UPM-Kymmene Oyj

OMXH:UPM

Earnings Call Transcript 2023-Q1

[Jussi Pesonen, CEO]

Ladies and gentlemen, welcome to UPM's Q1 2023 Results Webcast. My name is Jussi Pesonen. I'm the CEO of UPM. And I like always, I'm here with our CFO, Tapio Korpeinen.

[Tapio Korpeinen, CFO]

Good afternoon to everyone.

[Jussi Pesonen, CEO]

Let's get started. Ladies and gentlemen, we have two main topics to be discussed today. First, we delivered solid Q1 results, even though it was clearly held back by short-term lack of volumes. And secondly, I am absolutely excited that we have successfully completed two of our transformative major growth projects. This is a very important milestone that we had two weeks ago within UPM.

The Paso de los Toros stores pulp mill in Uruguay is currently ramping up the production and is already producing high-quality sellable pulp. At the same time, Olkiluoto nuclear power plant unit here in Finland is now in regulatory commercial production. Both investments will contribute to UPM's results and future opportunities for decades to come.

Ladies and gentlemen, our Q1 result was the second best first quarter in over 20 years. Our sales grew by 11% from that of last year, and our comparable EBIT grew by 29% to be on EUR356 million. Operating cash flow was strong at the EUR740 million. The main positive driver in our result is attractive unit margins in most of the businesses. Also, unit margins were higher than that of last year in all our business areas. We have succeeded well in margin management.

On the negative side, market shipments in most product areas were substantially below long-term trend due to intense destocking in the product value chain. This held back UPM delivery volumes too as well across almost all businesses. UPM's average deliveries to capacity ratio was around 70% in Q1.

Ladies and gentlemen, this is a very important slide of the narrative that we are conveying today. Let's discuss the destocking impact a bit more as our assessment is that the main part of the delivery volume weakness is temporary by nature. What I am talking about here is destocking throughout the whole product value chains downstream, not only our or our direct customers' inventories.

Last year had an unusual circumstances that resulted in elevated inventories in many parts of the value chain. First, last year, there was a genuine concern about the availability of all kind of goods. In many products, the markets were tight, while the logistics bottleneck -- bottlenecks and supply chain disruptions represented additional risk to availability of goods or timing of the shipments, holding unusual safety stock helped to mitigate this risk.

Secondly, cost increase was very high during the last year. It made sense to hold some additional inventories as everything was getting more expensive each month. Towards end of the year, both availability concerns as well as cost concerns started to level off. At the same time, the higher interest rates made holding working capital more expensive. Therefore, suddenly, nobody wanted to hold inventories and the destocking started. Because of the unusual background of last year, the destocking has been unusually large and has lasted unusually long.

On this slide and the picture here, we saw as an example, European self-adhesive label market shipments to illustrate the intensity of the current destocking. And this is, as you can see from the picture, this -- the source is FINAT. As you can see, demand for the labels typically has low volatility and healthy long-term growth, typically being 3% to 4%. This is natural as the high share of the labor materials demand serves daily consumer products and end users.

In this graph, you can see the impact of the global financial crisis 2008 and '09 and, more recently, the one quarter of destocking after COVID lockdowns had been lifted in Europe in Q3 2020. In Q1, this year, however, market shipments of self-adhesive label materials was down by 33% from that of last year. This is clearly impacted by significant destocking.

Most likely, the underlying consumer demand has been impacted by slow growth of -- and high inflation in the relevant economies. Some of the leading consumer brands companies have been estimating a middle single-digit decline in their daily consumer products markets. This is very -- this is still very far away from a 33% decline in the quarterly shipments, as you can see from here.

Destocking is impacting other products markets and -- product markets as well, including specialty papers, communication papers and pulp. Destocking is temporary. Of course, we expect that the destocking impact to phase out in the coming months and quarters, although it will be still impacting the markets in this quarter, i.e. the Q2. The long-term growth prospects remains unchanged and are in most businesses attractive. So basically, the long-term view has not changed.

During this kind of short-term turbulence, we continue to focus on managing margins that what we have been doing last three, four years. This gives us a good position once volume starts to recover. Meanwhile, many variable costs have passed their peak, but the benefit is still to be materialized in the -- in our results.

Now ladies and gentlemen, I will hand over to Tapio for some more analysis of the results. Tapio, please?

