UPM-Kymmene Oyj

OMXH:UPM

Earnings Call Transcript 2022-Q1

[Jussi Pesonen, executive]

Dear audience, welcome to UPM's Q1 2022 Result Webcast. My name is Jussi Pesonen. I'm the CEO of UPM. I'm here with our CFO, Tapio Korpeinen.

[Tapio Korpeinen, executive]

Hello to all of you on the line.

[Jussi Pesonen, executive]

Today, we will cover three topics. First of all, the Q1 result and then the collective labor agreement in Finland, and finally, we talk about very important projects that we have, the transformative projects. Ladies and gentlemen, welcome to this meeting and let's have a proactive good meeting. First, we will really discuss about the Q1 results and the outlook for 2022.Our Q1 performance was very strong and our results were on par with the last year. All in all, we expect this year to be another good year for UPM, with full year of 2020 result on similar level or higher than last year. Second, we have now achieved business level collective labor agreements for all our businesses also in Finland. This increases flexibility and the competitiveness of our mills and operations, while at the same time, offering a competitive terms for our UPM employees. This is laying an excellent foundation for the future growth also here in Finland.UPM has about 6,000 employees and total assets of about EUR10 billion in Finland. We have responsibility to enable our people and businesses prosper and for our assets to generate attractive returns for the shareholders. This is actually very important for all of us as we speak. And thirdly, as I said, we talk about the major growth projects and they are continuing with good pace. The projects are an important part of the strategy of UPM, enabling significant future value creation and earnings growth for the company.But let's move on to the last quarter or quarter one results and market demand for the -- for our products was good and the markets were tight during the whole quarter. Sales prices increased significantly in all of our businesses, more than offsetting the rise of the variable costs. The strike in Finland lasted 16 weeks until 22nd of April and affected our Q1 production delivery volumes. Russian war in Ukraine had some impact on our operations as well. In this context, our Q1 results are on an excellent and is an excellent achievement. Sales grew by 12% from that of last year and our comparable EBIT was on par with the last year. Comparable EBIT margin, as you can see from here, was 11%.But ladies and gentlemen, at this point, I would like to hand over to Tapio for more analysis on the results. Tapio, please.

[Tapio Korpeinen, executive]

