UPM-Kymmene Oyj (OTCPK:UPMKF) Q3 2022 Earnings Conference Call October 25, 2022 6:15 AM ET
Company Participants
Jussi Pesonen – President and CEO
Tapio Korpeinen – EVP and CFO
Conference Call Participants
Justin Jordan – Exane BNP Paribas
Lars Kjellberg – Credit Suisse
Robin Santavirta – Carnegie
Linus Larsson – SEB Enskilda Equities
Harri Taittonen – Nordea
Cole Hathorn – Jefferies
Jussi Pesonen
Dear audience, welcome to UPM’s Quarter Three 2022 Result Webcast. My name is Jussi Pesonen. I am the CEO of UPM. And I am here with our CFO, Tapio Korpeinen.
Tapio Korpeinen
Hello to everyone.
Jussi Pesonen
Today we do have a three main topics to be discussed. First in UPM we made a super good quarter. We reached all time high quarterly result in Q3. The strength of our operating model was on full display. So operating model in my opinion is one of the most important factor.
As we all know, we made a record quarterly result in five businesses communication; paper business, specialty paper, business Raflatac, energy, and biofuels. Fibers and plywood businesses achieved strong result and inside of fibers pulp made also a record quarter. All in all, Q3 was a great success considering the high uncertainty and volatile environment that we had.
Secondly, Q3 was clearly characterized by the energy crisis in Europe. Energy crisis and the volatility in the markets reached unprecedented levels. Market prices, pricing are crucially important both for the energy system as well as whole and for steering of UPM electricity generation and consumption. The optimization is significant source of the value creation, both in our energy business and in our energy consuming businesses.
Ladies and gentlemen, finally, our transformer the growth projects continue to make good progress. The Paso de los Toros pulp mill will grow our pulp business by more than 50% with very competitive cost level. Olkiluoto 3 nuclear power plant will grow our energy business by nearly 50% offering much needed Co2 free energy to the markets. And then Leuna biochemicals refinery will open a new sustainable growth business for UPM. In Raflatac, on top of all this, we completed the acquisition of AMC to accelerate growth and expand the product portfolio.
Let’s start with the Q3 results. Q3 was a first quarter this year with the normal production in our businesses, no strike, no significant maintenance activity. So our delivery volumes were back on normal, and our operational efficiency was good and on a very good level. The demand continued in most of our businesses, and prices more than offset the impact of continued increase of variable costs. As a result, business performance was strong in all businesses, and five businesses achieved record quarterly result as already stated.
Our Q3 sales grew by 36% from that of last year, and our comparable EBIT grew by 84% and reached the margin of almost 23%. But ladies and gentlemen, at this point, I will hand over to Tapio for more analysis of results and then I will come back. Tapio please.
Tapio Korpeinen
Alright, thanks, Jussi. So here on the left hand side, you can see the EBIT bids third quarter compared to last year’s third quarter. And obviously, as you can see, here, sales prices had the biggest positive impact prices increased in all business areas and really the biggest impact was in communication papers. Variable costs increased significantly as well, but across all input cost categories, but the price impact from the higher sales prices was clearly offsetting or more than offsetting that. However, that said this impact was larger than the negative impact of higher variable costs.
On the right hand side of the slide, you can see the EBIT compared with the previous quarter, the second quarter of this year. And here the biggest earnings driver was the normalization of our delivery volumes. In the second quarter, volumes were still impacted by the strike in Finland, by the lower inventories after the strike and large maintenance shutdowns that too far finished pulp mills. In the third quarter, these factors no longer held back our performance. Sales prices and variable cost increase from the second quarter and you can see also a decrease in fixed costs from the second quarter which is again mainly coming to from the maintenance shutdowns that we had in the second quarter compared to lower maintenance activity in the third quarter.
Here, you can see the comparable EBIT development by business area. And as you can see, we achieved very strong performance simultaneously in the upstream businesses like fibers and energy as well as the downstream businesses like communication papers, specialty papers and off the dock. So all businesses performed well, both upstream and downstream in the value chain. Energy achieved record earnings benefiting from high electricity market prices, also benefiting from the optimized hydropower generation in the markets that were quite volatile. And also the first notable generation volumes from the Olkiluoto 3 nuclear power plant.