[Tapio Korpeinen, CFO]

All right. Thank you, Jussi. So here, we have the usual slide comparing the first quarter to last year's first quarter and then sequentially to the fourth quarter of last year. And on the left-hand side compared to the first quarter, year-on-year, you can see that on group level, sales prices increased and the sales price increases have been larger than what was the negative impact of increasing variable costs.

And like Jussi already mentioned, our unit margins now are higher than last year in all business areas. You probably remember that most of our Finnish mills were on strike last year during the strike, then the employee-related fixed costs were low, explaining most of the fixed cost increase year-on-year that you can see here on the slide on the left-hand side.

Also, you see already described the destocking impact on our product markets. This year, our deliveries were low due to destocking last year. The deliveries were impacted by the strike in Finland. Year-on-year changes in delivery volumes had no impact on our EBIT on this -- in this comparison.

On the right-hand side, you can see the EBIT bridge compared with the fourth quarter. Deliveries increased -- sorry, decreased, as is seen in this picture from the fourth quarter and so did fixed cost as well. First quarter was light on maintenance, which explains main part of the decrease in fixed cost sequentially.

Sales prices decreased slightly from the fourth quarter. And in this comparison, the delta on variable costs is negative, again, between the first quarter and the fourth quarter. However, most of this is timing related, meaning the comparison quarter, fourth quarter last year and then related to the low delivery volumes.

First of all, when we think about the fourth quarter, there we had a number of positive energy related items and benefits which were booked in the Communication Papers business, as you surely remember we had none of those now in this first quarter figure. And then secondly, this sort of delivery or volume-related matter is that, of course, there is always a certain lag before the prices at which we purchase production in actually make their way as a positive or negative impact to the bottom line.

So in this case, even if we have seen kind of the direction turning as far as our costs -- input costs are concerned, given the low volumes that we had in the first quarter this kind of a lag is longer before it shows up in our bottom line. So the underlying variable cost drivers actually were broadly flat from the fourth quarter to the first quarter.

And in many cost items, we are over the peak already. So obviously, then this positive variable cost impact is yet to materialize in our results. We expect that we start to see decreasing variable cost impact in our second quarter result from there onwards.

Then if we go to the following slide, looking at the Q1 business performance by business area. Market shipments in most products were substantially below the long-term averages. The businesses that were not impacted by the low volume environment where UPM Energy and biofuels, and they achieved strong results in the first quarter. Communication Papers and plywood, despite the low volume environment achieved good results.

Fibers, I would say, continue to deliver satisfactory results in this environment. And of course, the business was getting ready to start up the Paso de los Toros pulp mill. And then Raflatac Specialty Papers, they managed to maintain healthy unit margins in their product range, but the results in both businesses leave room for improvement as delivery volumes recover.

And here, you can see our first quarter cash flow broken down into few components. Operating cash flow totaled EUR714 million for the quarter and free cash flow after investments totaled EUR416 million. Our first quarter free cash flow was enough to fully cover the first dividend payment in April.

We continue to receive cash inflow from energy hedges in the first quarter this time with EUR695 million total positive cash flow impact. Our working capital increased by EUR400 million in the first quarter, as you see on this slide towards the left, which again partly is due to timing.

For example, as our volumes were low, then that means also that our accounts payables decreased substantially. Also, of course, the fact that the Paso de los Toros pulp mill was getting ready for the end of quarter startup, then that meant that in that process, working capital in Uruguay has been on the increase as expected.

And obviously, financial position continues to be very strong. Net debt totaled EUR2.67 billion at the end of the first quarter decreasing by EUR207 million from the fourth quarter. Net debt-to-EBITDA ratio was 0.82, and our liquidity totaled EUR6.7 billion at the end of the quarter.

And then to our outlook. Our outlook for the 2023 year is unchanged. In the first half of 2023, our comparable EBIT is expected to increase from the first half of 2022. In 2023, our delivery volumes are expected to benefit from the ramp-up of the Paso de los Toros pulp mill and then OL3 nuclear power plant unit.

In the first half of the year, however, demand for many UPM products is expected to be held back by destocking in the various product value chains. The opening of the Chinese economy from the COVID lockdowns and easing inflation in other key economies represent potential for increasing demand as the year progresses.

This year 2023 started with a high cost level for many inputs, while the lower demand is exerting pressure on product prices. However, several input costs have progressed past their peak and the benefit is yet to materialize in our results. We continue to take measures to manage margins in this environment.