Thanks, Jussi. Here, once again, you have the EBIT bridge and on the left-hand side, the bridge year-on-year first quarter compared to first quarter last year. Sales prices increased in all business areas and the largest impact was in Communication Papers in this sense. Variable costs increased in all businesses too. Energy costs, in particular, increased significantly despite of hedging. It is obvious here that the magnitude of both sales price and variable cost increases have been unusually large over the past 12 months. Nevertheless, we have been able to manage our margins well.In the first quarter of '22, delivery of volumes decreased in most business areas due to the strike in Finland. Fixed costs were lower than last year, again, impacted by the strike. All in all, we estimate that the strikes affected the first quarter results by about EUR180 million to EUR220 million. Considering the lost sales volumes, lower fixed cost on the other hand and then various dynamic impacts affecting margins.On the right-hand side, you can see the sequential EBIT bridge fourth quarter last year and to this first quarter of this year. Also in this comparison, sales prices and variable cost increased significantly with sales prices more than offsetting the increase in variable costs. Deliveries were clearly lower, again, due to the strike. Fixed cost decreased due to the seasonal reasons, more maintenance that was taking place in the fourth quarter, the comparison period and then the impact of the strike during the first quarter. Finally, in the fourth quarter last year, we increased the fair value of our forest assets by about EUR103 million, whereas in the first quarter, now this year, this value increase was only EUR12 million. This is visible in the rightmost bar in the EBIT bridge.And here, on this slide, we see the comparable EBIT by business area. Starting with UPM Fibers, prices for pulp and sawn timber were at healthy levels, and our pulp operations in Uruguay and the timber business performed very well. The business area EBIT was lower than in the comparison quarters, however, as two-thirds of our pulp capacity, the three mills in Finland were down during the strike.Communication Papers returned to solidly positive profitable numbers, thanks to the tight market and successful commercial execution. The business experienced a steep price in input costs, particularly energy, but was able to increase sales prices accordingly. A third of our graphic paper capacity was down because of the strike in Finland, but the business was able to cover deliveries partially from existing stock and from the mills outside of Finland. Then looking at specialty papers, the market for release liner and packaging paper continued to be good and prices increased. However, our delivery volumes were lower than usual, again, due to the strike in Finland. Fine paper prices increased in Asia.And then for Raflatac, the underlying demand and margins continued to be healthy despite significantly higher raw material, energy and logistics costs. It's also good to note that in the first quarter, comparable EBIT, we include a EUR13 million provision for expected credit losses related to the Raflatac business in Russia. Raflatac delivery volumes decreased as the strike in Finland cost, raw material shortages and production curtailments.And Plywood achieved another record quarter in earnings, thanks to strong demand and high sales prices. The new business-specific collective labor agreement signed in December, improved flexibility and production in our Finnish mills. This is particularly important in the current strong markets and also considering declining Russian volumes.And then energy reported strong first quarter results, thanks to continued high prices in the Finnish price area. However, Finnish prices and the business area results came down from the record high levels of the fourth quarter. The market for advanced renewable fuels continued to be strong. UPM biofuels, however, had no production or deliveries in the first quarter because of the strike in Finland. And as you remember, biofuels was moved to other operations at the beginning of this year as part of the biorefining unit and thus is not visible on this slide.Then on this slide, we see our cash flow. During the first quarter, operating cash flow was low at EUR12 million. Working capital increased during the quarter by EUR258 million. Partly, this is inflation related in a sense due to higher prices in general, which is increasing working capital. partly also included here is the working capital needed for energy hedges in the current volatile markets.Our balance sheet continues to be very strong. Net debt was EUR837 million at the end of the quarter and net debt to EBITDA was at 0.46x. Liquidity was EUR2.9 billion at the end of the first quarter. As we all know, the geopolitical environment in Europe has changed dramatically after Russia's attack on Ukraine. Our primary concern are the people suffering from the war and we have started delivering humanitarian and material to Ukraine. The war and the related sanctions and counter sanctions have significantly increased our certainties related to European and world economy, also in the energy markets in Europe.European businesses have been impacted as well. We decided to cease all deliveries to Russia. And we also ceased wood sourcing in Russia. We have decided to suspend production at our Chudovo plywood mill. Fortunately, our Russian exposure has not been very high as you can see on the right-hand side of this slide. Nevertheless, in the first quarter, we have booked EUR95 million of impairment charges related to assets in Russia. These are items affecting comparability, so not affecting the comparable EBIT. The first quarter comparable EBIT does include EUR17 million provisions for expected credit losses in Russia. As mentioned earlier, most of this was recognized in Raflatac and the rest booked in Communication Papers.And here, we have our outlook for 2022. As you remember, in '21, our earnings recovered back to the strong pre-pandemic level. And even though there are significant uncertainties, we expect 2022 to be another good year for the company. We expect good demand to continue for most of our products. During the first half of the year, our production and earnings are affected by the strike in Finland and the following ramp-up of production now as the strike has ended.In the second quarter, we also have scheduled large maintenance shutdowns at two of our Finnish pulp mills, Kaukas and Pietarsaari. We expect that these shutdowns will affect our second quarter EBIT by about EUR80 million, given the extent of the works and also given the attractive margins in the pulp business. Sales prices and variable costs are expected to increase in most businesses in the first half of the year and we will continue to manage margins in the inflationary business environment.So, we reiterate our earnings guidance for the first half of the year, meaning that we expect the first half comparable EBIT to be on similar level compared to the last year's first half. We also now introduced a full year 2022 guidance, that is, we expect our full year comparable EBIT to be on similar level or higher than in 2021.And now I'll hand it back over to Jussi for some more longer-term topics.