Fibers achieved an excellent quarterly result with continued solid demand and pulp prices that stayed high. Our timber business however, was affected by a visible slowdown in the construction, markets and end users. Communication papers has faced the radical rise in input costs, particularly in energy as well as in fiber costs. But these input cost increases have been successfully offset by increases in sales prices.
In this highly volatile and uncertain business environment, the business has been very determined in adopting a more agile operating mode. There are no long term price contracts in place any longer and the business is very active in optimizing its production vis-à-vis changes in the energy markets. Specialty papers delivered an all time high quarterly results despite historically high priced raw materials. The market for release liners and packaging papers remained very strong. Asian fine paper markets continue to be challenging. But despite that, all time high in quarterly results.
Favorable market conditions continued for Raflatac. Customer demand for labor remained good and the business performance was extremely good reaching again record quarterly result for the third quarter. Plywood had a good quarter despite slowing demand in construction and uses. Sales prices did increase for most products and then as part of our other operations reporting within that, biofuels achieved a record production and profitability in the strong markets for renewable biofuels. Our strategy is based on proprietary technology and UPM integrated feed stocks, which this proprietary technology enables to support high sustainable renewable fuels. This strategy is now delivering results.
As Jussi said this year in whole and the third quarter also in particular, have been characterized by the energy crisis in Europe. Even though electricity prices and price volatility have increased significantly still the markets as such, continued to function well. On the electricity markets, power generation and consumption have to be always on balance as you cannot store electricity in large amounts. There are large variations in the national or regional electricity needs between different hours of a day, between days and between seasons. Also on the supply side, wind power especially renewables wind and solar in general represent a big variable and unpredictable component for the energy balance.
So to maintain that balance in the system at all times, market price signals are crucially important. UPM is an active player on the electricity market. We continuously optimize our electricity consumption towards hours when the prices and society’s energy needs are at the lowest. And also on the other side, we increase our hydropower generation when energy needs are the highest. So, consequently, we help to balance the electricity market, particularly in Finland.
On this slide you can see how you UPM’s hydropower optimization on paper mill production optimization work in practice. The examples shown are for the average day during the month of August this year. As you can see, the variation of our hydropower generation and paper mill electricity consumption within a day can be quite significant. This is beneficial for the electricity system, helping to maintain the balance and to avoid worst price peaks. And at the same time, it provides an economic benefit for us both in the energy business and in communication papers.
Every now and then something unexpected happens and further adjustment is needed on the electricity market to maintain balance. And here we have an example from the eighth of September this year. At that point in time the wind forecast was incorrect and wind power output turned out to be practically zero. On the same day, August the 3, few hours late and ramping up its output in the testing schedule, the electricity system needed either additional generation or less consumption or obviously both. To provide the needed up regulating volume the market price signals are again crucially important in these kinds of situations. In this case, or in this kind of cases, the Finnish transmission system operator, Fingrid it does not have this kind of reserve capacity to meet the total need or demand for up regulation as an example in this instance.
So therefore, the market participants provide the regulating volume which Fingrid asks for based on market prices. UPM is active on the regulating market both with its hydropower power and its paper mills. So like in this instance, we were able to at the same time, increase our output from hydro but then also to reduce our consumption in our paper mills.
Again, this activity is both beneficial for the system and provides an economic benefit for us. So these two examples have, I would say three main points. First of all, market signals, market price signals are crucial for the functioning of the electricity markets on a daily basis, on an hourly basis very short term for the next 24 hours. UPM secondly is very active in optimizing its electricity generation and consumption again based on market prices. This helps balance the market and thus provide us with value creation opportunities. And then the third point being that in an energy intensive business such as communication papers, being able to adjust production based on energy market prices is a clear competitive advantage.
Let’s move to cash flow. As we discussed in the second quarter released and presentation also, the third quarter operating cash flow for UPM was affected still by cash outflow related to energy hedges. The rise and volatility in energy futures prices across the forward curve continued in the third quarter. Futures prices as you can see on this slide, peaked in August and moderated thereafter ending the third quarter still on a higher level than at the end of Q2. This resulted in cash outflow of €681 million related to the futures contracts. This cash flow taking place during the third quarter or a total of €1,783,000,000 in the first nine months of 2022.
