UPMKF - UPM-Kymmene Oyj (UPMKF) Q2 2023 Earnings Call Transcript
2023-07-25 12:52:06 ET
UPM-Kymmene Oyj (UPMKF)
Q2 2023 Earnings Conference Call
July 25, 2023 06:15 AM ET
Company Participants
Jussi Pesonen - CEO
Tapio Korpeinen - CFO
Conference Call Participants
Justin Jordan - Davy Research
Robin Santavirta - Carnegie
Charlie Muir-Sands - BNP Paribas Exane
Lars Kjellberg - Credit Suisse
Ephrem Ravi - Citi Research
Linus Larsson - SEB Enskilda Equities
Martin Melbye - ABG Sundal Collier
Harri Taittonen - Nordea
Ramachandra Kamath - Barclays
Presentation
Jussi Pesonen
Ladies and gentlemen, dear audience, welcome to UPM's Second Quarter 2023 Results Webcast. My name is Jussi Pesonen, and I'm the CEO of UPM. I'm here with UPM's CFO, Tapio Korpeinen.
Tapio Korpeinen
Hi to everyone.
Jussi Pesonen
Ladies and gentlemen, we will today cover three main topics. First, we will discuss the second quarter results and the outlook. Continued low volumes, significant lower pulp and energy prices and high maintenance activity resulted in exceptionally low second quarter results. However, we expect deliveries to improve and variable costs to decrease in the second half of 2023.
Second topic, we will discuss some of our measures to improve competitiveness. As of today, we’ve implemented and planned actions in place to reduce our graphic paper capacity by 18% during 2023 and reduce the number of employees by 8% compared to autumn 2022, targeted fixed cost savings exceeds €100 million.
And thirdly, we will obviously discuss progress of our growth projects. Paso de los Toros pulp mill ramp up is proceeding very well. I will come back to that. Leuna project is proceeding, but while with some delays due to headwinds of that, that what we’ve been experienced, and we will come back to that as well. But all in all, UPM's transformation continues the positive long-term drivers and growth prospects for UPM are intact, and they are really exciting.
Let's start with the second quarter results. Our second quarter sales were €2.558 billion and at the same level as last year. Comparable EBIT was exceptionally low at €140 million. On the other hand, operating cash flow was strong at €459 million. During the first half of the year, the business environment has been exceptional. Political uncertainty, low economic activity and high inflation were impacting consumers.
At the same time, the extraordinary destocking in various product value chains continued throughout the first half of the year. Consequently, deliveries of our products were well below estimated end use demand and well below historical long-term trends. This was very similar to Q1. We saw no meaningful improvement in markets, the market deliveries during Q2, but no meaningful weakening either.
Unusually, low activity in most pulp consuming sectors impacted the pulp market. Pulp and energy prices fell from historical heights in second half 2022 to cyclical bottom levels by the end of Q2. This affected profitability of our fibers and energy businesses.
In the other businesses, we continue to manage our unit margins successfully, positively -- variable costs started to decrease from Q1. Q2 results were also impacted by high maintenance activity with an EBIT impact of €95 million all in all. The current down cycle in our product markets has been exceptionally severe and has lasted longer than what we expected. This is not the normal cyclical -- normal cyclicality in any of our businesses.
On this slide, we again show European self-adhesive label market shipments to illustrate the intensity of the current destocking. As you can see, demand for labels historically has low volatility and healthy long-term growth. So in this picture, you can see it very clearly. This is natural as the high share of the label materials demand goes to a daily consumer products and those kind of end users.
In Q1 2023, market shipments of self-adhesive label materials were down by 33% from that of last year, followed by 31% decline in Q2. This is clearly impacted by significant destocking even though the underlying end use demand is estimated to have decreased from that of last year somewhat.
Destocking has been impacted other product markets as well, including specialty paper, communication paper and pulp. The destocking component is temporary and is expected to phase out gradually during second half of this year, allowing market shipments to recover towards to -- towards the underlying end use demand.