[Jussi Pesonen, executive]

Yes. Thank you, Tapio. This was good and proud of the result that we have made. Our focus areas are clear. No change on those. This slide is summarized by clear focus on actually ensuring the performance and, of course, the transformative projects that are growth projects for UPM to enhance our kind of earnings. The pandemic still continues while the Russian attack on Ukraine costs also a new uncertainty. Our focus is very clear, as I said already in the beginning.We have really today reported a strong Q1 result considering the most of the -- considering that the most of the -- our Finnish mills were not producing during the quarter. The labor negotiations themselves were all about ensuring the performance in long term and I'm very pleased with the negotiation result. We achieved all targets we set for the [ negos ]. As mentioned, in the beginning, we have about 6,000 employees in Finland and our assets in Finland are totaling EUR10 billion.It is therefore very important that we ensure productivity, flexibility and competitiveness of our mills and operations and, therefore, attractive returns on assets. It is also important when considering the future investments and the Vision 2030 in Finland. UPM's long-standing goal has been to take the collective bargaining to the level where the conditions of the work are best known, i.e., in the individual businesses, mills and operations. In most of our operation -- operating countries, this has already been the case.However, in Finland, there has not -- was an extensive and rigid collective labor agreement in place that originate back to the 1940s and did not recognize the major differences in our versatile portfolio of businesses and the mills or rapidly changing nature of the business environment. Last week, we were able to settle the collective labor agreements in five of our businesses in Finland with the Paperworkers' Union. The 16-week long strike finally ended earlier in December. We signed two more business-specific agreements, i.e., the plywood and timber with the Industrial Union. I'm happy to say that we reached our goals, the negotiations led to an agreement that benefit both businesses and the employees and strengthen our kind of premises for success well in the future. And we are looking long-term vision for 2030 in Finland.Now, we have seven business specific labor agreements in Finland, which will improve the flexibility and competitiveness of each of the businesses. Our employees got also competitive terms for their employment. Finally, our businesses are now responsible for their own labor agreements, work will be organized and will continue on the same level as where the business strategies, commercial decisions and sourcing decisions are made. This is how the UPM operating model works. We do have the six businesses in our portfolio. And hopefully, in the future, there will be an event based on these biomaterials.I believe this is yielding a good returns and good decisions in rapidly changing business environment. But to kind of give a quick win or quick actually claims on what has already happened in like Tapio already mentioned that in plywood, we were able to sign the deal in December last year with the new CLA where we can effectively and efficiently move into 24/7 operating model that was not feasible before and with the old CLA. This is meaningful this year, I mean, 2022, more than 70,000 cubic meters of more production from our plywood mills in Finland. And this year, it means also close to EUR25 million even -- could be even higher improvement to BA's EBITDA. This is a great example of -- that it shows how does this business-specific CLAs are working and contributing to the future competitiveness of the business.But ladies and gentlemen, let's move on to the spearhead of growth investments and the projects. This slide, you have seen quite many times. We have attractive major growth projects under construction in Uruguay and in Germany and under consideration in our biofuels business in Netherlands. The projects are an important part of our strategy, enabling future value creation, earnings growth and illustrating this -- which is now illustrated in this familiar slide to you.Considering Paso de los Toros, the pulp mill project is progressing well towards its start-up by the end of Q1 2023 with very competitive cash cost level of USD280 per delivered tonne of pulp. The mill will bring significant earnings growth once it's up and running. More than 7,000 people are currently working on the projects at the various construction sites, reaching the peak activity before commissioning work starts in construction and activity starts, then the construction activity will then start to decrease. And here, you can see the pictures as we speak from various locations.Then let's jump into the Leuna and the pictures are pretty illustrative as well. The biochemicals refinery project in Leuna is now also progressing well. We have finalized our new investment estimate, which is now EUR750 million for the project considering the scheduled ramp-up by the end of 2023 and the current high cost environment. Supported by high customer demand, the investment case for the project is still very attractive and the long-term growth strategy for the business -- biochemicals business looks increasingly appealing.Thus, we are already having a team in place planning for the next growth steps beyond the first refinery in Leuna in Germany. Our CapEx estimate for 2022 is unchanged that being EUR1.5 billion in terms of CapEx '21 and '22 will be the most intensive years on this, as you can see from this picture in the transformative projects. But then like 2023, it starts to come down and 2023 or 2024, we are then prepared to move on considering that the balance sheet is strong as it is today, taking new decisions.In biofuels, which is the basic -- in the basic engineering phase of the potential new biorefinery and it is continuing with the full base, now focusing on the site in Rotterdam. So, basically, the work is now very dedicated work in Rotterdam. The demand for Climate Solutions is clearly on the rise. At the same time, the dramatically changed geopolitical situation has further underline the need of rapid -- to rapidly find alternatives for the fossil fuels. I believe that the UPM can play an important role in decarbonizing society and creating future beyond forces.Once again, this is one of the topics that now is very positive to UPM. The Olkiluoto 3 nuclear power station unit was connected to the national grid in March and production is rising steadily step by step. Once the unit starts regular commercial operations in Q3 this year, it will markedly increase UPM's CO2-free electricity generation. In addition, this will improve Finland's sales efficiency regarding electricity and raises the share of Finnish carbon-neutral electricity generation to about 90% level.And as the kind of latest example of UPM's commitment to the sustainability in March, we published our Forest Action program, which is highlighted here. This program will steer our global wood sourcing operations and covers our forest in Finland and in United States, as well as plantations in Uruguay. Forest Action pushes us and our sustainability forestry practices well beyond current standards that we have had and those requirements, and we will have a positive impact on full -- on all fundamental aspects of the sustainable forest climate, biodiversity, soil, water and social contribution. This program builds and future expands of our existing commitments, such a climate positive forestry and net positive impact on biodiversity.With these words, ladies and gentlemen, you see the summary. I'm not going to repeat it, but we are now prepared to take questions. Dear operators, we are ready to Q&A session.