As we discussed three months ago, this cash flow will later be offset by a similar or larger cash inflow either from the energy hedges if the futures prices come down or from the electricity generation and sales at the time when these mature and the electricity is produced. In the meantime, it does tie up liquidity and to ensure strong liquidity in all circumstances we signed committed credit facilities totaling €4.3 billion during the third quarter. All in all, the exceptional energy market situation does indicate strong earnings potential for UPM energy.
Still continuing on cash flow. This slide shows our cash flow during the first nine months of the year. Operating cash flow was €1,068,000,000 negative year-to-date. The main reason for this and the only unusual item is the cash flow related to the energy hedges. During the first nine months this cash flow of the energy hedges totaled nearly €1.8 billion and as I just described, this will later be offset by a similar or larger positive cash flow. Working capital increased by about €600 million year-to-date if we exclude the items related to the energy hedges. This mainly comes from inflation, everything being more valuable, value of receivables, inventories being higher.
Below operating cash flow, you can see that the investments are taking place at the expected rate. We have guided for investments to total 1.5 billion in the full year of 2022. We expect the Paso de los Toros pulp mill and the Olkiluoto 3 nuclear power plant to start contributing to earnings and cash flow already next year while the CapEx starts to then decrease. And finally, within the second quarter, as we’re looking at the first nine months in this slide, in the second quarter the dividend payment took place.
Then looking at the financial position of UPM. Net debt increased to €3,133,000,000 at the end of the third quarter. And the net debt to EBITDA ratio was 1.39; a significant part of the increase in net debt is temporary due to the cash flow impacts of energy hedges and future energy generation. Liquidity continues to be very strong at €5.2 billion in total in cash and unused credit facilities at the end of the third quarter. And then here you can see our outlook for 2022.
We expect our comparable EBIT to increase from 2021 during this year following the record strong third quarter results 2022 third quarter results. Our financial performance is expected to continue above last year’s level. It is good to note that there remains significant uncertainties in the outlook. Nevertheless, we expect to reach a new record for UPM’s full year earnings in 2022. In the fourth quarter, we do have two scheduled maintenance shutdowns one that [Indiscernible] pulp mill in Uruguay, and one at the biorefinery. We estimate that the EBIT impact of these shutdowns will be about €50 million during the fourth quarter.
And at this point I will hand back over to you Jussi for an update on our strategy.
Jussi Pesonen
Thank you Tapio. I guess that before I focus on those areas that Tapio mentioned of strategy and transform the investments it was a great proof point what Tapio was presenting on the slides 5 and 6 of the operating model of UPM. It is not only that businesses are having the operating model that will cope with the input costs and the prices of the products, but on top of that UPM is having a very efficient energy actually management in place, which is as Tapio stated, at the same time, it is providing a clear economic benefit for our energy business and especially for our communication paper business what was actually the case in third quarter as well. So basically, it is actually now we have an even wider perspective of the operating model, how it operates in UPM.
But let’s move on into the focus areas. This is not a big surprise that we are presenting this, but this is something that we repeat and repeat that protecting our profitability is the main task of today, and then at the same time to really make transported projects proceeding as they are planned. Given the whole high uncertainty in the business environment, our focus is very clear and therefore, it is visible on our results as well. And let’s then move into the next page. And this is also very familiar illustration of the transformation of UPM. But it is actually every quarter, it is a more a proof point where we are, as you can see the numbers, through our spear head of growth, we will grow the businesses where the long term growth fundamentals are strong and returns are supported by unique competitive advantage or the barrier to entry factors.
We have three large growth projects ongoing and away and nearing their startup phase. These are of course, the Paso de los Toros mill in Uruguay, Olkiluoto 3. nuclear power plant in Finland and Leuna biochemicals refinery in Germany. On top of that, we actually just completed the acquisition of Raflatac which is very important growth step in our Raflatac business and we will come back to that as well. And we have one project in basic engineering face namely the Rotterdam biofuels refinery, which is proceeding well as well. So, as we see our growth is in an intensive phase. At the same time we continue to take care of the competitiveness and the cash flow generation of the communication paper business which is operating in declining market and there I’m really happy how the business has been run.
