that, Biofuels achieved a record production and profitability in the strong markets for renewable biofuels. Our strategy is based on proprietary technology and UPM integrated feedstocks, with this proprietary technology enables to support high sustainable renewable fuels. This strategy is now delivering results. As Jussi said, this year, in all and the third quarter also in particular, have been characterized by the energy crisis in Europe. Even though electricity prices and price volatility have increased significantly, still the markets as such, have continued to function well. On the electricity markets, power generation and consumption have to be always on balance as you cannot store electricity in large amounts. There are large variations in the national or regional electricity needs between different hours of a day between days and between seasons. Also on the supply side, wind power, especially renewables, wind and solar, in general, represent a big variable and unpredictable component for the energy balance. So to maintain that balance in the system at all times, market price signals are crucially important. UPM is an active player on the electricity market. We continuously optimize our electricity consumption towards ours when the prices and societies energy needs are at the lowest. And also on the other side, we increased our hydropower generation when energy needs are the highest. So consequently, we help to balance the electricity market, particularly in Finland. On this side -- this slide you can see how UPM's hydropower optimization and paper mill production optimization work in practice. The examples shown are for the average day during the month of August this year. As you can see, the variation of our hydropower generation and paper mill electricity consumption within the day can be quite significant. This is beneficial for the electricity system, helping to maintain the balance and to avoid worst price peaks. And at the same time, it provides an economic benefit for us both in the energy business and in Communication Papers. Every now and then something unexpected happens and further adjustment is needed on the electricity market to maintain balance. And here, we have an example from the 8th of September this year. At that point in time, the wind forecast was incorrect, and wind power output turned out to be practically 0. On the same day, Olkiluoto 3 was a few hours late in ramping up its output in the testing schedule. The electricity system needed either additional generation or less consumption or obviously both. To provide the needed up regulating volume, the market price signals are again crucially-important in these kinds of situations. In this case or in these kind of cases, the Finnish transmission system operator, Fingrid, it does not have this kind of reserve capacity to meet the total need or demand for upregulation as an example, in this instance. So therefore, the market participants provide the regulating volume, which Fingrid asks for based on market prices. UPM is active on the regulating market, both with its hyper power plants and its paper mills. So like in this instance, we were able to, at the same time, increase our output from hydro, but then also to reduce our consumption in our paper mills. Again, this activity is both beneficial for the system and provides an economic benefit for us. So these 2 examples have, I would say, 3 main points. First of all, market signals, market pricings are crucial for the functioning of the electricity markets on a daily basis, on an hourly basis, very short term for the next 24 hours. UPM secondly, is very active in optimizing its electricity generation and consumption, again, based on market prices. This helps balance the market and does provide us with value creation opportunities. And then the third point being that in an energy-intensive business, such as Communication Papers, being able to adjust production based on energy market prices is a clear competitive advantage. Let's move to cash flow. As we discussed in the second quarter release and presentation, also the third quarter operating cash flow for UPM was affected still by cash outflow related to energy hedges. The rise and volatility in energy futures prices across the forward curve continued in the third quarter. Futures prices, as you can see on this slide, peaked in August and moderated thereafter, ending the third quarter still on a higher level than at the end of Q2. This resulted in cash outflow of EUR 681 million related to the futures contracts. This cash flow taking place during the third quarter or a total of EUR 1.783 billion in the first 9 months of 2022. As we discussed 3 months ago, this cash flow will later be offset by a similar or larger cash inflow, either from the energy hedges, if the futures prices come down or from the electricity generation and sales at the time when these hedges mature and electricity is produced. In the meantime, it does tie up liquidity and to ensure strong liquidity in all circumstances, we signed committed credit facilities totaling EUR 4.3 billion during the third quarter. All in all, the exceptional energy market situation does indicate strong earnings potential for UPM Energy. Still continuing on cash flow. This slide shows our cash flow during the first 9 months of the year. Operating cash flow was EUR 1.068 billion, negative year-to-date. The main reason for this and the only unusual item is the cash flow related to the energy hedges. During the first 9 months, this cash flow of the energy hedges totaled nearly EUR 1.8 billion. And as I just described, this will later be offset by a similar or larger positive cash flow. Working capital increased by about EUR 600 million year-to-date if we exclude the items related to the energy hedges. This mainly comes from inflation, everything being more valuable, value of receivables, inventories being higher. Below operating cash flow, you can see that the investments are taking place at the expected rate. We have guided for investments to total EUR 1.5 billion in the full year of 2022. We expect the Paso de los Toros pulp mill and the Olkiluoto 3 nuclear power plant to start contributing to earnings and cash flow already next year, while the CapEx starts to then decrease. And finally, within the second quarter as we are looking at the first 9 months in this slide, in the second quarter, the dividend payment took place. Then looking at the financial position of UPM, net debt increased to EUR 3.133 billion at the end of the third quarter. And the net debt-to-EBITDA ratio was 1.39. A significant part of the increase in net debt is temporary due to the cash flow impacts of energy hedges and future energy generation. Our liquidity continues to be very strong at EUR 5.2 billion in total in cash and unused credit facilities at the end of the third quarter. And then here, you can see our outlook for 2022. We expect our comparable EBIT to increase from 2021 during this year, following the record strong third quarter results, 2022 third quarter results, our financial performance is expected to continue above last year's level. It is good to note that there remains significant uncertainties in the outlook. Nevertheless, we expect to reach a new record for UPM's full year earnings in 2022. In the fourth quarter, we do have 2 scheduled maintenance shutdowns, one at our Fray Bentos pulp mill in Uruguay and one at the Lappeenranta biorefinery. We estimate that the EBIT impact of these shutdowns will be about EUR 50 million during the fourth quarter. And at this point, I'll hand this back over to Jussi for an update on our strategy.

