UPM-Kymmene Oyj

OMXH:UPM

Earnings Call Analysis

Stable Outlook and Strategic Investments

UPM maintains a stable outlook for 2023 with the second half comparable EBIT expected to be on a similar level or higher than the first half. The dividend will be paid in two installments of EUR 0.75 per share. Paso de los Toros pulp mill's ramp-up is on track to reach close to full capacity by year-end, already turning EBITDA positive in Q3. UPM's Energy sector presents long-term growth opportunities, while the Leuna biorefinery is set for commissioning by end of this year. Paper machine closures are set to save approximately EUR 100 million annually in fixed costs. The company has started to enact cost-saving measures since the previous year, aimed at reducing headcount by 1,400. Capital expenditure for the year is estimated at EUR 1.1 billion, with future decreases anticipated.

Leadership Transition Paving the Way

In Q3 2023, UPM announced a significant change in leadership as Massimo Reynaudo is set to become the President and CEO starting January 1, 2024. Outgoing CEO Jussi Pesonen, expressed confidence in the future of the company and pride for his 20-year tenure, marking his 80th quarterly report.

Navigating a Sales and EBIT Decline

The results revealed sales contracted by 24%, coupled with a sharp 72% descent in comparable EBIT to EUR 220 million. Deepening the slice into UPM's challenges, particularly dismal average pulp and energy prices eroded profits in the Fibres and Energy business areas.

Signs of Recovery Amid Tough Times

Despite a daunting industry downcycle, exacerbated by geopolitical uncertainties and inflation, demand for UPM products started to show some promise of recovery in Q3. This uplift in demand was also bolstered by key growth investments such as the Paso de los Toros pulp mill and the Olkiluoto-3 nuclear power plant, enhancing delivery volumes.

Strong Cash Flow and Debt Reduction

A silver lining for the quarter was the robust operating cash flow, which amounted to EUR 641 million, aided by a release of working capital and cash inflow from energy hedges. This strong cash flow performance allowed for a notable reduction in net debt, which decreased by almost EUR 200 million from the preceding quarter.

Strategic Focus Maintaining Margins

UPM prioritized margin management through timely cost and capacity reductions, a move designed to sustain a decent performance level amidst declining sales prices in most business areas compared to the second quarter. The adjustments made were sufficient to maintain margins despite some operational setbacks, like the EUR 20 million hit from the Kaukas pulp mill maintenance shutdown.

Transformative Investments Underpinning Future Growth

Continuing its commitment to strategic growth investments, UPM's Q3 results were favorably affected by the new production capacities from the Paso de los Toros pulp mill and the Olkiluoto-3 nuclear power plant, contributing to CO2-free electricity production and strengthening the overall delivery volumes. The Energy sector particularly reaped benefits from stable prices offsetting lower sales figures witnessed in other sectors.

Innovation Thrust Through Acquisition

Echoing its dedication to innovation, UPM acquired SunCoal Industries, a German company with a portfolio of over 300 patents, emphasizing its focus on renewable functional fillers. This strategic decision cements UPM's position in the biochemicals segment and attracts strong commercial interest for its bio-based products.

Steady Financial Outlook Amidst Cost Management

Entering H2 2023, UPM expects comparable EBIT to be on a similar level or increase from H1, with a forecast of reduced variable costs, an anticipated end to destocking, and increased delivery volumes. The company has estimated its capital expenditure (CapEx) to be around EUR 1.1 billion for the year, a figure slightly escalated due to accelerated investment in the Leuna biorefinery. Notably, UPM projects a substantial decrease in CapEx for the following year.

Earnings Call Transcript 2023-Q3

[Jussi Pesonen, executive]

Dear friends, dear UPM friends and audience, welcome to UPM's quarter 3 2023 result webcast. My name is Jussi Pesonen, and I am the CEO of UPM and I'm here with our CFO, Tapio Korpeinen.

[Tapio Korpeinen, executive]

Hello to everyone.

[Jussi Pesonen, executive]