[Operator]

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

[Justin Jordan, analyst]

I've got three different questions, if I could, please. Firstly, I appreciate this is a very delicate situation. But can I -- I suppose just trying to understand the impact as you see it from the ongoing Ukraine-Russia conflict. You've talked about it as being potentially positive, I suppose, for plywood demand because of less Russian competition. Do you see similar positive potential impacts in terms of sawn wood and then wood for construction, pricing environment in, shall we say, ex-Russia, Europe?And then secondly, just within the EUR95 million impairment that you've taken, I just want to clarify, have you written down the Chudovo, Russians plywood mills to zero in doing that? Then perhaps secondly, more positively, can you just talk through the positive impact of the new labor agreement that you've agreed from April '22, what's some more flexibility does this give you? And how should we think about this as potentially a catalyst for future capital allocation to Finland going forward?

[Jussi Pesonen, executive]

If I actually start with the first and maybe the last one and Tapio will come to the impairment. Justin, I think that the markets will then decide what will be the balance of supply demand. Obviously, Russia has been quite big on plywood and in timber deliveries in even the global market. So, we'll see how the demand-supply balance will move, but nothing to comment that. But of course, it is in plywood and in timber, Russia has been quite a significant player.And then when it comes to CLA, of course, first of all, therefore, I discussed about the plywood kind of quick win where you can see that the first year after the signing of the deal will yield EUR25 million EBITDA contribution where the kind of the old CLA was not able to actually get that kind of results. Similar case with all businesses. We do have different businesses where, like if I start from pulp where you have the continuous run needs where you run 365 days, and then you have every second year in 18 months kind of face, we have the major shutdown. So, basically, we have that kind of agreement now that we do not have a Christmas or mid-summer subs. We are having a full run and then allocating resources through the major shutdowns. So that's kind of where actually we are getting a lot of efficiency. And hopefully, as I said, good contribution on kind of competitiveness.In the paper, which is totally different type of business where there's seasonality, cyclicality and a lot of volatility on demand is happening, there's much more different type of flexibilities. We do not run the kind of Christmas and mid-summer breaks. And if we were in some year to do so, then the cost will be lowered. There will be extra hours worked in that business to get the flexibility and how to organize the work and shift working and multiple other things concerning that business.In biofuels, once again, bit similar to what the pulp making is 365 days, operating model kind of security also when the strike and if there will be disturbances, how to make the kind of mill running on the closed loop. That is an agreement allocating resources, of course, into the major shutdowns differently. So, plentiful of kind of detailed level topics that will enhance the competitiveness of our assets. This is a -- like I said that we actually were able to achieve all of our targets. And one of the major target was that when UPM is organized differently than many of our competition that we do have these six different businesses where the responsibility on costs and on the markets is in the same hands.Now the -- how we agree with the unions, how do we organize the work, how do we get the flexibility in the circumstances that business is fluctuating is also now done and dealt locally. And that's one of the kind of founding -- kind of places where you can build on long-term competitiveness. And obviously, I truly believe that this will definitely enhance, especially all of our growth businesses, but also the challenging communication paper business that we could actually know more in the future to actually get efficiencies out and therefore prosper on the business in here in Finland.But like I said earlier, we do have a similar model now in other operating countries. Now finally, Finland is also in this same topic. I'm looking very positively to the future. And even if this has been costly exercise, I firmly believe that cost of strike will be covered many times in the coming years and decades to come. And now I hand over to Tapio to talk about the impairment.