Thank you, Tapio. I guess that before I focus on those areas that Tapio mentioned of [indiscernible] transformative investments. It was a great proof point what Tapio was presenting on the slides 5 and 6 of the operating model of UPM. It is not only that the businesses are having the operating model that will cope with the input costs and the prices of the products. But on top of that, UPM is having a very efficient energy, actually management in place, which is, as Tapio stated, at the same time, it is providing a clear economic benefit for our energy business and especially for our Communication Paper business, what was actually the case in the third quarter as well. So basically, it is actually now we have an even wider perspective of the operating model, how it operates in UPM. But let's move on into the focus areas. This is not as a big surprise that we are presenting this, but this is something that we repeat and repeat that protecting our profitability is the main task of the day and then at the same time, to really make these transformative projects proceeding as they are planned. Given the whole high uncertainty in the business environment, our focus is very clear, and then therefore, it is visible on our results as well. And let's then move into the next page. And this is also a very familiar illustration of the transformation of UPM, but it is actually every quarter, it is more a proof point where we are, as you can see, the numbers through our spearheaded growth, we will grow the businesses where the long-term growth fundamentals are strong and returns are supported by a unique competitive advantage or the barrier to entry factors. We have 3 large growth projects ongoing underway and nearing their start-up phase. These are, of course, the Paso de los Toros, pulp mill in Uruguay, Olkiluoto 3 nuclear power plant in Finland and Leuna biochemicals refinery in Germany. On top of that, we actually just completed the acquisition of Raflatac, which is very important growth step in our Raflatac business, and we will come back to that as well. And we have one project in basic engineering phase, namely the Rotterdam biofuels refinery, which is proceeding well as well. So as we see our growth is in an intensive phase. At the same time, we continue to take care of the competitiveness and the cash flow generation of the Communication Paper business, which is operating in a declining market. And there, I'm really happy how the business has been run. First, let's go into the Raflatac. Actually, as mentioned, we completed the acquisition of the AMC AG, a label materials company based in Germany in September. The acquisition will accelerate Raflatac's growth, expand its product offering, and that is maybe the most important part, and then strengthening Raflatac's position in the filmic labels in Central Europe. AMC has good quality label factories in Germany. It has been consistently growing and profitable in the year -- past years. And in 2021, its sales totaled EUR 110 million. The acquisition is expected to result into a good synergies as we have guided. Then moving to the Paso de los Toros pulp mill project in Uruguay. It's continuing well. The project will grow our pulp business by more than 50% with a very competitive cash cost level of $280 per delivered tonne of pulp. Production at the mill will start by the end of the first quarter 2023. At the mill site, the machinery installation is nearly completed. The commissioning phase is progressing the auxiliary boiler and power boiler have already been commissioned and the commissioning of the water intake and the treatment, process air system, fiber line and wood handling have already started. A significant milestone in the project was reached when the new pulp terminal, i.e., the Montevideo Harbor was inaugurated in October as you can see from the picture. Then moving to Leuna Construction at a biorefinery site in Leuna, Germany is proceeding as planned. You can see the -- in these pictures, how the refinery is taking shape. Production at the refinery is expected to start by the end of '23. Here, we are opening a new -- really a new growth business for UPM providing more sustainable solutions for replacing fossil-based materials in many end uses. Looking customer interest is innovating biochemicals production, and it is very inspiring. Finally, the Olkiluoto 3 is in the testing period for as we speak, and it continues once the whole plant is in commercial production, the unit will grow our energy business almost by 50%, providing much-needed emission-free electricity to the market. It will significantly improve Finland's electricity sales efficiency as well as the climate performance of the Finnish electricity system. Last but not least, looking at the electricity future prices, it increases the earnings potential of the UPM Energy business area. This is only an illustration of the CapEx, which we update you every time our estimated CapEx for 2022 is unchanged. It will be around EUR 1.5 billion. And as you can see from this picture that the CapEx will start to come down next year. And then finally, ladies and gentlemen, I will actually stop here by saying that UPM long-term transformation is visible in the shareholder value as well. Rarely have been -- there have been so many uncertainties in the world, geopolitical and in the global economy as they are today. The higher uncertainty has impacted stock market during the year. But then UPM's share price has been -- has not been immune, but the company has held up very well when it comes to value. I believe that we are well prepared for the phase of uncertainty with the high-performing businesses and agile operating model and strong balance sheet that we have. This year, we expect our annual earnings to reach a new record heights. In addition, our growth projects are nearing their startup phase, adding significant new earnings in the future. Over the longer term, I'm confident that our bio for strategy is well calibrated to the -- to provide what the world needs in the future, competitive zero carbon energy and sustainable and renewable materials for the many, many possible end uses. I think that I will stop here where the summary is, and we are prepared to go for the questions. Dear operator?