First, let’s go into the Raflatac. Actually, as mentioned, we completed the acquisition that of the AMC AG a labor materials company based in Germany in September. The acquisition will accelerate Raflatac’s growth, expand its product offering that is maybe the most important part and then strengthening Raflatac’s position in the filmic labels in Central Europe. AMC has good to quality label factories in Germany. It has been consistently growing and profitable in the past years. And in 2021 its sales totaled €210 million. The acquisition is expected to result into a good synergies as we have as guided.
Then moving to the Paso de los Toros pulp mill project in Uruguay. It’s continuing well. The project will grow our pulp business by more than 50% with a very competitive cash cost level of $280 per delivered ton of pulp. Production at the mill will start by the end of the first quarter 2023 at the mill site. The machinery installation is nearly completed. The commissioning phase is progressing. The auxiliary boiler and power boiler have already been commissioned. And the commissioning of the water intake and the treatment process air system fiber line and wound handling have already started. A significant milestone in the project was reached when the new pulp terminal i.e. the Montevideo Harbor, was inaugurated in October as you can see from the picture.
Then moving to Leuna construction at the biorefinery site in Leuna, Germany is proceeding as planned. You can see in these pictures how the refinery is taking shape, production at the refinery is expected to start by the end of ‘23. Here we are opening a new, really a new growth business for UPM providing more sustainable solution for replacing fossil based materials in many end uses. The key in customer interest is innovating biochemicals production, and it is very inspiring.
Finally, the Olkiluoto 3 is in the testing period for as we speak and it continues once the whole plant is in commercial production unit will grow our energy business almost by 50% providing much needed emission free electricity to the market. It will significantly improve Finland’s electricity self sufficiency as well as the climate performance of the Finnish electricity system. Last but not least looking the electricity future prices, it increases the earnings potential of the UPM energy business area.
This is only a illustration of the CapEx which we update you every time. Our estimated CapEx for 2022 is unchanged, it will be around €1.5 billion and as you can see from this picture, that the CapEx will start to come down next year. And then finally, ladies and gentlemen, I will actually stop here by saying that UPM long term transformation is visible in the shareholder value as well rarely have been, there have been so many uncertainties in the world, chaotic geopolitical and in the global economy as they are today.
The high uncertainty has impacted stock market during the year. But then UPM share price has not been immune but the company has held up very well when it comes to value. I believe that we are well prepared for the face of uncertainty with the high performing businesses and agile operating model and strong balance sheet that we have. This year we expect our annual earnings to reach the new record heights in addition, our growth projects are nearing their startup phase adding significant new earnings in the future.
Over the longer term, I’m confident that our bio for strategy is well calibrated to provide what the world needs in the future competitive zero carbon energy and sustainable and renewable materials for the many possible end uses. I think that I will stop here where the summarize is and we are prepared to go for the questions. The operator?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] The first question today be coming from Justin Jordan calling from BNP Exane, please go ahead. Your line is open.
Justin Jordan
Thank you. I’ve got two questions, if I may. And firstly on the strongest comments in MNG, just on all three, we’ve had some slight delays on its commissioning. Can we just reconfirm at this point is the UPM board hedging the electricity output from all three and then the second follow up from that is assuming the board will begin [Indiscernible] in due course when production is more reliable, as it has done with one or two. And then my second question is on the area of biofuels clearly a very, very strong record production and profits from our business in Q3. How should we think about that in the context of the board evaluating decision, potential Rotterdam biofuel refinery? Does that presumably make that project much more appealing in terms of the transport, thank you.
Jussi Pesonen
Tapio talks about the Olkiluoto 3. I might actually start with the biofuels. Of course, yes the Q3 was a record year for the biofuels and it is a great pleasure to see how the operation is moving on in [Indiscernible]. We are doing record production. We are making record profitability of it and then when it comes to Rotterdam, the basic engineering is proceeding as planned. And of course, then, when that is done, then we are coming to a kind of phase where you need to think about timing on investment. I would not invest that today with very high uncertainty of the raw material prices whether it’s steel prices are up and components and construction, but the timing can change quite rapidly as well. So, the timing is crucially important when to invest that you are not overpaying on the investment. So, basically the basic engineering is moving on. And when it is done, then we are entering the typical UPM phase where we are then actually drawing the conclusions of the basic engineering and then the timing is very important when do then take the FID decision based on those analysis.