I would actually start to share today's big news. I'm happy to say until that Massimo Reynaudo have been appointed President and CEO, UPM-Kymmene as of 1st of January. But before going to that, kind of introducing Massimo, I have to say that this has been great day, I have felt myself proud, privileged and confident. I'm proud of all UPMers what I have been -- had an ability to work with in transforming UPM today's kind of position where we are.Privileged, it has been great, great journey more than 20 years. This is by the way, my 80th quarterly reporting during the 20 years career and confident, I'm really confident of the future of UPM.Massimo has been with UPM ever since 2017, and knows UPM Communication Papers and UPM Raflatac very well. Before UPM, he made a very international career at Kimberly-Clark. Massimo is 53-years old and Italian citizen. You will have many opportunities to get to know him as of next year. Our Chairman, Henrik Ehrnrooth, said that the Board was seeking a 3 characteristics when they were choosing a new CEO. First, sharp business acumen; secondly, they were thinking about the vision of the future value-adding based and biofore strategy how to implement that; and thirdly, ability to build high-performing teams.I'm really proud that the best candidate came from in-house. I wish Massimo all the best in his demanding role for the future. I will continue myself as the President and CEO until the end of this year. And after that, I will work for Massimo and for the senior management until I will retire from UPM on 30th of April this year.I wish to express my deep, deep gratitude to UPMers. Together, we have been able to go a long way together and we have reinvented UPM to the benefit of all stakeholders. It means, shareholders, it means, UPMers, it means the society and our partners and suppliers. I'm extremely proud of all that we have achieved during this last 20 years.And of course, I want to thank wholeheartedly the former Chairman, Bjorn Wahlroos for the support that I got from him for many, many years and my executive team members. So very happy with the announcement and I wish Massimo and Henrik Ehrnrooth a really, really strong performance for the future. They both have a excellent track record.But now moving on today's agenda. UPM delivers improved profits and results from previous quarter and continues to build-up long-term growth. If we compare Q3 last year, our sales decreased by 24% and comparable EBIT came down 72% to EUR 220 million level. EBIT margin was 8.5% for the quarter and EBITDA marching close to 15%. As you may recall, Q3 last year was the strongest quarter in UPM's history, EUR 779 million of EBIT with almost all businesses reaching the quarterly record in comparable EBIT, energy and pulp prices, in particular, reached the heights.In Q3 this year, average pulp price and energy prices were on the bottom levels, which impacted profits in the Fibres and Energy business areas. On the positive side, in the other businesses, we continued to manage margins successfully. As already mentioned, demand for many UPM products started to gradually recover in Q3 and our growth investments, the Paso de los Toros pulp mill, and then the Olkiluoto 3 nuclear power plant unit contributed significantly to our deliveries.Our Q3 operating cash flow was very strong, supported by release of working capital and cash inflow from the energy hedges. Net debt decreased from both comparison periods. Our financial standing is strong. This year, the business environment has been exceptional with the downcycle far beyond normal in the industry. Market deliveries of our products have been held back by the unprecedented destocking in most of the product value chains.Geopolitical uncertainty, low economic activity and persistent inflation have also impacted the underlying demand for the consumer products. We believe that the destocking in our product value chains is now gradually phasing out during the second half of this year. Inventories of many of our customers are already on the low side. However, operating environment remains uncertain and impacting our customers and buyers' behavior.In these unusual circumstances, we have focused on margin management and implemented a wide range of timely and cost -- timely cost and capacity reductions to maintain good performance. Meanwhile, we have been ramping up our strategic growth projects and continue to build the foundation for the future growth.But ladies and gentlemen, at this point, I will hand over to Tapio for further analysis of our results. Tapio, please.

[Tapio Korpeinen, executive]