[Operator Instructions] The first question today will be coming from Justin Jordan calling from BNP.

I've got 2 questions, if I may. Firstly, on the strong performance in energy. Clearly, just on OL3, we've had some slight delays on its commissioning. Can you just reconfirm at this point, is the UPM board hedging the OL2 output from OL3? And then as with the second follow-up on that is assuming the Board will begin hedge OL3's outputs in due course when production is more reliable than what we have done with OL1 and OL2? And then my second question is on the area of biofuels, clearly a very, very strong record production on profits from a business in Q3. How should we think about that in the context of the Board, we're currently evaluating the [indiscernible] Rotterdam biofuel refinery, does that presumably make that projects much more appealing in terms of the [ trends profile ] going forward?

It's not we have talks about the Olkiluoto delay, I might actually start with the biofuels. Of course, yes, the Q3 was a record quarter for the biofuels. And it is a great pleasure to see how the operation is moving on in Lappeenranta. We are doing record production. We are making record profitability of it. And then when it comes to Rotterdam, the basic engineering is proceeding as planned. And of course, when that is done, then we are coming to a kind of phase where you need to think about timing on investment I would not invest today with very high uncertainty of the raw material prices, whether it's steel prices are up and components and construction. But the timing can change quite rapidly as well. So the timing is crucially important when to invest that you are not overpaying on the investments. So basically, the basic engineering is moving on. And when it is done, then we are entering the typical [ UPF ] phase where we are then actually drawing the conclusions of the basic engineering and then the timing is very important when to then take the FID decision based on those analysis.

