Stora Enso Oyj (OTCPK:SEOJF) Q3 2022 Earnings Conference Call October 21, 2022 7:00 AM ET
Company Participants
Annica Bresky – President & Chief Executive Officer
Seppo Parvi – Chief Financial Officer & Deputy Chief Executive Officer, Country Manager Finland
Conference Call Participants
Cole Hathorn – Jefferies
Justin Jordan – BNP Paribas
Linus Larsson – SEB
Harri Taittonen – Nordea
Lars Kjellberg – Credit Suisse
Andrew Jones – UBS
Sindre Sørbye – Arctic Asset Management
Henri Parkkinen – OP Financing Group
Annica Bresky
Thank you very much and welcome everyone. Our purpose to do good for people and the planet is more important now than ever before. We need to look after our people, the communities in which we operate in and, of course, the development of the company. And by replacing fossil-based materials with our renewable products, we can leverage on this opportunity for long-term earnings growth and can at the same time contribute positively to mitigating climate change.
This is what drives both our underlying performance and our opportunities for growth. Sustainability is deeply embedded in both our business strategy, our corporate culture and it is supporting our growth. We believe that through innovation and collaboration in our ecosystems, we can grow together with our customers and our products and the CO2 they replace and store can mitigate climate change and realize the renewable future for all.
So on top of this, I’m of course very pleased that we have delivered another strong quarterly performance and that we have executed on our strategic agenda with investments to accelerate and safeguard our long-term growth potential.
I will now just give you an overview. This was the best operational EBIT that we have delivered since the early 2000s. And it is an excellent performance, especially in these times of unprecedented market volatility, inflationary pressure, along with also continued logistical constraints.
We have been able to mitigate those challenges through pricing, flexibility in logistics, as well as energy hedging. And I’m very proud of the organization, so continuing to contribute to our growth journey and for delivering these results.
We continue to invest in growth in renewable packaging, one of our strategic growth areas and the acquisition of the Dutch company, De Jong Packaging. It is one of these actions that we have taken during the quarter. And of course, we are very excited about this investment. It will help us accelerate our growth in renewable packaging and it will also help us expand our European footprint.
We’ve also decided to go ahead with the conversion of an idled paper machine and convert it into a cost-leading high-quality consumer board machine at our existing site in Oulu in Finland. And I will give you a little bit more detail on the strategic initiatives in a short moment. We are investing in growth in Building Solutions and have recently started up a new cross-laminated timber site, which I will also get back to shortly.
Lastly we’re also progressing with the commercialization of the Lignode-based product portfolio with a range of products for different uses. And I will share a few details on what we’re working on there as well.
Now let’s take a closer look at our group performance. Our sales increased by 15% if we exclude paper and this was a 17% increase compared to last year. Operational EBIT increased by nearly 30%, with an EBIT margin close to 18%. And you can see five quarters on this chart. But actually this was the seventh consecutive quarter of growth in operational EBIT. The operational return on capital employed, excluding ForEx, was at 22%, which is well above our target of 13%. So all in all, I’m very pleased with our performance for this quarter.
With a €1 billion enterprise value acquisition of De Jong Packaging Group, we are ready to take the next step and enter a new corrugated packaging market opening up the Western Europe for us. And accelerate our growth in renewable corrugating packaging in countries such as Benelux, Germany and the UK. We have a potential here of €1 billion in sales and this acquisition will nearly double the Packaging Solutions division.
The market as such in corrugated packaging is fragmented. So this local presence that we have there is key for the sustainable growth that we are targeting. And we find that this is a perfect strategic match for us. The De Jong Packaging Group is active in attractive end-use segments that complement our own product setup in areas such as fresh produce, which in practice is trays for fruit and vegetables industry, fast-moving consumer goods and e-commerce.
The company has demonstrated a strong growth track record and it’s one of the largest corrugated packaging producers in the Benelux area. We expect to close the transaction beginning of 2023 and we also expect it to be EPS accretive for the first year — from the first year. This is a big opportunity for us for both driving a strong commercial, but also cost integration benefits over kind of the joint business in current Packaging Solutions and the potential acquisition of the De Jong Packaging Group. We will also be able if we find that the feasibility study in Langerbrugge site that’s ongoing right now if that is decided upon, there will also be additional synergies following that potential conversion.