In the second quarter, we will have significant scheduled maintenance activity with the Kymi pulp mill and the OL number one and two nuclear power plants doing their maintenance works and also the [indiscernible] biorefinery going through its longer turnaround maintenance shutdown. And we estimate the EBIT impact of this maintenance works to be around EUR90 million compared to the first quarter. And finally, it's good to note that there are significant uncertainties, both positive and negative in the outlook for the year 2023.

And I'll now hand back over to Jussi for some discussion on our growth projects.

[Jussi Pesonen, CEO]

Thank you, Tapio. Ladies and gentlemen, now it is time to change shifts to a long-term growth and the benefit of being a growth company on Biomaterials. The big news, of course, is that the Paso de los Toros pulp mill has started production and is ramping up. The mill was ready for start-up by the end of the Q1, as we promised and as we scheduled. And then we received the operating permit -- final operating permit after Eastern.

I have to say that I'm absolutely proud of my team and our team in Uruguay, who has been able to implement the biggest investment project in UPMs, Finnish or Uruguayan history in a timely manner and in very unusual circumstances, including the pandemic and later, the global logistical debottleneck is next and not even mentioning the horrible war in Ukraine.

Now the mill is running, and the raise is now towards nominal capacity and the target is by the end of the year that we are on the nominal capacity. This picture is actually very nice to actually show to you here. You can see the pictures of the pulp mill and pulp bales that have been already produced at the mill. And the top right corner, the pulp is already in the Montevideo harbor ready to be put into the ocean ship and delivered to the customers.

The project has been -- has big positive impact. It will grow our pulp business more than 50% with a very competitive cash cost level of $280 per delivered tonne. Now on top of that, what we have been experiencing, then the UPM platform can be optimized for two mills, and we expect both mills to reach similar low cost level as that $280 per delivered tonne.

The new pulp mill have a significant positive impact, of course, on the local communities and to the whole Uruguayan economy. Our plantation-based business platform in Uruguay is also enabling us to the future growth opportunities in various biomaterials in a sustainable and competitive manner. That is a very unique option for a company like UPM. Competitiveness for the long term is secured by high productivity and continuous productivity improvements also in the forest.

As well as Uruguay is up and running, and the quarter was actually great on that respect that now -- the three nuclear power plant unit has also started regular commercial electricity production in April and is running at the high capacity utilization already. The unit will increase UPM's energy CO2-free electricity generation by almost 50%. It is an excellent example how we are living up to the purpose. We create a future beyond fossils.

Olkiluoto 3 increases energy sales efficiency in the country of Finland and provides a response to the energy crisis in Finland and European crisis in Finland. In the long term, our agile and competitive energy business platform opens growth opportunities in the green transition as well, potentially, complementing our growth in biochemicals and biofuels with the synthetic materials and fuels as well.

Then the next page is about the Leuna Biochemicals refinery, which is taking shape. Speaking of biochemicals, here you can see some exciting pictures of our biorefinery project in Leuna, the unit is really taking shape, as you can see from this picture. Customer interest for the biochemicals products continues to be high, and this has been even higher than what we expected two years ago and gives the confidence on the business case and growth strategy.

Ladies and gentlemen, our focus areas for growth remains unchanged. Now we have completed major growth steps in fibers and energy. Next growth steps will be most likely be in -- and on the right-hand and left-hand wings by starting the scaling up of the biochemicals and businesses and by completing the basic engineering in the Rotterdam site in biofuels.

And looking into the growth options, the timing of the next steps in Raflatac and Specialty Papers is also in our focus. On top of that, in the middle of the fibers business, obviously, we are starting to build a next kind of phase for growth basically, putting a lot of effort on raw material sourcing and raw material -- access to the raw materials.

Next page this is familiar slide shows the progress of our transformation. Over the past years, we have been able to grow our attractive growth businesses quite significantly with the relative tight CapEx. The portfolio change has also driven UPM group profitability as the growth businesses have been, on average, achieving 3 times higher EBIT margin than the mature Communication Papers business.

As you know, since 2019, we have increased our CapEx significantly. Now these investments will start to deliver. This is another way of looking at our transformation and the growth. The fair value of the forest and energy assets represents 40% of UPM's capital employed at the end of being roughly EUR6.5 billion. We will continue to manage and develop these assets for sustainable value creation. So that is an important part of the growth.