Yes. And then, Justin, to your question on Olkiluoto 3, there has been, like you said, some additional delay to continuing the debt program in Olkiluoto 3 and also then to the start of the sort of regular operations, [indiscernible] in their website maintains good information on that. So sort of in addition to their sort of notices to the exchange. You can follow the updates there. As far as hedging is concerned, like we have said earlier, given the uncertainty on the Olkiluoto 3 volumes, we have not earlier hedged any of those. So all the hedging that has been done, that is in place is in relation to the OL2 in a sense, existing capacity. And as far as Olkiluoto 3 is concerned, then before we would start hedging any of the volumes, then we will wait to see in a sense then the sort of outcome of the test fronts. And therefore, the -- let's say sort of first stable outlook as far as those volumes are concerned. So no hedging at this point in time yet.

We'll now go to Lars Kjellberg calling from Credit Suisse.

Just coming back a bit about the uncertainties. Clearly, you're operating really well, as many companies are in the paper business, it seems as if there's clearly some companies, including UPM that is cost advantaged. But when we're looking at the uncertainties now in terms of macro outlook, consumer potentially being out of wallets, where do you sort of see any material changes to the outlook? You called out wood products being one of them, construction activity has come down. The upside tax seems to still be doing really well, but we're also seeing packaging companies talking about lower volumes, so just a bit curious, how we should think about record profitability in a weak market and how we should think about sustaining this extraordinary good operating profit for you? And one specific question on pulp. You called out sort of strong demand and you pull back on operations for getting the pulp deliveries in the quarter were down almost 100,000 tonnes versus a year ago. Is that due to your still building inventory? Or why did we not produce more pulp or ship more pulp in the quarter?

Well, let's say, on the outlook, let's say, of course, macro outlook impacts our businesses as well as others, like you said. In the construction sector, we have seen some first signs of kind of the cycle turning, even if, again, the plywood business, actually, the sort of logistics-related end uses like obviously LNG tanker projects, but also vehicle flooring continues to be strong. Raflatac perhaps compared to some other kind of segments of the packaging business, we are operating in a sort of specific niche or specific niches in the packaging materials space, so driven by actually a multiple of different sort of end use drivers, of course, e-commerce being one private consumption of personal care and sort of daily hygiene products, another, but then also a number of sort of special end-use segments, medical and so on. So perhaps this kind of diversification of end users gives us a little bit different sort of outlook and therefore, stability to the market and perhaps for the more commodity kind of packaging materials. Pulp -- obviously, pulp demand in the globe and Asian markets, China is affected by, let's say, how the Chinese economy develops. So of course, some uncertainties there, possibly in the future. At the same time, the U.S. market seems to be quite and the U.S. economy quite resilient, so to speak. Then on your volume question, let's say, again, it's always, let's say, a kind of a number of factors that sort of explain the difference between 2 quarters, whether it's this current quarter or the comparison quarter, but its inventory effects and also the fact that in the third quarter last year, we had quite strong production.

And maybe -- maybe, Lars, I will continue with the margin management in that respect that typically, when there has been a pricing cost typically, and then we haven't had any agility to react on the rising costs because of the long-term deals, we do not have like in Communication Papers or no other businesses, long-term deals anymore. The margin management is really crucially important. But I believe strongly that with this operating model, we are -- we can have the agility to react also when that market turns. But we will -- of course, we'll see then later on. But the operating model of UPM is now proven to be very efficient. And especially now when the cost has been rising, then we have been able to really react on the rising costs quite nicely as the result is showing that.

If I may just add a really quick follow-up on the one cost item that, of course, comes up to you versus maybe some of the European continental companies is wood. And I'm not sure I may have [indiscernible] talked about potential -- your Rotterdam business, particularly raw material as an uncertainty. It feels as if there's now competition coming from wood -- from the energy sector, which is now starting to spread up to the Nordic as opposed in wood costs. Is that starting to have a meaningful impact on you? And is that what you meant when you talked about Rotterdam and securing raw material? Was that more about the equipment side of steel, et cetera, that you talked about, just to be clear.