Moving on now to how we also accelerate organic growth. We have decided that we can see through the growth in the markets that the plastics are being more and more replaced by renewable packaging that we also want to continue growing our footprint with investing in our Oulu site. We’re investing €1 billion in converting the second idle paper machine in Finland. And this investment will be taken from — will take from this year up until the full ramp-up and full production starting up in 2025.
After successfully converting the first paper line in Oulu to kraftliner for containerboard, we see an opportunity here to capture additional growth by converting the second paper line into consumer board for folding boxboard and for coated unbleached kraft. And the total capacity of this conversion is 750,000 tonnes per year.
The expected annual sales at full capacity is approximately €800 million. And we will use now existing infrastructure, which significantly reduces the risks of conversion and the investment costs and this is compared to a greenfield expansion. And of course, all the experience that the local teams have — in having done the first successful conversion.
On the marketplace this will put us in a very strong position to drive revenue growth and build market share in key segments for instance in frozen and chilled food and beverages mainly in the markets of Europe and North America where we see the biggest potential for long-term growth. So of course, this is a great opportunity for us going forward.
I’m also happy to say that we continue our journey to ramp up the growth in Building Solutions and have recently inaugurated our latest site in Czech Republic for cross laminated timber production. With this new site, Stora Enso’s production capacity will increase and grow substantially to meet the increasing demand for both sustainable, but also cost efficient and renewable building materials. We’ve already delivered 15,000 projects in this area. So this will continue to help us in meeting the growing demand on the market.
It will also accelerate our position as a global provider of pre-fabricated modular building segment. And we target annual sales of €70 million with an investment of approximately €80 million. The annual production capacity will be 120,000 cubic meters and this will increase our total capacity to 410,000 cubes. The CLT site in Zdirec in Czech Republic is very well located in Stora Enso’s European market and the integration with the existing sawmill also bring of course additional benefits. For example, in terms of raw material, energy supply and logistics.
Lastly, our third area of growth, we are also progressing with the commercialization of lignin-based product portfolio ramping up on step stone applications, for instance, in the end uses of glue and binders. And here we see growth opportunities and innovation developments, and we have a lot of collaborations in the areas of furniture and construction, but also ongoing customer trials with binders in asphalt.
We’re also partnering to progress the commercialization of Lignode, which are further processed products for green batteries. We have here ongoing trials for renewable and not material for batteries. And we target here end users such as tools and other handheld applications energy storage systems and EV vehicles.
The ongoing customer trials have the target of customizing the Lignode into the different performance specifications customized for these different end uses. And as I’ve said, we have several partnerships ongoing. We have externally communicated the supplier and customer relationship with Northvolt, but also we have signed a letter of intent with Beyonder, a Norwegian energy storage technology company to deliver Lignode for their development of bio-based batteries.
A few words now on the divestment process for the paper sites. We continue with the sales process of four of our five paper sites. And as you have seen, we have divested Maxau paper site and Nymölla paper site.
The ongoing ones for the last two [indiscernible] and Sunila are proceeding, and this will decrease the Stora’s annual group sales by fully divested by approximately €540 million, and reduce the annual paper capacity by just over one million tonnes for the site of Maxau and Nymölla. And the total enterprise value for the divestment of those two sites was €360 million.
So we will continue to operate both sites until the expected closing of the transaction is finalized early next year. And as I said, the divestment process continues for the remaining two sites, but here we have no set deadline.
And now if we take a look at an overview of our financial targets we can see that we exceed all long-term group-level targets, which is of course very good place to be. Both packaging materials and biomaterials were well above their respective return on operating capital targets.
For Packaging Solutions, the target has changed from 25% to 15% and this is due to the acquisition of De Jong Packaging changes in the business portfolio with the divestment of the Russian entities and future growth ambitions with new businesses.
Forest was just below. Its operational return on operating capital target of 3.5 billion, but it landed very closely on 3.4% and the Paper division target of cash flow after investing activities to sales ratio improved to 6% from a negative level last — a year ago. And this was due to improved profitability and good working capital efficiency.