Thank you, Jussi. So here, we have once again the waterfall slide comparing third quarter to the one last year and to the second quarter this year. So on the left-hand side, you can see that the lower sales prices explained most of the decline in the quarterly EBIT. Prices decreased in all businesses, excluding Plywood. But I would say the vast majority of the negative price impact that you can see here is coming from pulp and electricity sales prices. This then impacted EBIT in Fibres and Energy business areas. In the other business areas, margins have been maintained at a healthy level. Delivery volumes increased from last year, mainly driven by volumes from Paso de los Toros and from Olkiluoto 3.And on the right-hand side, you can see the third quarter EBIT compared to the second quarter sequentially. Again, sales prices decreased in most business areas. This was then offset by a slightly larger decrease in variable costs, and therefore, margins were maintained. So as we have been guiding earlier already the sort of positive tailwind has been increasing from the previous quarter, as is illustrated in this chart.The sequential EBIT improvement came from higher delivery volumes and lower fixed costs. Deliveries increase in Fibres, Specialty Papers, Raflatac and Biofuels. The decrease in fixed cost is mainly due to lower maintenance activity, while the capacity closures in Communication Papers at the end of the second quarter also play a role. And here, looking at the EBIT development by business area, starting by Fibres, the third quarter EBIT was slightly in the red figures. Pulp prices were at the bottom of the cycle level for our deliveries in the third quarter, which is the main factor affecting the result. Additionally, in Finland, the weak sawn timber market and the high wood costs also played a role or affected the result.In the third quarter, average pulp sales price was 43% lower than last year and 18% compared sequentially to the second quarter. Demand for pulp was good during the quarter, and market prices started to recover from the bottom levels. The ramp-up of Paso de los Toros in Uruguay progressed according to plan, and our pulp deliveries grew by 54% from last year or 35% compared to the second quarter.The Kaukas pulp mill maintenance shutdown had a roughly EUR 20 million negative impact on the third quarter EBIT. Then Communication Papers achieved solid results again, despite continuously low demand. Margins were successfully protected by implementing cost containment measures and by adjusting capacity. So EBIT increased from the second quarter. In Raflatac, the deliveries for self-adhesive label materials increased gradually from the previous quarter. And so the deliveries of Specialty Papers' label and packaging papers.The market sentiment improved in Asia overall, which was also visible in fine paper deliveries. In both businesses, comparable EBIT from the -- increase from the second quarter and the impact of lower sales prices was offset by lower input costs. In the Energy business area, the Olkiluoto-3 nuclear power plant unit was now in regular commercial electricity production. Weak industrial activity in Europe has resulted in unusually low electricity consumption, which then combined with the fact that the third quarter in the Nordics was quite wet contributed than to lower electricity prices in Finland.Energy's EBIT improved slightly from the previous quarter but was clearly lower than during the energy crisis in Europe last year. In Plywood, demand for spruce plywood and veneer was weak as building and construction activity slowed down. But then demand for birch plywood was good. In other operations, Biofuels delivered good results after the Lappeenranta refineries turnaround maintenance shutdown, that was done during the previous quarter.And then looking at cash flow. Obviously, our cash flow was very strong in the third quarter. Operating cash flow was EUR 641 million. We released EUR 95 million from working capital and the cash inflow from energy hedges continued. So the third quarter free cash flow then after investing cash flow out was EUR 323 million.Our financial position continues to be very strong. Our net debt decreased by almost EUR 200 million from the previous quarter and was EUR 2.363 billion at the end of the third quarter. Net debt to EBITDA was 1.27. Our cash funds and committed credit facilities totaled EUR 6.5 billion at the end of the third quarter. And here, I would also like to remind you that this year, we are paying our dividend in 2 equal installments, first installment of EUR 0.75 was paid on the 21st of April and the second installment of EUR 0.75 per share will be paid on the 2nd of November.And then to our outlook, which is the outlook for 2023 is unchanged. Comparable EBIT in the second half of 2023 is expected to be on similar level or increase compared to the first half of 2023. Our delivery volumes are expected to increase in the second half of '23 compared to the first half. Destocking is expected to gradually phase out during the second half and the production ramp-up of Paso de los Toros pulp mill, plus the Olkiluoto-3 power plant unit will add to UPM's deliveries during the second half.Second half of this year started with low pulp and energy prices impacting these businesses in the other businesses, we will continue to manage margins. We expect variable costs to continue decreasing during the second half of the year. And in addition, we are implementing measures to reduce fixed and variable costs.So now, I'll hand it back over to Jussi for some comments on our growth investments.

[Jussi Pesonen, executive]