Yes. I guess that when we talk about the Rotterdam, typically, you make the investment when the typical cost of the machinery will actually be not on the highest if you think about the steel prices today and all kind of prices, energy, construction and what have you, the hill the higher level should you make the final investment decision on that moment, not necessarily, at least in UPM. We definitely think the timing is very crucial that we do have an outlook actually for a competitive pricing of the machinery. We were lucky with Uruguay in that respect that we made the decision in summer '19 and made all the major deals in several months after that decision in summer '19. And definitely, we were benefiting out of that quite greatly that we were able to have a right timing if you know, of course, we didn't know anything about the COVID coming.

Cost and availability in fact become an increasing topic getting into trajectory. How should we thinking about that?

I couldn't follow you now, at least, I don't know, if Tapio, you could...

Yes, could you repeat that?

Yes, wood cost and availability has been called out by some as a topic in Europe. And again, as the energy sector is competing for alternative fuels to [ high in price for offshore. ]

Yes. Wood cost, of course, is dominantly finishes we are having in a few months' time, we are having more than 3 million tonnes of capacity on pulp making in Uruguay is where the wood cost is stable and the cost of the operations will be efficient. Of course, it is going to be challenged here in Scandinavia where you have the challenge of wood going -- the biomass going also to the energy production, but that is -- that is something that we have prepared well. And of course, even the strike that we had earlier this year has helped us in that respect that we do have good reserves as we speak. But of course, it is something that to follow that how the cost of wood for the production of the finished assets in our case is increasing.

We'll now move to Robin Santavirta calling from Carnegie.

Yes. Now first of all, related to Raflatac, very strong quarter in Q3 with earnings almost 50% up from the past few -- on the average of the past few quarters. What are the key reasons for Raflatac's strong performance in Q3? And is this sustainable going forward? And then the second question I have is related to the slide you have #5 and especially #6, should we read this as -- I understand that the hydropower works sort of on the balancing market, that is easy to understand. But is it so that in Communication Papers as well, you have been able to sort of sell some of your secured power on the balancing market when the prices have been very high, I guess, up to EUR 5,000 per megawatt power.

If I start with Raflatac, it is a combination of many things. First of all, in Raflatac, we have changed quite dramatically our operating model where, once again, the costs and commercial decisions are combined all the time when making the decision. So it is once again coming back to kind of where operating model. But of course, it is a good actually solid growth in the business. Demand has been good, and we have been able to really take care of the costs, i.e., fixed cost and variable cost on top of that. So it is -- there's nothing actually extraordinary. I feel very comfortable with Raflatac now that it is operating above double-digit EBIT margin as it has been for several quarters already. Margin management is crucially important.

Yes. And then maybe if I'll comment on the energy balancing, so basically, like those slides, they sort of illustrate 2 different types of situations. As you know, we have the 24-hour day ahead market, which is the first slide basically. So whether you are buying or selling electricity, you put in your bids for purchases or sale of electricity for the next 24 hours. And there, of course, depending on your view in a sense, whether you're consuming or buying of how the sort of next 24 hours energy balance will behave depending on weather and wind and all the factors, then in a sense, you can optimize your consumption, consume more if you think that night time prices are going to be very low, run your mechanical power plants full and fill in your tanks. And then during the day, consume less of electricity produced less mechanical pulp, as an example. And run the paper machines on the pulp that is in the tanks. And you can not only in a sense, take a view on the day, that flexibility to some extent, is even, let's say, more than 24 hours at our paper mills. Then obviously, the other side of the equation works for the power generation of the hydro assets that can be regulated. So that's, in a sense, the sort of 24-hour ahead view. But then what happens on top of that is that during the day, there is the intraday market where there's normally always some trade to be done, but then also some special situations like the illustration from the beginning of September where you get even up to EUR 5,000 per megawatt hour prices. And there, of course, what is needed is either someone to produce more or someone to produce less -- someone could consume less to balance the market. If you have a situation where actually there is a kind of an error in forecast or some other factor that causes a sort of a short-term imbalance in the market. And so as an example, then we -- we'll look to find additional output from our hydro assets as we stand on that example. The -- but then also, we cannot consume in our paper mills, the amount that we have in the previous days bidding bought and get paid for that. And in fact, on a day like what we have described there on several of those hours of that total flexibility needed to balance the Finnish market, about half came from us combination of production of additional hydro power and then the demand flexibility from the paper mills.