Tapio Korpeinen
Yes, and then just into your question on Olkiluoto 3 there has been like you said, some additional delay to continuing the test program in Olkiluoto 3 and also then to the start of the sort of regular operations in their website maintains good information on that. So, sort of in addition to their sort of notices to the exchange, you can follow the updates there. As far as hedging is concerned, like we have said earlier, given the uncertainty on the Olkiluoto 3’s volumes, we have not earlier hedged any of those. So the hedging that has been done that is in place is in relation to the — in a sense, existing capacity. And as far as Olkiluoto 3 is concerned, and before we would start hedging any of the volumes, then we will wait to see in a sense then the sort of outcome of the test runs and therefore let’s say sort of stable outlook as far as those volumes are concerned. So no hedging at this point in time yet.
Operator
Thank you, sir. We will now go to Lars Kjellberg calling from Credit Suisse. Please go ahead.
Lars Kjellberg
Thank you for taking my questions. Just coming back to about the uncertainties. Clearly, you’re operating really well as many companies are in the paper business. It seems there’s clearly some companies including UPM, that is cost advantaged. But when we looking at the uncertainties now in terms of macro outlook, consumer potentially being out of wallets, where do you start to see any material changes to the outlook? You call that wood products being one of them why construction activity has come down Raflatac seems to still be doing really well. But we also see in packaging companies talking about lower volumes. So just to be curious how we should think about record profitability in a weak market and how we should think about sustaining this extraordinary good operating profit for you? And one specific question on pulp, you called that seeing a strong demand and you’re back on operations again and get your pulp deliveries in the quarter we’re down almost 100,000 tons a year ago. Is that due to us still building inventory or what did we not produce more pulp or ship more pulp in the quarter?
Jussi Pesonen
Well, let’s say on the on the outlook, let’s say of course, macro outlook impacts our businesses as well as others like you said in the construction sector, we have seen some first signs of kind of the cycle turning even if and again the plywood business actually the sort of logistics related and uses like obviously LNG tanker projects, but also vehicle flooring continues to be strong. Raflatac perhaps compared to some other kind of segments of the packaging business, we are operating in a sort of specific niche or specific niches in the packaging materials space.
So driven by actually multiple of different sort of induce drivers of course, e-commerce being one private consumption of personal care and sort of daily hygiene products another but then also a number of sort of special and new segments medicals and so on. So, perhaps this kind of diversification of end users gives us a little bit different sort of outlook, and therefore, stability to the market and perhaps for the more commodity kind of packaging materials. Pulp, obviously, pulp demand in the globe and Asian markets, China is affected by, let’s say how the Chinese economy develops. So, of course, some uncertainties there possibly in the future. At the same time, the U.S. market seems to be quite the U.S. economy, quite really, really resilient, so to speak. Then on your volume question, let’s say, again, it’s always, let’s say, a kind of, number of factors that sort of explained the difference between two quarters whether it’s this current quarter or the comparison quarter, but its inventory effects, and also the fact that in the third quarter, last year, we had quite strong production.
Tapio Korpeinen
And maybe last time I will continue with the margin management in that respect that typically when there has been a rising costs, typically, and then we haven’t had any agility to react on the rising costs because of the long term deals. We do not have like in communication papers, or no other businesses, long term deals anymore. The margin management is really crucially important, but I believe strongly that with this operating model we are, we can have the agility to react also when the market turns. But we will, of course, we’ll see then later on, but the operating model of UPM is now proven to be very efficient. And especially now when the cost has been rising, then we have been able to really react on the rising costs quite nicely as the result is showing there.
Lars Kjellberg
On the one cost item that of course stands out to you versus maybe some of the European continental companies would and I’m not sure I may have misheard about when you talked the potential Rotterdam business but security with all material as an uncertainty, it feels that there’s now competition coming forward from the energy sector. It’s now starting to spread up to the north wood cost. Is that starting to have a meaningful impact on you? And is that what you meant when you talked about Rotterdam and securing raw material was that more about the equipment side of both steel, etc, that you talked about?