Thanks, Tapio, that was very clear. And let's then move on to the transformative investments. Let's start with the Paso de los Toros pulp mill. And here, you can see the latest picture of the mill and production ramp-up is progressing well. As you remember, Paso de los Toros started up and started the production in mid-April and shipments started actually only in month of May.Already Q3, the mill delivers kind of roughly 70% of its nominal capacity. As expected, as we promised, the mill was EBITDA positive already in Q3. In my view, this is an excellent achievement, given the fact that we started only in the middle of the Q2, and the pulp sales prices have bottomed of the cycle -- reached the bottom of the cycle levels in Q3. We continue to target the mill to reach close to nominal capacity as the run rate by -- like in that we are in the nominal capacity run rate by the end of the year. And that is actually proceeding well. We actually delivered in Q3, 68% of the nominal capacity. So it is actually progressing well.We are having good weeks already. Stability is not yet there on a nominal capacity, but the best days and best weeks are already there. The new pulp mill will grow our pulp business more than 50% in a high competitive way. The mill is expected to reach highly competitive low-cost levels of approximately USD 280 per delivered tonne of pulp once the full production is happening and the full optimization.Furthermore, the Fray Bentos mill will gradually benefit from the synergies of the 2 mill concept then optimized wood sourcing, improving the logistics also. Basically, the whole Uruguay platform will then reach the USD 280 cost level per delivered tonne. Most of our pulp capacity is now in Uruguay, where the plantation-based business platform is highly competitive and offers opportunities for continued productivity improvement.And here, I would like to remind us, we have been talking about it that in Uruguay, 1 hectare of land -- plantation land is giving us more than 70% pulp than 20 years ago. So basically, the productivity gain is actually happening and 20 years is only 2 rotations. So it will continue. It also offers further growth opportunities in various biomaterials in the long run. Q3 was the first full quarter of a normal operations at the Olkiluoto-3 nuclear power plant unit, which started regular commercial electricity production in month of May. Olkiluoto-3 increases our CO2-free electricity output significantly, we are talking about close to 50%.In the long run, UPM's competitive and agile Energy business platform will open growth opportunities in the synthetic fuels and synthetic chemicals and materials. Biochemicals, the contribution and construction of the first of its kind biorefinery in Leuna is progressing well according to a kind of revised plan that we -- what we have been doing. All major structures have been erected as we speak, and gradual commissioning of the refinery will start by the end of this year.So next year, we'll be dominating of the commissioning. And of course, there will be a lot of activity still on some of the parts of the mill that we are actually having the instrumentation, electrification and so forth.In Q3, Biochemicals also acquired a German-based SunCoal Industries with its unique technology portfolio. We are talking about more than 300 patents that we acquired with the SunCoal Industries. This is strengthening UPM's patent portfolio as well and particularly related to renewable functional fillers of the mill. Commercial interest for the bio-based MEG and the renewable functional fillers continue to be very strong. And we announced the first large-scale contracts with Dongsung, the South Korean company and then Brenntag, a German company to be our distributors for the product.Here you can see a few pictures from the refinery. Then as I have always said that we need to protect our profitability and our performance, this is moving to our measures to ensure our competitiveness. And let's start with the Communication Papers, which continues to adjust its capacity and cost to meet profitable customer demand. We closed down 2 paper machines by the end of second quarter with a total capacity of 485,000 tonnes. In July, we announced a plan to close our Plattling -- whole Plattling mill in Germany with a capacity of close to 600,000 tonnes.Last week, the participation process and the wide negotiations with the employees represent that this was concluded, and the mill will cease production during November this year. Together with these closures, we'll reduce capacity by almost 1.1 million tonnes during the '23, which is representing 18% of UPM's Communication Paper capacity. The annual fixed cost savings will be totaling around EUR 100 million.We continue to manage margins and take measures to reduce variable and fixed costs in the other businesses and functions as well. Such measures include both temporary and permanent closures as well. The decided actions over the past 12 months within UPM, the operating model is actually supporting that we started already to take cost measures already a year ago starting from September last year. And that now is actually kind of getting together a personal reduction of 1,400 people, including the capacity restructuring zone in this page.The positive long-term drivers and growth prospects for UPM are intact and exciting. We continue to work with long-term growth, and our focus areas remains unchanged. Now we have completed major growth step in Fibres and Energy, as Paso de los Toros is ramping up and Olkiluoto-3 is in regular commercial production.Next, growth steps will most likely be on the right and left wing of the picture, starting and scaling up the Biochemicals business, completing the basic engineering of Rotterdam biofuels and looking for the next growth steps in Raflatac Specialty Papers.In Fibres, spearhead of growth part, we will continue to develop our business platform based on the raw materials and therefore, the raw material sourcing and raw material kind of focus will be for the future. When the company is having a bankable raw material supply with low cost, then it is easy to make decisions for the next big investments.Next slide will show our CapEx estimate for this year. Our CapEx estimate is EUR 1.1 billion. This is clearly down from last year but somewhat higher than what we earlier estimated. This is due to the timing of the CapEx items mainly related to Leuna biorefinery. We have made good progress in the project and some of the CapEx items are now expected to take place already this year instead of early next year. Next year, our CapEx will decrease significantly from this year. And of course, we are coming back to that in our January meeting and then giving you a kind of clear number for '24 as we speak.Our transformation continues. As you can see from this picture, our biggest investment, the Paso de los Toros pulp mill is now ramping up production and coming from investment phase to a contribution phase. Leuna is making good progress, and we continue to prepare the next steps in UPM. Meanwhile, as discussed today, we continue to take care of the competitiveness, and we do have a focus on performance protecting profitability and cash flow from Communication Papers.And this slide will complete the prepared part of the presentation. Dear operator, we are ready to take questions. Thank you.

[Operator]

[Operator Instructions] The next question comes from Justin Jordan from Davy.

[Justin Jordan, analyst]

First, I just want to say congratulations to Massimo and clearly to Jussi, thank you for 20-plus years of transformational leadership as CEO and clearly best wishes for the next chapter as a business influencer. I've got 2 quick questions, if I may. Firstly, you talked in your prepared remarks about destocking gradually phasing out. Can you give us a little bit more color as to what you mean by division? I'm sort of thinking, I suppose Raflatac, Communication Papers, Specialty Papers, et cetera.And secondly, specifically, in Communication Papers, where clearly, I suppose comparable EBITDA was substantially ahead of consensus expectations today. Can you give us some information as to how you've managed to achieve higher margins year-over-year in Q3 in Communication Paper, despite clearly volumes being down 28% in Europe year-to-date for the industry and clearly lower prices year-over-year? It's sort of a remarkable performance given the challenging markets. Just wondering if you can give us some more color on that?

[Jussi Pesonen, executive]

If Tapio takes the first, and I will try to answer you for the second.