Capital employed in our industry operations has -- in our industrial operations has increased significantly during the past three years to the level of EUR10 billion. Almost a quarter of our capital employed, more than EUR4 billion is related to transformation growth projects that are -- that have not yet contributed to our sales or bottom line in Q1 as we speak, 2023. There are, of course, expected they are, of course, expected to generate attractive returns once fully ramped up. And this actually represents a significant earnings growth.

This slide is -- shows our CapEx estimate for the full year of 2023, which is EUR950 million. And of that, that includes EUR750 million, which is related to remaining CapEx of our ongoing transformative growth projects, i.e., on and partly also Paso de los Toros during this first quarter.

Finally, before summarizing my presentation, I would only remind us of the dividend UPM as to pay and has decided already to pay attractive dividend, and our dividend policy is that at least half of the comparable bps is paid out. The AMG Annual General Meeting on the 12th of April decided on a 15% increase on -- in dividend, half of that was paid last week and the remaining part will be paid on November.

Ladies and gentlemen, I will not repeat what we have been presenting Tapio and myself here. This is great quarter from that of -- we have been able to manage our margin during the very unprecedented destocking kind of market situation and the biggest thing the long-term and long-lasting contribution is these two growth projects.

Dear operator, we are ready for Q&A session.

[Operator]

[Operator Instructions] The next question comes from Lars Kjellberg from Credit Suisse. Please go ahead.

[Lars Kjellberg, Credit Suisse]

Thank you. A couple of questions, starting with the growth projects. You [indiscernible] now. What do you expect as an output in the current year? When do you expect the mill to start to contribute more materially to the top? The other question relates to costs. You talked about a number of costs that have passed peak. And at the same time, we've seen, of course, especially in Europe and Finland specifically for you, wood costs coming up quite a bit like it feels is still rising. How should we see the balance of those past peak and the continuation of wood costs?

And then finally, you shared a quite strong growth, of course, in the label business in terms of the destocking impact. Can you share with us any views you have on communication papers, fibers, especially those two divisions were on the stocking versus normality, please?

[Jussi Pesonen, CEO]

Yeah, Lars. There were many questions. Tapio was at least writing all of them down. I will start with Paso de los Toros. Now the mill is up and running and pretty much on the balance. And obviously, by the end of the year, we would be on the nominal capacity. So that -- this is a very kind of fast ramp-up -- within in three quarters, you will be on the nominal capacity. So that is what it is. And then when it comes to EBITDA generation and contribution, that will start by the end of this quarter.

[Tapio Korpeinen, CFO]

Yeah. Maybe if I'll comment on the cost overall, one can say that we can see, I would say, obviously, already costs kind of turning positive in a sense tailwind for delivery logistics costs, availability has changed completely as far as that is concerned, fiber, recycled fiber pulp, obviously, pulp price is coming down from the peak levels where we have been, it's plus on the cost side for our pulp consuming businesses, Specialty Papers and fine papers in the compact business area, obviously.

And let's say, energy cost, again, if you look at energy cost last year vis-a-vis this year, I think, let's say, most indicators out there are indicating for, let's say, a more benign environment even if, obviously, there is still some significant uncertainty here in Europe, including whatever geopolitics may bring. Of course, in our case, should there be, let's say, another turbulence in the energy markets, then that can be a benefit for our energy business.

Concerning wood, first thing, I would sort of mention there is that we have just started a 2.1 million tonne pulp mill in Uruguay where wood costs are under our control. No concern there. Over time, wood cost will go down in Uruguay. And as Jussi mentioned, there's a very sizable cost synergy forward cost for the combined platform of Fray Bentos and Paso de los Toros now when we are optimizing the wood supply to two sites.

In Finland, obviously, we have seen cost pressure on wood cost as we are -- as an industry or a country or a Nordic region kind of adjusting to the new situation where there is no imports of wood from Russia of all assortments, whether it's pulp wood, whether it's energy wood and so on. But I would say, while the wood cost pressure here is there, perhaps also we'll start to see some stabilization there, but we will see.