Jussi Pesonen
Yes I guess that when we talk about the Rotterdam typically, you make the investment when the typical cost of the machinery will actually be not on the highest. If you think about the steel prices today and all kinds of prices, energy, construction, and what have you, the high level, should you should you make the final investment decision on that moment, not necessarily, at least in UPM. We definitely think the timing is very crucial that, we do have outlook actually for a competitive pricing of the machinery. We were lucky with Uruguay in that respect that we made the decision on summer ‘19 and made the all the major deals in the several months after that decision in summer ‘19. And definitely we’re benefiting out of that quite greatly that we were able to have a right timing it. Of course, we didn’t know anything about the COVID coming.
Jussi Pesonen
I couldn’t follow you. Now I at least I don’t know Tapio if you could —
Tapio Korpeinen
Yes could you repeat the question.
Lars Kjellberg
Yes. With cost and availability in Europe. And again as the energy sector is competing for alternative fuels to highly priced fossil fuels.
Jussi Pesonen
Yes wood cost is of course, predominantly finishes. We are having in few months time we are having more than 3 million tons of capacity on pulp making in Uruguay where they would cost this stable and the cost of the operations will be efficient. Of course, it is going to be challenged here in Scandinavia, where there you have the challenge of wood going the biomass going also to the energy production, but that is something that we are prepared well, and of course, even the strike that we had earlier this year, has helped us in that respect that we do have good reserves as we speak, but of course, it is something that to follow that how the cost of wood for the production of the finished assets in our case is increasing.
Operator
Thanks so, much, sir. We will now move to Robin Santavirta calling from Carnegie. Please go ahead.
Robin Santavirta
Yes, thank you very much. Now, first of all related to Raflatac very strong quarter in Q3 with earnings almost 50% from the past few on the average of the past few quarters. What are the key reasons for Raflatac’s strong performance in Q3 and is this sustainable going forward? And then the second question I have is related to the slide, you have a number 5 and especially number 6. Should we read this as I understand that the hydropower works on the balancing market that is easy to understand, is it so that in communication papers as well, you have been able to sort of sell some of your secured power on the balancing market, when the prices have been very high, I guess up to €5000 per megawatt hour.
Jussi Pesonen
If I have to start with Raflatac, it is a combination of many things. First of all, in fact, we have changed quite dramatically our operating model where once again the costs and commercial decisions are combined all the time when making the decision. So, it is once again coming back to kind of our operating model, but of course, it is a good actually solid wealth in the business. Demand has been good and we have been able to really take care of the costs, i.e. fixed costs and variable costs on top of that. So, it is there is nothing actually extra ordinary. I feel very comfortable with Raflatac now that it is operating above double digit EBIT margin as it has been for several quarters already. Margin management is crucially important.
Tapio Korpeinen
Yes, and then maybe a final comment on the energy balancing. So basically, like those slides, they sort of illustrate two different types of situations. As you know, we have the 24-hour day ahead market, which is the first slide basically. So whether you are buying or selling electricity, you put in your bids for purchases or sale of electricity for the next 24 hours. And they’re of course, depending on your view, in a sense whether you’re consuming or buying of how the sort of next 24 hours energy balance will behave depending on weather and wind and all the factors then in a sense, you can optimize your consumption, consume more if you think that nighttime prices are going to be very low, run your mechanical power plants full and fill in your tanks. And then during the day, consume less of electricity, produce less mechanical pump as an example and run the paper machines on the pump that is in the tanks and you can not only in a sense take a view on the day that flexibility to some extent this is even let’s say more than 24 hours at our paper mills.
Then obviously, the other side of the equation works for the power generate generation of the hydro assets that can be regulated. So, that’s in a sense, the sort of 24 hour ahead view but then what happens on top of that is that during the day, there is the intraday market, where there is normally always some trade to be done, but then also some special situations like the illustration from the beginning of September where you get even up to €5000 per megawatt hour prices. And there of course, what is needed is either someone to produce more or someone to produce less someone to consume less to balance the market, if you have a situation where actually there is a kind of error in forecasts or some other factor that causes a sort of short term imbalance in the market.
And so, as an example, then, we will look to find additional output from our hydro assets as was done on that example but then also we cannot consume in our paper mills the amount that we have in the previous days bidding bought and get paid for that and in fact, on a day like what we have this right there on several of those hours of that total flexibility needed to balance the Finnish market bout half came from us combination of production of additional hydro power and then the demand flexibility from the paper mills.