And with that, I hand over to you Seppo to explain a little bit further how the profitability has been built-up for the quarter.
Seppo Parvi
Thank you, Annica. And I start by looking at the bridge from Q3 last year to the Q3 that we have just reported today. The attractively mitigated increased variable costs to safeguard profitability.
Key action there has been to work on the sales prices. And they have been up now €420 million year-on-year. Additionally, net foreign exchange has helped by about some €61 million. That is mainly coming from US dollar euro exchange rate changes moving in our favor.
Variable costs have been up about €116 million. And staying on top of that variable cost like energy and logistics a bit over €100 million in chemicals and fillers some €75 million. Then there’s been some small positives on depreciation associated and closed units.
Then let’s move to energy, which is the hot topic today and reducing cost exposure has been one of the key actions this year. We are very happy that we have very high energy sales sufficiency when it comes to Stora Enso. If you look at the total energy, our sales substance rate is 80% excluding paper and taking into account focused towards the three impact after it has been started up. And when it comes to electricity, we have reached 97%.
This is a strength of Stora Enso and gives us competitive advantage compared to our many competitors for instance in Central Europe. Then let’s look at the divisions and I start at Packaging Materials where we had strong quarter, driven by improved containerboard profitability. Sales were up 23% year-on-year, driven by higher port prices.
We could see further weakening demand in containerboard as was also mentioned — commented in Q2 report. We have stable demand in consumer board with strong order book, but there is pressure on margins due to increasing variable costs before we are able to increase selling prices and we are implementing those at the moment.
Operational EBIT was up 19% year-on-year reaching €181 million. This was driven by improved containerboard profitability; higher board port prices will offset high — sorry higher board prices offset higher variable costs. And operational return on capital was at 21.3% level compared to long-term target of 20%.
Then I look at the Packaging Solutions. Year-on-year profitability was impacted by the exit from the Russian operations and investments in new businesses as well as lower demand. Sales were flat year-on-year. Higher prices in European corrugated packaging and growth in the new businesses was visible here. And divestments of Russian units and lower deliveries in Europe had a negative effect on the sales line.
Operational EBIT was down €7 million year-on-year affected by exit from Russia as well as higher ramp-up costs in the new businesses. Our return on capital was at 1.7%.
Then let’s move to Biomaterials where we had all-time high sales and profitability supported by continued strong market demand. Sales were up 33% year-on-year and this was an all-time high quarter and driven by all-time high price levels and strong US dollar. Lower wood availability and logistical constraints had an effect in the result.
Operational EBIT was up 67% reaching €197 million for the quarter and this is all-time high result. Higher price have positive foreign exchange rates fully offset higher variable costs that we are facing in the business and operating return on capital at 28% clearly above the long-term target of 15%.
In Wood Products, we had record high third quarter sales. They were up 3% year-over-year reaching €520 million, driven mainly by higher sales prices. So, good market continued to weaken as seen already in the Q2 and good demand in Building Solutions continued. Operational EBIT was down €53 million year-on-year at €70 million. This was affected by increased costs mainly for logistics, electricity, and raw materials.
Return on capital at 38.4%, clearly above the long-term target of 20%. In the Forest division, stable financial results continued with strong good demand. Sales were up 6% year-on-year at €581 million.
Higher wood prices were driven by strong demand during the quarter and discontinued Russian good imports were largely mitigated by flexible use of own forest [indiscernible] network in the pulp area. This is a strength of Stora Enso.
Operational EBIT continued at a stable level reflecting resilient forest performance, an operational return of capital at 3.4% for the quarter. Forest asset fair valuation remained stable, at €8.1 billion. It was slightly decreased, mainly due to foreign exchange rates having an effect there. Fair value is equal to about €10.3 per share.
An important note here, also that we are 30% sufficient of wood supply, taking into account our own forest assets and long-term agreements, with the suppliers. Then Paper division, the business turnaround after restructuring is clearly visible. Sales were up 7% year-on-year and higher sales prices, in the retained business after closure of Veitsiluoto and Kvarnsveden paper sites in Q3, 2021 was very visible.