[Tapio Korpeinen, executive]

Yes. So maybe to be clear, I'll just begin by repeating that as we have suspended or stopped actually deliveries to Russia. So then, therefore, we have also taken the EUR17 million reservation against our receivables in Russia, Communication Papers and Raflatac which is included in the first quarter comparable EBIT. And at the same time, then as, let's say, the environment for conducting business in Russia for the future is highly uncertain then we have taken a basically general decision to write off all of our assets in -- all of our other assets in Russia. So, that is where that EUR95 million impairment comes from and that does include the Chudovo plywood mill.

[Operator]

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

[Lars Kjellberg, analyst]

To start with the strike, you provide an estimate of EUR180 million to EUR220 million. How should we think about the continuation of that impact into Q2? You obviously are three weeks out. I'm also bit curious about the Fiber division's performance in Q1, which seems to generate extremely low margins considering Fray Bentos are very high margins. Can you talk us through what has happened to the costs during the quarter in that division? And by the same sort of token of logic, I guess, the Communication Paper division was quite strong considering your lower cost mills out. So, are there any peculiar risks such as stock movements or something that have impacted that particular division? And the final point, I just wanted to clarify, if I heard you right on the maintenance activity that would cost about EUR80 million in Q2? And should we expect a similar number as Fray Bentos costs out in Q3? That's all my questions.

[Tapio Korpeinen, executive]

I can take the ones that I have noted down and then you can sort of -- if there's something that I've missed them, please fill in. But, well, let's say on the strike impact, well, obviously, the strike ended last Friday. So, then we have the continued impact from the month of April. This week, we are ramping up. So, the last volumes in a sense are there. Then we will see how the remainder of the quarter goes. Obviously, now we are ramping up. The good news is that we are ramping up into a tight market where margins are good. So, we will see how much we can, in a sense, gain back from there, but no sort of numbers in that sense.In the Fibers business, again, we had three of our four pulp mills down. So obviously, it's going to impact the business area level figures even if the sawn milling business was performing well, but in scale, obviously, quite small compared to the pulp business margins in Fray Bentos were extremely good. And then in Communication Paper, again, we had the mills here in Finland, not producing, but then we were able to produce, obviously, in the mills outside of Finland, kind of catch up as much as we can with the capacity outside of Finland plus then as mentioned, we did have some inventory also to sort of deliver from, but again, the numbers basically are coming from the good margins that we have been able to produce in that business in the mills that have been able to run outside of Finland.And then the question around the maintenance, yes, I said EUR80 million is the impact in the second quarter. And again, remembering, there are two mills, so Kaukas and Pietarsaari that both have their maintenance now during this current quarter. But they're also some more than usual in a sense. So Fray Bentos, then we will have a kind of a normal shutdown, obviously, on the one mill, and that will be in the fourth quarter.

[Jussi Pesonen, executive]

And I might actually only add on what Tapio most probably already said that in Communication Papers, it was actually a good success in commercial implementation. So, this is only a proof point again that how well the UPM operating model works that when there's a tight market and we have been able to generate high margin on that kind of market as well. So, it's pretty much operational that's what we have been doing in those mills that has been operating.

[Operator]

And the next question comes from the line of Cole Hathorn from Jefferies.

[Cole Hathorn, analyst]

Just looking at specialty paper, division has done very well and you'd imagine that higher pulp prices are impacting the China fine paper business. Would you mind just breaking down a little bit on the demand trends you're seeing in the specialty paper, particularly the label release liner and how you're supplying customers despite the strikes in Finland? And then focusing specifically on the China or the Asia fine paper business, how is that market developing at the moment?