Robin Santavirta
I understand. Thank you very much for that useful detail. Final question short one, Uruguay how long does it take to start until you reach $280 a ton?
Jussi Pesonen
Yes, that the cash cost level of course, it is actually we are actually ramping up, the pump mill ramp up is actually pretty fast. Within one year you are on the nominal capacity easily. So basically if things cost like planned, this is ramping up quite quickly and $280 is very much from the beginning already when it comes to cash cost because of fixed wood price and all of the things but of course it is taking some time to ramp it up into the full production.
Operator
Thank you so much, sir. We will now move to Linus Larsson calling from SEB. Please go ahead.
Linus Larsson
Thank you very much. Question on CapEx looking on your slide 17. It looks as if CapEx for 2023 will be in the region of €800 million is that right understood? And if you could please break that down how much is expected to go to base maintenance CapEx and other? Thank you.
Jussi Pesonen
Linus I guess that it goes like it is ballpark right number. We have not guided yet. But of course we do have the normal CapEx which is in the nature of 300 plus minus millions. And then the rest goes for the growth projects i.e. the Leuna and some of course, related to Toros.
Linus Larsson
Right, thank you. And then just coming back to the Rotterdam project, and thank you very much for the comments so far, but could you just maybe add some commentary on the feedstock discussions that you have how understand there may be different options, but what’s your current thinking of choice of feedstock or feed stocks?
Jussi Pesonen
It has not changed. And it will be mainly UPM integrated feedstocks and plus on top of that, we definitely go for some feedstock which is coming from the market, but no, kind of no change on that topic at this point of time.
Linus Larsson
When you say which integrated feedstocks are you contemplating right now?
Jussi Pesonen
all kinds of related one, of course the crude oil, which is residual of the pumping process, but then we do have these oily crops as well that we can plant in like a winter crop. And then of course, some other related kind of residue outs that we have in our processes. I don’t want to go in further details on that. But they are very much related to UPM residuals and that kind of materials.
Linus Larsson
Correct. Okay, thanks. So no change there really?
Jussi Pesonen
Not really.
Linus Larsson
And then just overall variable costs. The outlook for the fourth quarter we touched upon it. But how do you see on maybe on a group level, variable costs include wood, chemicals, energy and so forth.
Jussi Pesonen
Well I would say, looking, let’s say a bit forward, beyond sort of fourth quarter even I would say we are in a high cost environment. On the other hand, we do see some first signs of some of the, let’s say, inputs starting to sort of normalize perhaps the worst bottlenecks in us as being best or so on, obviously, whether it’s logistics, availability, and cost, oil prices have come down somewhat from the peaks which will then impact some of the sort of the inputs, for instance, for Raflatac business eventually. So perhaps early to sort of call an age of deflation by any means here coming. But we are perhaps starting to see, in a sense, the first signs of this kind of a cost cycle starting to turn as well eventually. But of course, we have specific areas, like we have talked a lot about energy, particularly here in Europe, which is also driven by events in a sense, which cannot be forecasted.
Operator
Thank you so much sir. We’ll now move on to Harri Taittonen calling from Nordea. Please go ahead.
Harri Taittonen
Yes. Good afternoon. Continuing from Linus, his question on page three and just the variable cost, indeed, seems quite manageable that what you show there on the quarter on quarter bridge, and I mean, if you give some color on the split, or particularly how the energy costs increase, how big a role it played there, and how did you end up being affected by the higher sort of natural gas prices in their continental European paper production and because I guess that was sort of one worry before the result was pre-announced.
Jussi Pesonen
We don’t have any sort of the breakdown or detail to sort of give on that. Of course, still, we have been having some benefits of whether it’s gas or electricity on the consuming side some benefit of hedges that have been put in place earlier. So that has kind of given some predictions still against the increases, but again, I would say, of course, like you can see still on this page three, both prices and variable costs were sort of helping us so we have been able to manage the margins.