But quarter notice that sales on retail businesses increased by 52%. Operational EBIT was up €80 million year-on-year, from a loss of about €30 million to a gain of €49 million. Higher prices fully mitigated, higher variable costs that we have been facing in the business and the structural changes that we have made have reduced fixed costs and volumes. And cash flow to sales ratio of investments was at 6% just slightly below the targeted level of 7%.
Now back to you an Annica, on your guidance please.
Annica Bresky
Thank you, Seppo. And if we look at the annual guidance we reiterate, that we are going to be above operational EBIT levels, compared to last year. And higher than €1.528 billion. And then a few words now, if we take the outlook for the fourth quarter. As you’ve seen, we entered the fourth quarter, with a good profitability and good margins.
And taking a look now, division by division, we can see that ahead of us that Packaging Materials division, is expected to have an impact on profitability and deteriorated profitability due to primarily maintenance — planned maintenance, we have maintenance at four of our sites including, the two largest ones.
We also see escalated cost inflation in energy, impacting going forward in the quarter. Of course, our demand in the areas of consumer board is strong. We have a strong order book and we are fully booked. But as you might be aware, the contracts in the consumer board business are typically fixed on long term.
And with the escalation that we have seen now on energy costs primarily, it takes some time before we can fully mitigate them by price increases, in the consumer board area. And this means that we, of course, renegotiate every time a contract expires, but there is a lag time before we can fully mitigate.
Last quarter, we talked about the normalization of containerboard and that continues. Contracts in containerboard, are more short term in the way of being set up. And hence, that gives us flexibility for renegotiations more often. So here we are able to more directly and in a shorter time frame, mitigate cost escalations. Demand for corrugated packaging, is expected to stay stable, which is very good. And also here we are able to mitigate inflationary pressures in a good way.
Moving over to pulp. We can see some early signs of normalization in pricing from the recent extremely high levels. But overall, I would say, that pulp demand is still very strong. We see that we expect the demand to be flat. I cannot see any significant increases in global market pulp inventories, which is normally a sign of kind of imbalanced supply/demand situation. So even if we see some slight signs of softening, I would just say, that it is still a very good prognosis for the coming quarter.
In wood products, there is a continued market decline in traditional sawn goods. We could see that already in quarter two. We have a good order book for Building Solutions, but we expect here also the demand to weaken going forward. And this is of course due to the uncertainty among construction developers and a softer construction market in general.
We have a possibility here to export to other markets. We are a global supplier in the US, in Japan and Australia. So of course, we adapt our mix where we see we have the best opportunities. In Forest Division, wood demand is expected to stay on par with the previous quarter. And we can see that if we look at the different kind of wood assortment that there is a strong demand for pulpwood, which is of course reflected as a result of the continued good demand in pulp production. But on the sawlog side, it’s lower levels, of course due to the weakened sawn wood market.
In the Paper Division, we have a solid demand outlook. It’s supported by seasonality but also a good order book. This is also a division just as packaging materials that is impacted by higher energy costs. And also in Paper Division we have maintenance work for the coming quarter.
I would also like to highlight, as Seppo said, that we have high energy self-sufficiency and the impacts from higher energy costs in packaging materials and paper will be partly recognized as income in in segment other. This is due to Stora Enso’s ownership of the energy company Pohjolan Voima.
Moving now over to our Capital Markets Day, I would just like to give you an overview of our 2030 ambitions. And for those of you who participated in September, the highlights include for instance an increase in group sales by 30% excluding inflation versus 2021. We also target 15% operational EBIT margin over the cycle.
For the growth businesses, we see that packaging through the actions that we are taking strategically. We represent more than 60% of group sales. Currently, we have – it’s about 45%, more than 40% of wood product sales will come from Building Solutions. And we also see that we will increase or have an ambition to increase our operational EBITDA in wood products by 75% over the cycle.
We target new revenue streams of €1 billion from Biomaterials innovation and we also have the ambition to develop more energy production, wind power generation from our group’s own forest land to a level of five to 10 terawatt hours.
Through the actions that we take by divesting paper but also increasing packaging, we also see that our market pulp exposure will be significantly reduced. And through our actions of divestment of paper, this will lead automatically to a less cyclicality in earnings. We estimate that it will be reduced by half compared to the years 2016 to 2021. So all-in-all, this is what we see that with the strategic agenda that we’re driving what Stora Enso will look like in 2030.