[Jussi Pesonen, executive]

If I start with the release liner market, of course, as you can easily understand, it is a very tight market as we speak, where we have our Tervasaari mill down here in Finland. But luckily in UPM, we have been investing quite heavily into the business also elsewhere. We do have a big facility or machine in China, producing fully release liner in our Changshu mill and that has had very good run. And then we do have the Nordland mill where we made a significant conversion couple of years ago to actually ensure the kind of supply in Europe and, of course, take the growth in the market. The release liner market is strong. It is growing fast. It is actually having a quite positive outlook.And now when we get the Tervasaari fully ramped up in a couple of weeks' time, obviously, that will help again. It is very tight market and has been kind of one of those spot place -- other places where we have had the tightest actually position, but luckily, like I said that we have been investing in last five years, more than EUR0.5 billion into the business. So, therefore, we have been able to support our customers also, coming to the customers from Asia or from our Nordland mill.The fine market has been solid in China. As we speak, enterprises have been quite good on that level, of course, remains to be seen how the whole COVID situation will -- pandemic will evolve in China. So far so good, the mill is operating and we haven't had any kind of problems there. But that remains to be seen how the China will develop in the coming months and quarters.

[Tapio Korpeinen, executive]

Maybe in the meantime, one can say that there's been some improvement in the surrounding markets as the COVID restrictions have been easing and the sort of business has been picking up there.

[Jussi Pesonen, executive]

That is correct.

[Lars Kjellberg, analyst]

And then just following up on Communication Paper, I mean, you called out a very good strong operational performance and you're benefiting from, obviously, the higher graphic paper prices. But is there any color you can give on -- you called out energy rebates in the division, any quantification that you can give there for Q1? And how you are phasing those rebates through the year? And then secondly, following up on Communication Paper, is there anything we should be thinking about on the U.S. business versus Europe? Is there any differences in trend or profitability that we should be aware of?

[Jussi Pesonen, executive]

If I start with the latter one and Tapio will come into the first one. The U.S. actually business is -- we have been quite strong always delivering to U.S. We have one LWC machine in the U.S., which is operating as is and is a quite significant part of the coated #5 grade supply in the U.S. And obviously, we then have other grades going to U.S. as well. Nothing that dramatically will be different from Europe.Of course, markets are declining and the supply/demand balance is improving by many conversions that we see closures and conversions in the U.S., as well as in Europe. There's lot of conversions happening from graphic paper to packaging rates. So, basically, we need to take only care of the competitiveness and this is what the CLA is all about that we need to work on all fronts of our costs and take the kind of actions that will actually give us a good returns for the business.

[Tapio Korpeinen, executive]

And maybe on this question concerning energy rebates. In the first quarter, there were no significant energy rebates as such in the Communication Papers result. And overall, one can say that this year, when it comes to, let's say, the rebates and CO2 compensations and the free allocation of CO2 rights and so on, that is expected to come more kind of throughout the year, so perhaps no big sort of quarterly swings there expected this year.

[Operator]

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

[Robin Santavirta, analyst]

Now related to the new CLAs in Finland and the improved productivity and flexibility you mentioned. Did you provide some view of the potential earnings impact now from these contracts going forward?

[Jussi Pesonen, executive]

No, we did not. Of course, this is -- our kind of aim has been long-term competitiveness and like I said, that in plywood, even if we didn't consider that there will be a quick win as we have now experienced very tight markets due to Russian situation, we have been able to really ramp up fast into the 24/7 model in our plywood mills and we do furthermore that in the latter part of the year as well.So, this is more actually finding specific contracts that will serve the businesses in different circumstances in different market situations and in different cost positions. And that is where I'm -- like I said, I feel very comfortable with is that now we have the kind of how do we organize the work is now coming home, if I put it that way, that the business areas are responsible for organizing the work and making the agreements how to work and what's the compensation of the work. And this will lead to a significant contribution to UPM when the time moves on.It's a bit similar type of situation that we experienced in 2006, those that remember that long ago, when we closed Voikka mill, it was first thought that now UPM is taking the capacity down and we lose market share and we'll -- everybody else will benefit. But as we have seen, we have been able -- with that action and with that kind of chain of actions afterwards, we have been able to keep the Communication Papers business in the shape that nobody else has been able to do.I think that this is a bit similar type of thing that it's in the kind of DNA and in our operating model, how we deal with the competitiveness. And we all know that it was a tough period of time. It was 22 weeks actually and tough period of time. But typically, when there's a tough period of time, then the success in the future will be there and you have the opportunities to be more competitive.