[Jussi Pesonen, CEO]

And then when it comes to the destocking, and you were asking the other product areas, Communication Papers statistics are saying that the decline on demand or market demand was minus 29%, pretty similar or even less than what it was in Raflatac, as you can see. And what we have guided on that Page 3, the weighted average delivery to capacity was about 70%. That's a rough estimate that you can get the magnitude that how it fits to different businesses when you compare deliveries to capacity, obviously, energy is not in this, but you know all the rest.

[Lars Kjellberg, Credit Suisse]

If I may just have one follow-up question on costs. You have, of course, for a long time, shared your cash margin cost of production on paper prices, today on Page 39, you've reproduced that, of course, marginal costs have dramatically declined. Is there any where you can pursue the pricing at a reasonable as opposed to just coming down to marginal cost again? Do you have a take on that?

[Tapio Korpeinen, CFO]

Yeah. This is an interesting question that the consolidation has happened quite significantly. There are many big companies that have been giving up in the business. And therefore, the kind of situation is totally different. I believe that this trend will change again even if we had 10 years or almost 20 years of quite challenging times now when there's a lot of capacity that has been transferred to packaging rates, this will definitely give us a new platform to operate differently.

And as you have seen that we will take our actions to keep the margins high level by taking our capacity down when there's a need for that. But this is a large, very interesting question, and I tend to believe that there's a new era coming, which is something that I don't know even myself at this point of time how that will evolve, but it won't be the same as last 20 years.

[Lars Kjellberg, Credit Suisse]

Thank you and good luck.

[Operator]

The next question comes from Justin Jordan from Davy. Please go ahead.

[Justin Jordan, Davy]

Three quick questions. Firstly, returning to your Slide 3 on destocking and as was the 70% capacity -- sorry, delivery capacity. Should be sort of essentially inferring a similar 70% in Q2 and hopefully probably improving in the second six months as hopefully destocking in areas like Raflatac or Specialty Paper communication labor ease? Is that sort of -- I'm trying to generalize your comments to a conclusion or is that a sort of a fair conclusion to reach?

And secondly, just in a follow-up potential spread for growth, can you update us on the intense commercial and engineering studies that are ongoing for the potential Rotterdam biofuel refinery, please?

[Tapio Korpeinen, CFO]

Justin, I guess that in Page 3, you have the answer next bullet, you just take the next bullet point. The impact of destocking is expected to phase out in the coming months.

[Jussi Pesonen, CEO]

Yeah. So obviously, we don't have a crystal ball in a sense how exactly the recovery in a sense from this destocking will happen. But again, if 70% was the sort of rough figure for the first quarter, we do expect this sort of recovery to start taking place. What the percentage will be, then we'll see.

[Tapio Korpeinen, CFO]

Justin, still I missed a bit part of your second question, which was related to Rotterdam, but can you repeat?

[Justin Jordan, Davy]

Sure. Sorry, just relating to Rotterdam, clearly, your prepared remarks talk about intense preparations for the business case ongoing. I assume now that, clearly, we are successfully ramping up Paso de los Toros, which has clearly been a major project for UPM for several years and the strong financial position of the group. Should we be expecting due diligence and -- on Rotterdam to be completed by the end of 2023 to reach an investment decision on that project?

[Tapio Korpeinen, CFO]

That will be decided when we are ready. I repeat what I said earlier that it is in the intense phase. There's a lot of things happening especially where we are doing a lot of progress is in the raw material, bankable raw material plan and then, of course, the technology investment itself and the kind of business case preparation. And finally, then we are putting a lot of effort also to understand the regulation -- regulatory world as well.

So basically, how I feel actually at this point of time now when this peak investment cycle is over, we are putting a lot of effort to develop the next phase. Whatever we do, 2024 will be down from that of what we are investing this year, which is EUR950 million. But whether we are doing the decision in this year or next year, is very much related to when we are ready. And this is something that we do. And of course, we need to be really sure that it works as well before taking the final investment decision.

[Justin Jordan, Davy]

Great. Thank you, Jussi.

[Jussi Pesonen, CEO]

Thank you.

[Operator]

The next question comes from Robin Santavirta from Carnegie. Please go ahead.

[Robin Santavirta, Carnegie]

Yes. Thank you very much. Now first question related to the outlook for Q2. If we look at the H1 guidance you have given, it seems to imply that the Q2 EBIT, if we exclude the negative impact from the maintenance actually would be up from Q1 outcome. What are the drivers of underlying improvement in earnings in Q2 versus Q1, we have seen pulp prices coming down quite significantly now recently and paper prices as well. Is it volume? Is it cost? And what is the sort of the key drivers for that?