[Tapio Korpeinen, executive]

Yes. Well, let's say, taking Raflatac as an example. Like we have discussed earlier as well, we do see when you kind of compare sequentially quarter-after-quarter that the sort of volumes are coming back gradually, but still coming back. So like, again, in the third quarter, we saw -- if you look at the sort of industry shipments and statistics for label stock or self-adhesive materials then in Europe, we saw sort of 4% to 5% sequential improvement in North America sort of 7%. And of course, in Europe, it's good to remember that seasonally, typically, third quarter is down because we have the holiday August month.So kind of correcting for that, then the developments in a sense, one could say similar to what we are seeing in the U.S. So clearly, there is a positive development. And I think again, that is what we expect to directionally see going forward as well, also sort of positive development in the Asian markets, which then was impacting our Specialty Paper business, including the fine paper business in Asia and in our Changshu mill. So therefore then, let's say, if you look at, again, the volumes for Specialty Papers sequentially for the business area as a whole, improving.So I think there, there you can see the sort of evidence so far what we can see, let's say, in talking to our customers and let's say, looking at the evidence in the sense that we have visibility too in the value chain is that the sort of any safety stocks or excess inventories that we can see have been sort of largely consumed. And now then perhaps what is kind of the way the customers manage the business is that they take in the volume that they need. And of course, the world is uncertain still in terms of what is the trajectory at which we will sort of move on from here.So that is perhaps then keeping the sort of customers or sort of meaning that the customers keep their inventory still in this sort of environment kind of a lean, but they are taking now volumes as they see their business sort of coming out from this destocking cycle.

[Jussi Pesonen, executive]

And then just in -- thanks for your kind words to me as well. But this is why and how Communication Paper business has been managing margins and made a good result for the quarter. It was doing that for second quarter. It was doing that for first quarter. It's a long journey. First of all, the main decision was that we, in UPM, felt that the Communication Paper business is important part of UPM and especially free cash flow focus, where the incentive schemes and all has been put in place that we are having a clear what we want to do with the Communication Paper business, which has been funding many of our growth businesses.Operating model, I remember times when people were saying that when UPM was dividing pulp and paper into different PAs, people were saying that without pulp, we wouldn't be competitive, but bit by bit with long work, a lot of work on optimization that we have been doing. So it is a business mix, product mill mix, how we run efficiently our mills, long-term optimization in our back office restructuring, we have been restructuring all of our back offices. We do have a big hub in Poland now that is serving a lot of our back office things in UPM. Cost control in variable costs, we are doing products, same products with lower cost, fixed-cost measures.I can list many of this. There's no kind of one trick pony. It has been several things, but this is now yielding to a situation where there has been many exits from the business, the business platform is good for us and especially the mix, how we run our operations and the machine part that we have there. So it's a long, long actually way of how we have been trimming the business. But I guess that the first point has been that it is important part of UPM and enabling the growth initiatives and transformation in other parts of UPM.

[Operator]

The next question comes from Johannes from Grunselius.

[Johannes Grunselius, analyst]

It's Johannes Grunselius from DNB. I have a question on your near-term outlook in terms of profits. And it's the same as you had after Q2, you're talking about flat or higher H2 EBIT versus H1. But if the earnings is going to be flat, I mean, it just implies a small uplift in earnings Q4 versus Q3. So could you shed some light on that? Are you very cautious on the unchanged outlook? Or do you foresee sort of any headwinds whatsoever in any area in the fourth quarter?

[Jussi Pesonen, executive]

I guess that now that Tapio might actually add on it. But if you read our -- clearly our outlook, it is saying that similar or improved. So that is actually -- and the confidence is there that we will actually achieve that.

[Johannes Grunselius, analyst]

I was just thinking about it. You have kept the word similar. But yes, maybe that's for everyone's interpretation.

[Tapio Korpeinen, executive]

Yes. I mean, of course, the outlook kind of includes the full range as it did when we gave it out in the end of the second quarter, but good progress, I would say, towards delivering on that so far.

[Johannes Grunselius, analyst]

Then on pulp, I think you mentioned you see that you were at 68% in the third quarter deliveries versus nominal capacity. Could you help us a bit where do you think you can be in the fourth quarter?

[Jussi Pesonen, executive]

Like, we have said that by the end of the quarter, we will be on the nominal capacity when it comes to production. That is our aim. That is our kind of progress is actually towards that. And the confidence is growing every day. Like I said, that there has been quite many days, first months after the start-up that we have already reached that level. And now also, we have on the weekly base had that. But of course, on that kind of start-up, you are having kind of stability of the production is not that high, but quite confident that the balance of the mill is good and means that there are no such items that would actually kind of stop us not to be there where we want to be by the end of the year.