[Robin Santavirta, analyst]

I understand. Related to the ramp-up of production now in Finland, I guess, that can be quite tricky, the mills and production has not been running for quite some time. How has the ramp-up proceeded? And how long does it take for the pulp mills and the paper mills to be fully up and running? Is it one week or three weeks or what?

[Tapio Korpeinen, executive]

Depends, but I have to say that what I have seen ever since Friday last week, it has been very positive kind of starting point. People have come quickly back to the work. And obviously, we have been keeping the mills in that shape that there -- the bearings have been -- we have been turning roles and we have been turning and keeping the mill in that shape, our affluent plans in that good shape that it is easy to start up. And of course, as you know, that our power stations have been operating during this strike.We'll see, of course, it is after so long of being shut down, it might take some down and there might be some challenges, but quite positively, I think that it will move on. Of course, paper machines are the easiest to start and then the pulp mills and the biorefinery is somewhat more complicated because of the nature of the process. But UPM'ers are kind of high-quality people, and they know what they do. They are hard-working people. And I'm actually looking positively to see the ramp-up going nicely, but we'll see. There's no kind of clear guidance how long it takes, but like I said that in order, paper machine is somewhat easier than pulp mills and then the biofuels plant is, of course, the most critical for the many reasons.

[Robin Santavirta, analyst]

I understand. And a quick last one in Communication Papers. How long is the average time spend of the price agreement you have? I know in history, it's been between three and even 12 months. Is it now considerably shorter? And would you mind providing some indication of the [indiscernible]?

[Tapio Korpeinen, executive]

Majority of the deals are quarterly based.

[Operator]

And the next question comes from the line of Linus Larsson from SCB.

[Linus Larsson, analyst]

So Olkiluoto 3 is in ramp-up. And I wonder if you could provide just some update on how that is going? And what to expect in terms of production for 2022? Maybe also comment on your hedging for that production and maybe even some comment on how you expect Olkilote 3 to impact your P&L this year?

[Jussi Pesonen, executive]

Yes. Well, you can actually kind of more or less real-time follow the production and the sort of testing program from the TVO website where they give the forecast for the coming hours and couple of days as a kind of real-time figures. But at the moment, they have been running tests at this so called 60% plateau where the unit is running at 60%, and they are conducting relatively sort of severe tests like on Sunday. They had a test of a turbine trip. And this week, they will have another test of a reactor trip and so called loss of outside power tests. So, these kind of steps are now being taken. In the next kind of weeks and months, we'll take the capacity up to 80% and 100% where the tests will be repeated. So, now it has been around 850 megawatts output.And obviously, also since the mid of May, when the connection to grid was taking place, then this kind of a test run electricity has been benefiting the shareholders of TVO, obviously, very small still in the last quarter as it was from the mid of March, but then with current prices, there is value for the shareholders now in the coming weeks and quarters. And the commercial start-up still, according to TVO expected at the end of July. And there you will see actually again from the TVO web page is this kind of a real-time updated information of the expected production. So, it's best to go and check there.We have been, obviously, let's say, considering this ramp-up and the risks related to that in the hedging decisions, so in that sense, been sort of cautious in terms of hedging any of the Olkilote 3 volumes to date as obviously this test run and exact volumes and timing as such is not certain. But then going forward, as more information comes then we make the hedging decisions accordingly.I've said earlier that the P&L impact is not material. Let's say, if you look at the UPM figures as a whole, but may be more meaningful than now looking forward, when you look at it from at least the energy business area point of view if you look at where the current forward prices are, which are at the levels which we have not been used to a couple of years ago still.

[Linus Larsson, analyst]

That's very helpful and reassuring. And then just one question on Raflatac. We had another very strong quarter, especially considering the provision that you took relating to potential Russian credit losses. Could you just update us on what you're seeing in the marketplace in terms of order situation, for instance, given the business area's proximity to consumer spending and potential concerns around that? How are the market trends out there?