So to summarize, before I let you in to ask all the questions, we have delivered a strong quarterly performance both financially and strategically. We have been executing on our strategic initiatives for long-term growth in our key strategic areas of Renewable Packaging, Building Solutions and Biomaterials Innovations.
The acquisition of De Jong Packaging Group will advance our strategic direction and accelerate our revenue growth. We will build market share in renewable packaging in Western Europe and open up new markets for us there. We are accelerating growth also in our packaging by investing in conversion for growing end-use segments in the food section through our investment project in outlook. And we are continuously positioning ourselves to leverage and accelerate our growth in renewable materials. And I believe that Stora Enso is gradually becoming a stronger and better positioned company for the future.
And with that, I’ll let you in for Q&A session.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Cole Hathorn from Jefferies. Please go ahead. Your line is now open.
Cole Hathorn
Afternoon. Thanks for taking my question. Just two from my side. Firstly, on – you’re calling out your ownership in PVO and the energy stake. Could you give us an idea of what that means? How much of a – how much access do you have to the Olkiluoto 3 nuclear power plant? Is it about one terawatt hour or roughly your share?
And then if we think about long term, you called out your ambitions to 2030, 30% sales growth, 15% EBIT margin. You’re looking at kind of €2 of EBIT. Are you kind of comfortable over that time frame where consensus is next year €1.3 billion going up there to a 6% EBIT CAGR, is that how you think about the business from kind of next year’s base going up to 2030 offering kind of a 6% per annum EBIT growth. Is that the right metric to be thinking about for a long-term view? Thank you.
Seppo Parvi
If I start by commenting on our ownership in Pohjolan Voima Oyj Olkiluoto 3 and then handing over to Annica to take the rest of your question. So, we own 15.6% of PVO, which gives us indirectly then about 8.9% of Olkiluoto all three nuclear reactors. And that is also about this 9% to Olkiluoto 3 out of this 1,600. Annica?
Annica Bresky
And if we look at the strategic agenda, we see that the pipeline of projects that we have announced right now and the opportunities that we have will get us to the level of 15% EBIT over the cycle, and then growing our business as I outlined. The divestment of paper of course will make sure that we increase the resilience of the company, also in kind of a less strong macroeconomic environment. And I believe that, with the actions that we have in our portfolio that we will be able to live up to these ambitions within this time frame as you stated.
Operator
Thank you. Our next question comes from the line of Justin Jordan from BNP Exane. Please go ahead. Your line is now open.
Justin Jordan
Good afternoon, everyone. I’ve got two different questions. Firstly, on slide 20 your very detailed outlook guidance. Thank you so much for the details here. I just want to drill down a little bit specifically on consumer board. Clearly, pre-set demand is very stable, which is reassuring. But just on your comment on the sort of time line between cost inflation and recouping that through price rises. Are you more cautious on your pricing power going forward relative to history here, or should we think about this as just a time lag issue?
And then secondly, just on clearly, the news on the extra billion of CapEx, I guess, really a question for Seppo. How should we think about the phasing of that in 2023 to 2025 should the bulk of the CapEx be in 2023 and 2024 with the residual small amount in 2025. And then just one final thing to Seppo. can you just help us understand the €63 million of interest charge in Q3. It’s a little bit higher than a normal quarter? Are there any one-offs in there, or is this just symptomatic of rising interest rates? Thank you.
Annica Bresky
Thank you for the questions. I can start then with the Consumer Board. And you’re right it is a timing issue, because we have a strong demand. We see that, the end users in consumer board in liquid and in food packaging are end users that are resilient and we have full order books. So, this has to do with the contractual structure of the business as such.
The contracts range from one year to three years. And of course, when we have had this kind of very short-term high shocks of energy increased prices, it is difficult to compensate immediately. But as the contracts expire and we have some contracts in Q4 expiring and moving on in Q1 and so on, we of course take the necessary discussions with the customers. So it’s not a question of pricing power. We are one of the largest players here on the market and have a strong market share. So, it’s more a timing issue.