During this kind of a low volume period, we continue to focus on managing our margins. This has been successful in the communication papers, specialty paper, Raflatac and plywood businesses and gives us a good position once volume starts to recover. Meanwhile, variable costs already started to decrease during the second quarter from that of the first quarter and we expect further tailwind from the variable costs in our second half of the year.
But ladies and gentlemen, now I will hand over to Tapio for more analysis of the results. Tapio, please.
Tapio Korpeinen
Okay. Thanks, Jussi. So here on the left hand side, you can see the comparable EBIT bridge from the second quarter compared to the last year's second quarter. In this comparison, pulp and energy prices were significantly down while variable costs increased because of timing, the cost of pulp and energy were still higher in the businesses where we are consuming pulp and energy, mainly, of course, the paper businesses. So there is a delay before this sort of market price drop is then materializing on the costs of those businesses and coming through on the bottom line.
But then -- also in this wood cost increase was less than half of this component in this comparison. Delivery volumes and fixed costs, both increased. And here, it's good to note that the comparison period last year included the strike in Finland.
Then sequentially, when comparing to the first quarter of this year, we can see sales prices decreasing in all business areas and clear majority of that impact that is illustrated here is coming from pulp and energy prices. This obviously affected profitability in fibers and energy businesses. But then here, as you can see, we are starting to then benefit from decreasing variable costs, which is coming through in this second quarter comparison to the first quarter.
Communication Paper, Specialty Papers, Raflatac and Plywood succeeded well in margin management, largely offsetting lower sales prices with the decreased variable costs. Delivery volumes increased from the first quarter, particularly for pulp and energy, fixed cost, higher here mainly due to the maintenance activity, which was higher in this quarter.
And then looking at the development by business area, the quarterly development here, the second quarter EBIT was broadly on the same level as in the first quarter in four businesses: Communication Papers, Specialty papers, Raflatac and Plywood. Communication Papers and Plywood performed well, maintaining good unit margins and relatively healthy profits despite lower volumes. And that is, I would say, a good result also in Communication Papers, considering the fact that the average sales price decreased by about 10% from the first quarter, but ending good unit margins.
Also Raflatac and Specialty Papers succeeded in unit margin management, but results were weak due to continuously low volumes. However, then comparable EBIT decreased in Fibers & Energy. In these businesses, volumes increased, but prices declined significantly from comparison periods.
The average pulp price decreased by 22% from the first quarter, whereas the average electricity price decreased by 30%. Also, fibers was impacted by the maintenance shutdown at the Kymi mill. Energy had the maintenance shutdowns of the Olkiluoto 1 and two units. In other operations reported in that segment, our biofuels business carried out the turnaround maintenance shutdown, meaning this is a large shutdown that is only taken every 4 years. So therefore, then we reported a negative EBIT in other operations.
And as Jussi mentioned, the total maintenance impact in the second quarter was about €95 million. Cash flow was strong in the second quarter. Operating cash flow was €459 million. And as is shown here, we released €196 million cash from working capital during the quarter, which is a good achievement, again, considering the fact that as Paso de los Toros ramp up is happening, that has been obviously tying up working capital.
Cash flow coming in from the energy futures contracts continued. And now the energy hedges have largely released the cash that flowed out in a sense, to an extraordinary extent during the energy market spike last year. Second quarter free cash flow was €180 million. Our financial position continues to be very strong. Net debt was €2.557 billion at the end of the second quarter, which is 1.07x last 12 months EBITDA. Our liquidity was very strong at €6.4 billion.
And here, we have our outlook for 2023. UPM's full year 2023 comparable EBIT is expected to decrease from last year's 2022 EBIT -- comparable EBIT in the second half of this year is expected to be on a similar level or increased compared to the first half of 2023. Our delivery volumes are expected to increase during the second half compared to the first.