Harri Taittonen
Well, two quick questions. One, you already explained quite a bit on the electricity. But one of your peers of Finland mentioned about additional kind of revenue potential coming from sort of stabilization fee or compensation for stabilizing the grid. I mean, is that something that you were already benefiting there? Or is it something that could be a sort of additional source of revenue or sort of value for your electricity? So that’s one question and then the other one was the plywood because apparently, isn’t it so that quite a bit of that supply for the European markets is out in the plywood business because of the EU sanctions against Russia and is that sort of how do you do that supply-demand and outlook for the next few quarters?
Jussi Pesonen
I will start with the plywood. Tapio will continue to energy. Plywood. Yes, that is correct. Plywood the business is having a very good supply demand balance as we speak and obviously, the main segments that we have in plywood is of course, the LNG tankers where you have seen that there’s a huge fleet to be built in the next coming two years which is actually great to see that we have a really big market share on that business and then the vehicle flooring is another one remains to be see how the recession or slowdown of the economy will affect on that. Those are the major big kind of segments on birch plywood. What has been great for UPM is that we have been able to compensate those losses that our mill, which is now stopped, we have been able to ramp up our Finnish mills based on that we are now having continuous run which means that we can compensate a lot of that those lost volumes in birch plywood that was produced in Russia. And that is where actually the market is of course the softness comes from the softwood i.e. the spruce plywood, where the construction industries is down which is actually similar to timber business that there the softness is coming, but basically there as well, we are we are having a very good cost position.
Tapio Korpeinen
If I can comment. On the stabilizing the grid, I’m not sure if I quote correctly, the reference to a peer but maybe one point that we weren’t able to sort of illustrate with this slide concerning the eighth of September is that Fingrid, the system operator here in Finland, for managing the energy balance has already since years basically turn to the markets and to the market players to buy that kind of capacity or capability to balance the grid. So of course, let’s say, in a more normal situation, when it works through the intraday market, then we have this sort of specific tight situations like this sixth September example, where then Fingrid puts out there basically a special tender when they need volume to balance the market.
But then on top of that, sort of stability reserves has been a kind of a regular part of the market during some years already were then even shorter within our hours or minutes or now in the future, even within seconds they buy flexibility to then manage the balance and the frequency in the grid for which purpose for instance, UPM has put in operation already a super capacitor here in Finland that can give those let’s say less than sort of a minute kind of flexibility to the market.
Operator
Thanks so much sir. We will now go on to Cole Hathorn calling from Jefferies. Please go ahead.
Cole Hathorn
Thanks for taking my question. Just looking into the biofuels business. Could you maybe give us some color on how you see that business developing in the 4Q and then into 2023? I mean, the profitability levels are extremely high and I understand you’re calling out high prices but I just like to understand that feedstock is all your feedstock internally so you’re in crude oil. So, your costs remain stable, but prices are high that’s why you get such a good profitability level?
Jussi Pesonen
Basically the crude oil is whatever is the source. It is in our case as well priced based on the market prices. So basically if it’s the internal source it will be market price anyway and what we have seen lately the increase of the crude oil prices has been occurring. So basically that is actually very clear in UPM case that even if it’s coming from internal sources or external sources, the business itself is based on market prices. So that’s how we run the business. Of course, we are not unfortunately giving any guidance for the profitability going forward, but of course, we are trying to manage the margin again where we sell how what are the markets and trying to be very efficient on sourcing.
Cole Hathorn
Thank you then, just following up on communication paper. You mentioned about managing the margin. And you’ve talked about energy management doing well on the production side. But if we start to see cost deflation, how do you see that impacting your communication paper business? Should we see prices coming down, but you effectively managing the profitability and margin levels with price and other costs coming down? Thank you.
Jussi Pesonen
That is what we are aiming actually. Like I said that typically, we have been very challenged when the input costs have been rising rapidly and then we have had the UPM as well in the industry long term price agreements. Now, we do not have long term price agreements and of course if there will be changes in the input costs and operational costs of course, and how the market will develop we are trying to manage that with a very flexible way of operating to generate good margin even if the market turns but we will see. this is where we have learned a lot during the last couple of years.
Operator
Thank you sir. As we have no further questions, I turn the call back over to the organizers for any additional or closing remarks. Thank you.
Jussi Pesonen
Thank you. And ladies and gentlemen, nice to have you in with this one hour and all the best and have a nice day. Thank you.
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