Seppo Parvi
And then, when it comes to capital expenditures relating to over [indiscernible] billion, so you are right that, ’23 — 2024 are the heavy years and CapEx is then say from €400 million to €500 million a year. And then there are some left towards them for the years after depending on the payment scope and some small down payments this year depending on, when we signed the contracts now that we have made the decision of the investment. Then your question on financial costs, yes, it includes — about €23 million of write-off of Russian-related loan receivables related to our exit from Russia.
Justin Jordan
Great. Thank you, Seppo. Thank you, Annica.
Operator
Thank you. Our next question comes from the line of Linus Larsson of SEB. Please go ahead. Your line is now open.
Linus Larsson
Thank you, very much, and good day to everyone. A question on your maintenance guidance, say on a group level, you will have less maintenance impact €25 million Q4 on Q3, but you also say that, you will have higher maintenance impact sequentially in the Packaging Materials division. So, do I get my math right here saying that, it’s probably in by materials that you see the decline — the corresponding decline in CapEx Q4 — sorry maintenance in Q4 on Q3, and does that implicitly suggests that you’re expecting higher biomaterials profits Q4 on Q3? Thank you.
Seppo Parvi
Well, I don’t comment profitability by division as such. But yes, you are right that, this means that dominant with the maintenance cost will be now in packaging materials in Q4.
Linus Larsson
And can you also maybe in that context explain the cost overrun in the third quarter. Where was that in which division or even which mill?
Seppo Parvi
Well, we had some boiler issues in paper division and that’s mainly that is coming from.
Linus Larsson
Okay. So, how big were the maintenance costs in paper in the third quarter?
Seppo Parvi
We don’t comment more specifically maintenance cost. That was the main reason.
Linus Larsson
Okay. Thank you, very much. That’s helpful.
Operator
Thank you. Our next question comes from the line of Harri Taittonen from Nordea. Please go ahead. Your line is now open.
Harri Taittonen
Yes. Hi, good afternoon. Just drilling a little bit on the cash use outlook and going through my old nose seeing that at least you indicated earlier that maintenance CapEx is somewhere around €200 million, €250 million. And I’m just wondering, how valid that is still after the exits and changes in the asset base. And then, if we think of that timing of the investment if it’s going to be something like as you say 400, 500 a year. I mean, is there sort of — I know that you don’t want to guide CapEx for next year, but still conceptually, will you reserve some budget for other potential projects in addition to the maintenance and all of that we should be aware of?
Seppo Parvi
Well, first of all, the maintenance CapEx, yes, the €200 million, €250 million is correct look at the history. It has been around roughly 2% of the turnover per year as a rule of fibre [ph] to estimate if you wish. And indeed, no change in that. Obviously, because of cost inflation, there are some — there has been somewhat up temporary now and we have to see our cost inflation moves going forward.
When it comes to CapEx guidance for next year in connection to Q4 reporting. So we will then tell more there.
But obviously, depending on the opportunities, we have a strong balance sheet, net debt-to-EBITDA at 0.8 and getting stronger with good cash flow. So we have space in the balance sheet. So depending on the opportunities and what we see we will then separately at issues around traditional CapEx if any for other projects.
Harri Taittonen
Right. Okay. So basically, we are looking at — so the €200 million to €250 million plus €400 million to €500 million and then plus whatever then the additional…
Seppo Parvi
Yes. Typically happen on top of the maintenance at development projects adding some capital is a next development projects that we are running on top of this kind of major projects like Oulu conversion now.
Harri Taittonen
Of course. Okay. Thank you.
Seppo Parvi
Thank you.
Operator
Thank you. Our next question comes from the line of Lars Kjellberg from Credit Suisse. Please go ahead. Your line is now open.
Lars Kjellberg
Thank you. I just wanted to talk a bit about cost inflation. I mean energy isn’t necessarily a new topic why do we specifically call that out now? The other component that you mentioned was also about wood availability, and we’ve seen some quite material moves in wood costs, especially pulpwood, where it seems as if the energy sector is now competing for the same wood source. So, if you can shed any light on what are the new buckets of cost inflation? And how we should think about wood costs going forward? And when these market prices — higher market prices will start to come through in your P&L given your inventory in such outstanding timber?