I understand. Final question, short one, Uruguay, how long does it take cross start until you reach $280 per tonne.

Yes, that the cash cost level, of course, it is actually -- we are actually ramping up -- the pulp mill ramp-up is actually pretty fast. Within 1 year, you are on the nominal capacity easily. So basically, if things go like planned, it is ramping up quite quickly. And $280 is very much from the beginning already when it comes to cash cost because of fixed wood price and all of the things, but of course, it is taking some time to ramp it up into the full production.

We'll now move to Linus Larsson calling from SEB.

A question on CapEx. Looking on your Slide 17, it looks as if CapEx for 2023 will be in the region of EUR 800 million. Is that rightly understood? And if you could just break that down, how much is expected to go to Leuna based maintenance CapEx and other?

I guess that it goes like it is ballpark right number. We have not guided yet. But of course, we do have the normal CapEx, which is in the nature of EUR 300 million plus minus EUR 1 million, and then the rest goes for the growth projects, i.e., the Leuna and some, of course, related to towers.

Right. And then just coming back to the Rotterdam project. But could you just maybe add some commentary on the feedstock discussions that you have, I understand there may be different options, but what's your current thinking of choice of feedstock or feedstocks?

It has not changed. It will be mainly UPM integrated feedstocks. And plus on top of that, we definitely go for some feedstock, which is coming from the market. But no kind of no change on that topic at this point of time.

And when you say which integrated feedstocks are you contemplating right now?

All kind of related one is one typical is, of course, the crude oil, which is the residual of the pulping project. But then we do have these oily crops as well that we can plant in like a winter crop. And then, of course, some other related kind of residuals that we have in our processes. I don't want to go in further details on that, but they are very much related to UPM residuals and that kind of materials.

Great. Okay. So no change there really?

Not really.

Okay. And then just overall variable costs, the outlook for the fourth quarter, we touched upon it. But how do you see maybe on a group level, variable costs, including wood, chemicals, energy and so forth.

Well, I would say, looking, let's say, a bit forward beyond sort of fourth quarter, even, I would say, we are in a high-cost environment. On the other hand, we do see some first signs of some of the, let's say, input starting to sort of normalize perhaps the worst bottlenecks in a sense being behind us or so on, obviously, whether it's logistics availability and cost oil prices have come down somewhat from the peaks, which will then impact some of the sort of inputs for instance, for our Raflatac business eventually. So perhaps early to sort of call an age of deflation by any means here coming, but we are perhaps starting to see in a sense, the first signs of this kind of a cost cycle starting to turn as well eventually. But of course, we have specific areas like we had talked a lot about energy, particularly here in Europe, which is also driven by events in a sense, which cannot be forecasted.

We'll now move over to Harri Taittonen calling from Nordea.

Well, continuing from Linus' question on the Page 3 bridge and just -- I mean, the variable cost indeed seems quite manageable that what you showed there on the quarter-on-quarter bridge? And I mean if you give some color on the split or particularly how the energy cost increase, how big a role it played there? And how did you end up being affected by the higher sort of natural gas prices in the continental European paper production because I guess that was sort of one worry before the result was preannounced.

We don't have any sort of further breakdown or detail to sort of give on that, of course. Still, we have been having some benefit of whether it's gas or electricity on the consuming side, some benefit of hedges that have been put in place earlier. So that has kind of given some protection still against the increases. But again, I would say, of course, like you can see, still on this Page 3, both prices and variable costs were sort of helping us. So we have been able to manage the margin.