[Jussi Pesonen, CEO]

I think we have covered those fairly well but -- in this sort of call so far, but let's summarize. We have Paso de los Toros starting, obviously, turning into a positive contributor to the bottom line from now on, already having some impact on the second quarter. We have Olkiluoto 3 volumes, since the start, let's say of the demonstration run, so April onwards.

And then we have what I already mentioned, the factor that we expect variable costs actually to turn to a positive driver already in the second cost also as far as the bottom line is concerned, not only the prices of goods that we have been purchasing. And then we also expect, in a sense, during the coming months, then the volumes starting to come back. And there in that sort of cycle, we are entering with very high margins. So like we had last year when volume started to come back, then also the impact on the bottom line came accordingly.

[Robin Santavirta, Carnegie]

All right. I understand. Can I just check now in Q2, so you expect a positive EBIT contribution already from Paso de los Toros, although you will -- the depreciation will come probably fall on most of the quarter.

[Jussi Pesonen, CEO]

But I won't sort of give details on that because then we will see how the volumes develop. But it will start, let's say, in any case, have a positive delta compared to the first quarter.

[Robin Santavirta, Carnegie]

All right. I understand. Thanks. The second question I have is related to the strategic initiatives you have. And I think you will see -- said that in the fibers business, you know sort of your focused on raw materials sort of gathering raw material, I think you said. What does that mean? Does that mean you sort of plan to expand the pulp business or is it more related to biofuels? What is it related to?

[Tapio Korpeinen, CFO]

It is all actually this business, if any, is actually all of the businesses are -- this is a raw material game. It is that we have some ideas on, of course, in pulp, but also biomaterials, whether it is biofuels, biochemicals, so they -- basically this is a unique -- that we have a unique option in UPM that we do have a great platform in Uruguay. And of course, we are having access to even globally in many locations. And we are preparing for growth for different type of biomaterials. And this is a very important part of the successful implementation of the projects.

If you remember, when we acquired Botnia, then we started to buy land immediately in Uruguay to be prepared for 19 July decision of the final investment decision on pulp making. So this is something that we will definitely now put also focus on top of that the right and left wing of the spearhead of growth will be in our focus when it comes to -- as where we are kind of looking growth as well.

[Robin Santavirta, Carnegie]

All right. Thank you very much.

[Operator]

The next question comes from Linus Larsson from SEB. Please go ahead.

[Linus Larsson, SEB]

Thank you very much. I'd like to drill down on Specialty Papers for a minute. If you could please elaborate a bit about what the developments were in the first quarter? I see that on aggregate, volumes were flattish Q1 on Q4, but margins came off quite sharply. If you -- as you often do split it up into office and the specialty grades. Could you please describe the developments maybe the destocking and price movements that you have seen and are seeing in those subsegments, please?

[Jussi Pesonen, CEO]

Well, of course, like the slide you see showed you, the destocking impact has been the biggest in the specialty packaging or self-adhesive label value chain. So obviously, the label papers part of Specialty Papers is in that same value chain. So therefore, in a sense, this volume impact from destocking was the strongest there. And well, let's say, the margins are the best there as well. Let's say, fine paper business in Asia and the Chinese market, let's say, from a volume point of view has been doing somewhat better, but the margins are thinner.

[Linus Larsson, SEB]

Great. And the current developments in the second quarter, how are these businesses developing now in terms of volume demand pricing?

[Jussi Pesonen, CEO]

I think nothing further to add in a sense that, again, like discussed, then this destocking, obviously, we expect to start to sort of unwind our volumes to recover during the coming months. And of course, then fine paper business if we see sort of continued positive signs in the Chinese economy then should benefit from that as well.

[Linus Larsson, SEB]

Great. And then just maybe a detail on Paso de los Toros. You did share some details there. But it sounds like we shouldn't be too worried about some start-up costs in the second quarter or are there some short-term impacts there? And from what date are you starting to depreciate the assets?

[Jussi Pesonen, CEO]

It has started as the production has started. And well, of course, let's say, the efficiencies are not 100% in the -- for the first tons, but no other sort of special start-up costs as such.

[Linus Larsson, SEB]

And depreciation is that from mid-April then or...

[Jussi Pesonen, CEO]

It starts when the production -- I don't have the specific date of April when it started.