[Operator]

The next question comes from Ephrem Ravi from Citigroup.

[Ephrem Ravi, analyst]

Two kind of micro questions on finance. Firstly, how does the tax rate potentially change with the Paso de los Toros ramp-up? I understand that it's a fixed EUR 7 million tax paying because it's located in the free trade area. So does that mean that the overall corporate kind of tax rate will decrease as Paso de los Toros becomes a greater proportion of your profits over the next 2 years?And second, just on the power business, I mean, correct me if I'm wrong, but the realized price this year has been lower than the average spot price by more than the usual amount. Obviously, 2022 was also the same, but that was an extremely high power price. Will the expansion in OL3 into the Finnish power market structurally depressed the power prices? So to that extent, you should be getting lower power price in the future because it's now become an oversupplied market. Would that be a fair conclusion?

[Tapio Korpeinen, executive]

Well, first, perhaps if I comment on the first question. Let's say, typically, if you sort of look back or kind of realized tax rate has been somewhat lower than the Finnish corporate tax of 20%. And in Uruguay, as you said, we have, let's say, effective tax structure, which is one of the reasons. And of course, that is a benefit that we'll have from Paso de los Toros as well going forward.Then on the power business, let's say, again, what we can expect is that the volatility will increase. There will be, in a sense, in the Nordic market and the Finnish market like we have seen moments where the market is oversupplied and moments where the market is very tight. It's good to remember that this year as I was saying earlier, the electricity consumption in the Nordic area, in fact, in the Europe and Northern Europe as a whole has been very low, historically speaking. And then it's been very wet. Actually, the third quarter was the wettest quarter in the Nordic area since 2003.So those have been the sort of shorter-term factors that have been then impacting the sort of demand and supply balance. Of course, now we have Olkiluoto-3 adding to the capacity. On the other hand, similar amount of capacity exited when the Russian imports to Finland stop. In the meantime, there's been wind capacity built in Finland and in the Nordic area as well. So what it means is that when it's wet and windy, there's plenty of power. When it is not, then we have a very tight markets.So like given now in the recent days, we have seen clearly in the 3-digit per megawatt hour power prices here in Finland. And let's say in the previous days, we have seen negative prices as well. So that's kind of the new normal. The benefit we have in UPM is that we have hydro, where we are creating significant value by trading doing the highest priced hours and days. And then we have emission-free cost competitive nuclear power as well.

[Operator]

The next question comes from Linus Larsson from SEB.

[Linus Larsson, analyst]

And again, congratulations to both Jussi and Massimo. A couple of questions just for clarification sake, on capital allocation, you are increasing your CapEx guidance for 2023. And in light of that, could you just specify the Leuna CapEx? How much that is? And also, what's the latest around Rotterdam? And what's the time line of that project? And what are the deciding factors that you are in particular, analyzing at this stage, please?

[Jussi Pesonen, executive]

And if Tapio you'd take the capital allocation, I talk about Rotterdam.

[Tapio Korpeinen, executive]

Well, I'd say in the Leuna CapEx, we have not disclosed, but what we said earlier was that this Leuna and the Paso were EUR 750 million now up to EUR 900 million. And as Jussi was saying earlier, main reason for that, in a sense, is timing for the Leuna than outflow.

[Jussi Pesonen, executive]

That is correct. And then when it comes to Rotterdam, there's plentiful work. It is a completion of many things. It's how do we actually have a bankable wood and raw material sourcing for the mill, where there's a lot of activity ongoing. Then we talk about the technology where we have been a lot of innovation going on. But of course, kind of learnings from the Lappeenranta facility. We do have the mill area already on the preparation. It is the markets, it is the whole concept of how we are running. That is work -- there's plentiful of work ongoing. And when that work is then ready somewhere in next spring time, then we are starting to become in the position that UPM can start to think about the investment possibilities or then decide whether go forward or not, it looks very good at this point of time. It is a business where there's a lot of potential.And if we only think about aviation fuels, it's a huge demand coming for the future also bio-based and then synthetic-based fuels for that. And therefore, we are really in the pole position because we do have the -- this decade will be most probably maturity. It will be Bio2x, i.e., the kind of fuels and synthetic fuels will come only next decade where we do in UPM, have a lot of biogenetic CO2 coming out of our pulp chimneys and pulp mill chimneys, and then we have a lot of CO2-free energy, like Tapio said, hydro and nuclear. So well positioned, and therefore, the Rotterdam is important to be developed to that stage that we can take the decision. A lot of work is going on in all sectors of that basic engineering phase.

[Linus Larsson, analyst]

And just to follow-up then. Back in July, you kind of indicated that CapEx for 2024 would be by and large, around the depreciation of EUR 600 million. Is that still a rough and fair assumption?