Then if I may just on Oulu, can you elaborate a bit what you’re doing? I mean this is a conversion yet we could spending €1 billion. So what buckets we’re spending in and also the time frame, which suggest it’s a seriously major project as opposed to simple conversion. So if you don’t mind just sharing a few details what you’re doing and why the cost is so high and taking two years to do?
Annica Bresky
Yes, I can start with Oulu and then, you Seppo might go into the cost questions on wood and energy but, compared to the first conversion that was just a machine conversion. What we’re doing now is that we’re also building a BCTMP top line to kind of accommodate for the 750,000 tonnes of production. So it’s double the size compared to what we did before. And then it’s also making the full site kind of a state-of-the-art mega site. It will lead to 1,350,000 tonnes capacity.
So this is, of course, taking the synergies of the infrastructure that is there, compared to a greenfield, such a machine of that size would require more than double the investment cost. So, considering that this is kind of a very investment tonne per cost-efficient investment. We will have a new pulp line as I said, but also do energy solution with a boiler, and we will make sure to have wastewater treatment that is state-of-the-art for the environmental perspective and reduce CO2 for the full site. So that is the difference. And then, if you Seppo will comment on energy and wood?
Seppo Parvi
Yes. First of all about the wood. Of course, you have to remember that we are a big forest on ourselves, and we have a pretty high self-sufficient with the wood sourcing, wood suppliers such at 30%, and having the forest in Sweden and some power plantations in Latin America, as well as our ownership in [indiscernible] in Finland.
And so they are also from our strong supply network in the politics. I would think that it’s fair to say that thickest wood cost inflation starts to be over, and that should be helpful in that sense. So I think we have been able to mitigate quite well the effect of the Russian wood of — missing the Russian exports compared to past that we used to have in Finland.
When it comes to cost effect of energy chemicals, wood and other I think for the FX in the input material. I think we have been shown during the past quarters in Q3 as well that we are able to mitigate there by managing our selling prices. We’re, obviously, working on SAPs [ph] as well in order to optimize the cost structure and that we also to mitigate the cost pressures that there are.
Annica Bresky
And I can also say the reason why — you asked specifically why we mentioned the energy cost right now is to make it clear that some divisions like packaging material and paper, they are bigger consumers of energy. And if we look at packaging materials in the next quarter, we want to help you and guide you in terms of that consumer board business as we said takes more time in order to fully mitigate for that cost inflation that has been in energy side. And just to remind you also that we, of course, the divisions they pay market pricing for the energy and we recognize the revenue in the segment Other as the group.
Lars Kjellberg
Just one clarifying point if I may just on the wood cost. We have cost in from official sources that wood prices both in Finland and particularly in Sweden are rising quite rapidly. So my question was really — and that’s to when you buy wood in the marketplace. When should we start to see that? In the past you talked about three to six months before we actually start to see that through your P&L. Is that still the same inventory you have at standing timber that it will take a bit of time for these market prices to come through in your respective paper and pulp divisions?
Seppo Parvi
Yeah, that’s — there is some something about the cycle there, yes, three to six months is typical time lag there.
Lars Kjellberg
Thank you.
Operator
Thank you. Our next question comes from the line of Andrew Jones from UBS. Please go ahead. Your line is now open.
Andrew Jones
Hi. Thanks for taking the question. I just wanted to ask about the FBB market. I mean, you’re clearly committed to adding large amounts of capacity. Net Board have also been talking about adding 800,000 tons in a project I guess long dated, but they clearly have designs of the market. And from reading some reports it sounds like there’s a large amount of capacity being added in China in the next year.
I’m wondering firstly, if you see any threats to your markets from that additional capacity coming out of China, or will that be absorbed within the region? And given the additions from your peers and in Asia, will the market be able to absorb that additional capacity? And how do you see that playing out? What are your assumptions on growth rates? Do you see it taking share of rival products? I mean, could you just frame how that is going to going to be absorbed by the market? Thank you.
Annica Bresky
Yeah. I can start with China. First of all, the growth in China for these grades is 5% to 6% annually. It’s a big market, but it’s also local market. So the capacity increases that you hear in China is predominantly for the domestic market serving China. Also the cost of folding box board produced in China is higher because many of the units or most of the units are unintegrated. So they buy market pulp on market price. So the cost from folding box board — producing folding box board in China is much higher than it is producing in Europe and often doesn’t trouble well, if I may put it like that.