[Jussi Pesonen, executive]

At least at this point of time where we have had the capacity down here in Finland, the tight -- market is quite tight and they are, especially for the specialties that we produce here in Finland, there is a tight market. But then when it comes to future kind of changes in the consumer confidence is you know that we don't guide at all. But having said even that, Raflatac and the Raflatac business is having a very solid outlook for the kind of longer-term trend growth for the reasons that we all know, whether it's e-commerce or whether it is all kind of labeling kind of materials needed in the business. So, basically, that's a very good actually kind of outlook for the kind of trend growth in Raflatac.

[Operator]

And the next question comes from the line of Johannes Grunselius from DNB.

[Johannes Grunselius, analyst]

I have one question about your thoughts on the wood fiber side, what you see in terms of availability and pricing and so on, especially given the Russian situation, they are a big exporter? Could you shed some light on that, please?

[Jussi Pesonen, executive]

And now when you talk about wood fibre, are you talking about pulp wood or are you talking about...

[Johannes Grunselius, analyst]

Yes. Pulp wood, yes.

[Jussi Pesonen, executive]

Yes. So that is actually as we all know that all of the companies in Finland has stopped buying wood from Russia and trading wood from Russia to Finland. So that has been stopped. Remains to be seen how it actually affects on the Finnish market. What I see that we have a very good -- we are still cutting much less than, for example, in Sweden of the annual growth of our forest.Our forest are growing 100 tonne, about 6 million cubes a year, whereas the annual cut has been on a level of 80, so the sustainable level of cutting is something that we have a very solid good kind of position on that even to some years to grow -- kind of take even somewhat more wood out of the forest. But we'll see that is something that, of course, we cannot know. It is then very much related to how the businesses are performing and how the global markets are moving on. But Finland in that respect is in a good position that we are talking about like less than 80% of the annual growth that we are cutting here in Finland. So, therefore, Finland is well positioned in that respect. But we'll see.

[Johannes Grunselius, analyst]

But anyways, you don't see any sort of immediate changes in the market here any sort of signs of rising prices.

[Jussi Pesonen, executive]

Yes, that is something that you never know, but that is the view that we don't see it as we speak, but who knows of tomorrow.

[Operator]

And we have one final question from the line of Harri Taittonen from Nordea.

[Harri Taittonen, analyst]

Yes, thanks for explaining the dynamics in a very exceptional quarter. And most questions have been sort of answered already, but maybe on the pulp side and what's your sort of thinking now that you are losing more than 0.5 million tonnes of pulp deliveries because of the strike. And then in addition, if we look at next year, depending on how much -- how quickly the Paso de los Toros ramps up, there will be something like 1.5 million tonnes or roughly more sort of deliveries probably from your system. And obviously, it's very good for -- very sort of strong contribution to your system. But how do you see the market kind of capability of absorbing that business or that sort of extra volume. The market has -- it seems to have been strong for longer, but how does that sort of show in your supply-demand thinking?

[Tapio Korpeinen, executive]

I think that there's nothing really that has changed our mind at all. The annual growth is there as we all know that all kind of materials that are replacing fossil raw materials is something that the consumers would like to see more and more Harri and therefore, there is a good demand for pulp. And we all know that the biggest entry barrier for pulp making is that you need to have the plantations and it takes 10 years or even more to build a solid good plantation base for a big pulp mill.And if I remember correctly, the growth -- trend growth will swallow one pulp mill a year going forward and therefore quite solid kind of outlook. There are not that many projects considering as well that there will be closures, the old worn-out pulp mills will close whether they are in Southern Hemisphere or in the Northern Hemisphere. And then on top of that, we don't know all what happens now in Russia and how that -- those volumes will then be visible in the markets in even the short term or medium term or even long term, how does that actually change the kind of supply-demand balance as well. So, basically quite positively considering that how the world goes on.

[Harri Taittonen, analyst]

Yes. that's helpful.

[Jussi Pesonen, executive]

It's good to remember that for a number of years, the net increase of capacity has been zero because there's been delay on most projects and there's been exit all the time. So, sooner or later, there needs to be some new volume coming to the market because the market continues to grow. Ladies and gentlemen, thank you for joining us this afternoon and have a very good day.