[Jussi Pesonen, executive]

That is a fair assumption. Of course, you could say that when now the timing issue that somewhat more investment this year that it would be lower. But we will come back to that '24 kind of guidance in our January meeting, but like, by and large, you can say that it is on the depreciation level.

[Operator]

The next question comes from Ram Kamath from Barclays.

[Ramchandra Kamath, analyst]

Best wishes for Jussi. I remember a couple of quarters back, you alluded a new era is coming as paper market won't be as same as past 20 years or so. I would like to hear from you what has changed in paper business over the years and how it is evolving considering the margin you maintained or improved in this paper business?

[Jussi Pesonen, executive]

This is going to last for 2 hours now. This is a long -- this is an excellent question, but there's many things in the paper markets. Of course, there is a lot of exits as well. There has been many companies that have lost their kind of faith for the business in a way, and they are closing down and converting those assets into the packaging area, which is actually, of course, helping that the kind of consolidation happens through exits rather than typical consolidation. So that is actually helping a lot that there will be fewer players, and it will be much more clear.Then, of course, we have done a lot, as I explained earlier already, a lot of kind of things that even in the kind of circumstances that we are today, we are able to keep the margins and optimize our production portfolio and business mix in a way that we are generating good free cash flow, which is the aim of the whole business. A lot of things that we have been doing in -- not only in the production sites, which is typically what the outside in view is, but also like in the back office costs that when the business gets smaller, we need to be much more efficient on the back office operations and that we have been doing a lot of work. We have moved a lot of kind of activities to kind of hubs in, for example, in Poland, that where we are having a big hub of doing efficiently, everything digitalization is helping us. So there's multiple things that we do for the business. Maybe this is a short answer to your question.

[Ramchandra Kamath, analyst]

And on the pulp business, it looks like China demand is coming back and growing while the European market remains subdued. Do you see pulp moving more towards Asia now and does impact realization even for coming quarters?

[Jussi Pesonen, executive]

Pulp demand is a function of the kind of general economic development. So it's kind of following that and the correlation is quite good. This only shows that in Asia and -- and in pulp, Chinese market has been pretty good for this year. In pulp markets, last year was a kind of destocking year when the kind of pulp demand was lower. And this year, it has been clearly higher than that of last year. We are talking about almost 2 million tonnes more deliveries this year than that of last year.Europe is very much related to the economic development, where we now see that the customer stocks and the board stocks are getting lower. And therefore, we are going to see a somewhat better demand actually for Europe as well, but it is very much related to general economic development.

[Ramchandra Kamath, analyst]

And if I may, last question on this wood prices. It looks like the wood prices remains high. And apart from this import restriction from Russia and lower supply still remain resilient, do you see any other reason why it continue to be so resilient and put pressure on pulp producers?

[Tapio Korpeinen, executive]

Well, maybe I'll start by commenting like the last time that it's good to remember that 60% of our pulp capacity is in Uruguay, where we have good control over the wood costs and expect them to improve going forward. But then here in Finland, of course, the wood market is now in a sense or has been tested by the fact that you mentioned that the Russian delivery is no longer there for the -- not only Finland but the Nordic area as a whole. And there has been also investments made, which increased the industrial and energy wood consumption.So that's, in a sense, what has been sort of testing the market or the market has to adjust to, of course, the fact that we see construction activity down, affecting wood products industry, then that will have an impact on the wood markets as well. So perhaps we have seen the peak as such. But still, as said, it's kind of moderate in a sense, really perhaps in the short-term that one can expect because again, it takes some time before kind of the new equilibrium is found.

[Operator]

The next question comes from Andrew Jones from UBS.

[Andrew Jones, analyst]

I say congratulations again to Jussi in your retirement. I think I just want to capture some of the dynamics in 4Q. I mean, we've talked quite a bit about Paso and the volume ramp-up and obviously, pulp prices going up. But just on some of the downstream businesses, you've obviously talked about half-and-half declines in cost. I'm wondering how costs evolved in smaller downstream areas between 3Q and 4Q, given obviously pulps rising, I guess, energy costs are picking up again. Can you just talk through the quarter-on-quarter cost trends and what sort of quantum of improvement you're expecting in volumes in some of those businesses and maybe even more obscure areas, but maybe a comment on price?

[Tapio Korpeinen, executive]

Well, if I sort of comment, we don't sort of disclose any quantums or quantitative data, obviously. But first, on your question on costs, like I was saying earlier that already in the beginning of the year, we said that we will -- we are expecting tailwinds, which will sort of add momentum through the year as they have so far done. We didn't see the impact on the bottom line in the first quarter yet. We did see that in the second quarter and now a larger impact in the third quarter.And we would expect still, obviously, tailwinds from variable cost in the fourth quarter as well. Having said that, the sort of positive news is, like we have discussed earlier, that we think we are past the bottom levels as far as pulp and even energy is concerned. So in a sense, that kind of momentum on those particular items on the cost side, as an improvement will be somewhat less, but then that means that there are, let's say, top line on those businesses, Pulp and Energy should and will sort of improve. There is some time lag, though, in the sense that, let's say, for instance, in the case of pulp before, we see the cost benefit in the pulp consuming businesses, there is a bit of a time lag there.