So if we look at kind of the size of this market of folding box board and also the CUK market which is also growing very healthily. It’s expected to grow with more than 11 million tonnes globally and it will approach 57 million tonnes until 2030. And the potential that we see here also with plastic substitution is additional to this. So we do not see an issue for us as building one of if not Europe’s most cost-efficient site in Oulu to be able to capture this opportunity and continue growing here. These are the segments that are growing fastest and have good margins and having a cost-leading position is something that we’re capturing with this investment. So no, I’m not concerned about the Chinese capacity increases.
Andrew Jones
And sorry, just to clarify about 57 million tonnes you mentioned. Are you talking about just FBB, or are you talking about FBB…
Annica Bresky
The consumer board market.
Andrew Jones
Consumer market. Yeah.
Annica Bresky
And this machine is going to be very flexible. So we’re going to be able to produce line solid box board and CUK and it will also help us to restructure the product portfolio within the other assets of packaging materials. So streamlining the production in the other units of packaging material. So it will bring up also production efficiencies for the rest of the sites.
Andrew Jones
No, that make sense. Okay. Thank you.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Sindre Sørbye from Arctic Asset Management. Please go ahead. Your line is now open.
Sindre Sørbye
Yes. Hi, good afternoon. Thanks for taking my question. Just regarding your somewhat cautious outlook for packaging materials. Looking at historical figure Q4 is always significantly lower in terms of EBIT than third quarter, is it just the let’s say a regular kind of seasonality we’re talking about here? And as a follow-up to that, can you give us an indication of how large proportion of your liquid packaging board contracts that are up for renewal for 2023 onwards?
Annica Bresky
No, I will not comment on the contracts, how much percentage that is. For packaging materials, you’re right there is always a seasonality. But this year also on top of that we have both the big sites of [indiscernible] as maintenance sites.
So on top of that as I said, the very rapid escalation of energy prices which of course takes some time to mitigate. But all in all you’re right there is always a seasonality in Q4. And this year major maintenance planned shuts are happening in Q4. Some other years it might vary between Q3 and Q4.
Sindre Sørbye
Okay. Thank you.
Annica Bresky
Yeah.
Operator
Thank you. Our next question comes from the line of Henri Parkkinen from OP Financing Group. Please go ahead. Your line is now open.
Henri Parkkinen
Yes. Hi. Good afternoon. It’s Henri Parkkinen from OP Financing Group. Just coming back to the Olkiluoto 3 and referring your presentation and this page number 12 where you presented your sales efficiency without paper and including Olkiluoto 3 and just naming about this electricity.
What is the situation if you compare it in Scandinavia? And on the other hand in Continental Europe, I assume that self sufficiency in Electricity is a little bit different on those two areas? That’s the first part of my question.
Annica Bresky
Yes. I can comment on that. Of course our position with high self-sufficiency and good hedging and is a competitive advantage for us compared to many Central European or Southern European players who are suffering.
Also of course the sites that, are very competitive and are in good cost quartiles compared to some other sites that might have been converted also. Old paper sites converted into packaging grades and now facing big challenges due to the escalated cost situation. So I expect going forward that we will also see this effect on the market – on the players in central Europe.
Henri Parkkinen
Okay. And my second part of my question is, I don’t know if you want to comment this but have you already made some forward hedges regarding your expected volumes from Olkiluoto 3?
Seppo Parvi
We don’t comment more basically on the hedging but you have to remember that we are not 100% self-sufficient voices in Finland. So we will be able to reduce our exposure. As you can see also on the graph on page 12,…
Henri Parkkinen
Yes.
Seppo Parvi
… we can reduce our exposure to market prices this additional volume.
Henri Parkkinen
Okay. That’s really helpful. Okay. Thanks.
Seppo Parvi
Thank you.
Operator
Thank you. There are no further questions at this time. So I hand the word back to Annica Bresky. Please go ahead.
Annica Bresky
Thank you everyone for a lot of good questions. And I wish you all a nice weekend. And see you hopefully in quarter four.
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