[Linus Larsson, SEB]

Okay. Thank you very much.

[Operator]

The next question comes from Charlie Muir-Sands from BNP Paribas Exane. Please go ahead.

[Charlie Muir-Sands, BNP Paribas Exane]

Good morning. Good afternoon. Thank you very much for taking my questions. Firstly, on your Uruguay pulp mills. I think you said, obviously, you're aiming to optimize the wood supply into fragments as well. Did you say that you think you can get that mill down to $280 a tonne as well? Did I hear that correctly? And if so or otherwise, can you just clarify how much the production cost of that site is today?

And secondly, related to that, if you're at sort of nominal full production outputs for Paso de los Toros by the end of this year, should we be expecting the cost efficiency to reach that $280 a tonne by then? That's the first bunch of questions. And then one briefly on energy or electricity, can you just clarify if you've been hedging further forward than you historically have done and what the status is on your forward sales of electricity? Thank you.

[Jussi Pesonen, CEO]

Maybe I start with the first question that you were asking that did I say that it will be a Tapio say that the whole Uruguay platform when it comes to cash cost level would be 280 level. Yes, we did, roger that. And that is actually where the benefit, especially fragmented is very much beneficial when we are starting to optimize the wood inbound logistics and where we are taking wood into the both mills. So that is correct. Then when it comes to starting up the Paso de los Toros, we will see what will be the kind of cash cost level by the end of the year when we are fully ramped up. But basically, there's no reason why it should not be very competitive.

[Tapio Korpeinen, CFO]

And then maybe on your question on the electricity hedging. So there -- well, first, as you perhaps remember, there was little activity during last year, given, again, the liquidity in the exchanges dried up almost completely. There has been some additional now liquidity but at a much lower level than what has been, let's say, normally or even in the recent years or even last year. So the liquidity has been very low. We have been doing some volumes, both futures and bilaterals. But the sort of current sort of market circumstances, still, let's say, at low volumes.

[Charlie Muir-Sands, BNP Paribas Exane]

Thank you. And sorry, just on Fray Bentos, could you clarify what is the cost base today.

[Tapio Korpeinen, CFO]

We are not disclosing.

[Charlie Muir-Sands, BNP Paribas Exane]

Okay. Thank you.

[Operator]

The next question comes from Cole Hathorn from Jefferies. Please go ahead.

[Cole Hathorn, Jefferies]

Good afternoon. Thanks for taking my question. Just following up on the graphic paper markets and Lars brought up an interesting point about the price and cost divergence is the market able to run it at lower operating rates more profitably versus history. I know people have been trying to time energy costs, et cetera. So I'm just wondering if the industry as a whole is able to run more profitability at lower operating rates.

And then the second question is on the other division. Can you just talk about the step-down in the biofuels. It was exceptionally profitable in the third and fourth quarter last year. And I'm just -- wanted to understand the step-down in the other division. Is it just a moderation in the pricing and rising costs? Thank you.

[Jussi Pesonen, CEO]

The Communication Paper business, of course, if you are kind of looking and reviewing what we were able to do this quarter, the answer is yes. But of course, it is, as you have seen over the last years that the volatility of the profitability has been quite high. But basically, I believe that there's the reason to think about that the kind of margin would be better than in the past for coming years for the reasons that we discussed already when it comes to consolidation, and there will be a lot of less players in the fields and that kind of thing.

But of course, it is not going to be as high margin as we are talking about the growth businesses. As I said earlier, they are like 3 times more in EBIT margin. But still we expect that the Communication Paper business is yielding a very good free cash flow, which I think that will actually enhance the opportunity to grow the rest of the company.

[Tapio Korpeinen, CFO]

And maybe on the biofuels business has performed very well, let's say, from a profitability or margin point of view during the first quarter as well. Let's say, movement in fossil diesel prices does have kind of an impact on the renewable fuels as well but still, let's say, significant premium. So therefore, financial result has been good. And as mentioned now in the second quarter, we have this so-called turnaround shutdown sort of a larger shutdown, which will impact the second quarter, second quarter results, which we report as part of this other segment.

[Jussi Pesonen, CEO]

Ladies and gentlemen, I think that we have used our time, and there are -- there is no further questions. So I thank you all being with us this afternoon. Thank you so much, and see you. Thank you. Bye now.