[Jussi Pesonen, executive]

And prices, we don't comment for the future.

[Andrew Jones, analyst]

And on the volume side any feeling about the sort of trend, I mean, you talked about destocking gradually phasing out, but we didn't see much improvement in some things like Raflatac and I guess, comparable still weak. I mean, are you expecting volume improvement in some of these areas in the fourth quarter or stable at a similar sort of low level or could we see even further declines?

[Tapio Korpeinen, executive]

Well, I would say the direction, of course, in the sort of growth businesses like Specialty Papers, Raflatac, also pulp markets. We would expect to continue in a sense to be positive, like I was commenting earlier on the sort of self-adhesive value chain. So that's in the sense the direction of travel there.

[Andrew Jones, analyst]

And Comm Paper?

[Jussi Pesonen, executive]

We do not have a kind of comment to that. It is actually gradually going to the right direction as well.

[Operator]

The next question comes from Cole Hathorn from Jefferies.

[Cole Hathorn, analyst]

Jussi, congratulations. I'd like to ask on the biochemicals facility. Just a follow-up on the infrastructure that you're putting into that facility in Leuna. Are you putting in and building it with the optionality to potentially do further brownfield expansions on that once you've successfully ramped up the initial project, is the first question. And then the second question is on your capital allocation you've [indiscernible] CapEx down next year and your free cash flow if things improve should be [ good ].And you talked earlier this year about potentially allocating capital to buybacks. I'm just wondering how you think about those buybacks? And would you wait until you have line of -- on the refinery investment before you make the decision on buybacks?

[Jussi Pesonen, executive]

Yes. Obviously, it is very clear to us that when we are now actually building the plant in Leuna, there's a lot of activity ongoing. But obviously, we think about how to expand, whether it is in Leuna or whether it is in other location is under consideration. There's a small team that is already thinking about that what will be the molecules, what will be the kind of the opportunities and where. But of course, the focus is very clear. Let's now build the mill and then ramp-up it as efficiently as we possibly can.So yes, there's a kind of consideration how to actually move on, whether it is in Leuna or somewhere else. And that was the -- maybe Tapio takes the second question.

[Tapio Korpeinen, executive]

Yes. Maybe one can sort of answer that question in a sense that, like you said, when we announced or communicated our new dividend policy and in a sense, our kind of view in terms of capital allocation, including distribution to the shareholders and the buybacks that you mentioned, obviously, that was, in a sense, talking about the framework that we see in front of us then, and let's say, we talked about the possible cycle around investments and so on and how this sort of investments in growth, dividend buybacks might fit in there.At the moment, as said, our financial position is very strong. Balance sheet is very strong. Liquidity is very strong. At the same time, obviously, it's clear that now our focus is on performance, getting cash flow and performance up from what we have seen in the previous quarter here. So I think after that, of course, then it's a better time to sort of take a view in terms of what is the timing of CapEx and other than uses of capital. Obviously, we aim to have a steady positive kind of development on dividends. What else there will be?I think that, again, the time to think about that will come when we are seeing also a strong sort of turnaround on financial performance overall.

[Cole Hathorn, analyst]

And then if you allow me a follow-up. Tapio, you mentioned the commentary that if construction markets cover, we see more sawmill activity and you'll get better availability of wood chips hopefully to lower kind of the wood costs to your pulp mills, et cetera. But should we be thinking about anything else in the market like demand for any wood or things like that across your various regions that are going to keep wood costs higher for longer?

[Tapio Korpeinen, executive]

Well, I would say that, let's say, as we talked about, we have a kind of a specific situation here in the Nordics, which I sort of talked about then, well, I also mentioned Uruguay. So there, we have things very well under control. And in Germany, basically, which is kind of the third wood basket for us there, particularly now when we are thinking or looking at ramping up the Leuna facility there, we are tapping into an underutilized wood resource, the broadly beach forests in Germany, which are today largely utilized for firewood, which obviously is a low value use for that wood.So in that sense, we are, as said, in a kind of an underutilized market structurally there as far as the wood supply is concerned.

[Jussi Pesonen, executive]

Ladies and gentlemen, I guess that we are ending our conference call today. Hopefully, this is not my last. It might be my last, I'm not sure yet that whether I participate in January as well but thank you for everything. We will see in the markets. I will be still meeting you all over the place for the next coming 5 months actually. So nice to have you and this was -- this is the end of the call. Thank you.