Yes, yes. Okay. Well, 2 quick questions. One, you already explained quite a bit on the electricity. But one of your peer West of Finland mentioned about the additional kind of revenue potential coming from some downright sort of stabilization fee or compensation for stabilizing the grid. I mean, is that something that you was already benefiting there? Or is it something that could be sort of an additional source of revenue or sort of a value for your electricity? So that's one question. And then the other one was the plywood because currently, isn't it so that quite a bit of that supply for the European markets is out in the plywood business because of the EU sanctions against Russia. And is that sort of -- how do you see that stellar demand and outlook for the next few quarters?

I will start with the plywood and Tapio will continue the energy. Plywood, yes, that is correct, Harri, that the birch Plywood business is having a very good supply/demand balance as we speak. And obviously, the main segments that we have in birch plywood is, of course, the LNG tankers where you have seen that there's a huge fleet to be built in the next coming 2 years, which is actually great to see that we have a really big market share on that business. And then the vehicle flooring is another one remains to be seen how the recession or slowdown of the economy will effect on that. Those are the major big kind of segments on birch plywood. What has been great for UPM is that we have been able to compensate those losses that our Chudovo mill, which is now stopped. We have been able to ramp up our Finnish mills based on that, that we are now having continuous run, which means that we can compensate a lot of that those lost volumes in birch plywood that was produced in Russia. And that is where actually the market is, of course, the softness comes from the softwood, i.e., the spruce plywood where the construction industry is down, which is actually similar to timber business that the softness is coming. But basically, there as well, we are having a very good cost position.

If I comment on the stabilizing the grid, I'm not sure if I caught correctly the reference to a peer, but maybe one point that we need to sort of illustrate with this slide concerning the 8th of September is that Fingrid, the system operator here in Finland for managing the energy balance has already since years basically turn to the market and to the market players to buy that kind of capacity or capability to balance the grid. So of course, let's say, in a more normal situation when it works through the intraday market, then we have the sort of specific type situations like this September example where then Fingrid's put out -- puts out there basically a special tender when they need volume to balance the market. But then on top of that, the sort of stability reserves has been a kind of a regular part of the market during some years already, where then even shorter within hours or minutes or now in the future, even within second, they buy flexibility to then manage the balance and the frequency in the grid for which purpose, for instance, UPM has put in operation already a super capacitor here in Finland that can give those, let's say, less than sort of a minute kind of flexibility to the market.

We'll now go on to Cole Hathorn calling from Jefferies.

Just looking into the biofuels business, could you -- maybe give us some color on how you see that business developing into 4Q and then into 2023. I mean the profitability levels are extremely high, and I understand you're calling out high prices, but I'd just like to understand that, that feedstock is all your feedstock internally to your own crude tall oil, so your costs remain stable, but prices are higher. That's why you get a such good profitability level.

Basically, the crude tall oil is -- whatever is the source, it is in our case as well, price based on the market prices. So basically, if it's the internal source of -- it will be market price anyway. And what we have seen lately, the increase of the crude tall oil prices has been occurring. So basically, that is actually very clear in UPM case that even if it's coming from internal sources or external sources the business itself is based on market prices. So that's how we run the business. Of course, we are not unfortunately giving any guidance for the profitability going forward. But of course, we are trying to manage the margin again where we sell -- what are the markets and trying to be very efficient on sourcing.

And then just following up on Communication Paper, you mentioned about managing the margin. And you've talked about energy management doing well on the production side. But if the -- if we start to see cost inflation, how do you see that impacting your Communication Paper business? Should we see prices coming down, but you're effectively managing the profitability and margin levels with price and other costs coming down?

That is what we are aiming actually. Like I said that typically, we have been very challenged when the input costs have been rising rapidly and we have had in UPM as well in the industry, long-term price agreements. Now we do not have long-term price agreements. And of course, if there will be changes in the input costs and operational costs, of course, and how the market will develop, we are trying to manage that with a very flexible way of operating to generate good margin even if the market turns. But we see this is where we have learned a lot during the last couple of years.

As we have no further questions, I turn the call back over to the organizers for any additional or closing remarks. Thank you.

Thank you. And hey, ladies and gentlemen, nice to have you in -- with this 1 hour and all the best, and have a nice day. Thank you.