Destocking is expected to gradually phase out during the second half, which will enable UPM's deliveries to recover towards the underlying end use demand. The production ramp up of the Paso de los Toros pulp mill and the Olkiluoto 3 nuclear power plant unit will add to our deliveries during the second half of this year.
The second half starts with low pulp and energy prices impacting these businesses in other businesses of UPM we continue to manage margins. Variable costs already started to decrease in the second quarter compared to the first as we just looked at we expect variable costs to continue decreasing during the second half of the year. In addition, we are implementing measures to reduce fixed and variable costs.
And now I'll hand it over back to Jussi for some comments on our growth projects and actions to improve competitiveness.
Jussi Pesonen
Thanks, Tapio. Let's start with an update of Paso de los Toros pulp mill. Here, we have good news. The production ramp up is proceeding well. Paso de los Toros startup -- started production in mid-April, and the shipments, its first customer deliveries was in month of May. The ramp up is proceeding according to our plan. We have now reached and reaching 70% run rate in July of that. We expect the mill to be EBITDA positive in Q3 even with the current bottom of the cycle pulp prices.
With a combination of the competitive wood supplies scale, best available technology and efficient logistics. The mill is expected to reach highly competitive cash cost level approximately US$280 per delivered ton of pulp once the full production and optimization is done. The mill will grow our pulp business by more than 50% in a highly competitive way and in a highly competitive area.
Most of our pulp capacity is now in Uruguay, more or less 60% where the plantation-based business platform is not only highly competitive, but also offers future growth opportunities in various biomaterials in the long run.
Another milestone during Q2 is that the Olkiluoto #3 nuclear power planned unit started regular commercial electricity production in May, increasing our CO2-free electricity output by nearly 50%. In the long-term , UPM's competitive and agile energy business platform will open growth opportunities in synthetic fusion materials.
Our biochemicals investment project in Leuna, Germany is proceeding and obtain -- obtained the operating permit in May. However, the project has been negatively impacted of the overall geopolitical situation and material and resource availability and prices.
Building a first of its kind biorefinery under these circumstances and making required adjustments has been demanding and has caused rescheduling and delays in the project. The completion of the investment project is now expected to take place by the end of 2024 and total investment is estimated to be €1.180 billion.
The project continues with full speed. The civil construction on the site will be completed during Q3, i.e., this quarter, and commissioning will start in main departments or process departments, and it will be implemented in phases starting in fourth quarter of this year. We have full confidence in profitable Biochemicals business and the technologies that what we have been using in Leuna. Learnings from the first project will be benefiting our future scaling up of the business.
On the commercial side, we’ve successfully created collaboration and partnerships with different type of distributors and customers and global brands, interest for our renewable products replacing fossil materials has been proven to be high. In here, the Leuna Biorefinery is progressing, as you can see from these six different spec pictures.
Then in UPM, we need to ensure our competitiveness, and we need to protect our profits. Let's start with the Communication Papers. Communication Papers continued to adjust its capacity and costs to meet the profitable customer demand in line with the long-term market outlook.
We closed down two paper machines by the end of second quarter, i.e., the Schongau PM6 in Germany and the Steyrermühl PM4 in Austria with total capacity of 485,000 tonnes. Today, we’ve announced the planned closure of the Plattling mill in Germany by the end of this year with capacity of 595,000 tonnes. Together, these closures would reduce capacity by almost 1.1 million tonnes or in a different way of putting it 18% of UPM's total paper capacity. The annual fixed cost savings would be totaling approximately €100 million.
But that is not all. In UPM, we already have utilized our unique opportunity and operating model to enable a consistent and timely actions to ensure our competitiveness. We started this journey already September last year by setting targets for each business and its functions to manage our margins and to take care of our variable and fixed costs.
As I said, UPM's operating model is in this continuation consists activity across businesses and functions. We’ve decided all kind of decisions and actions to restructure, take temporary layoffs, flexible working hours and all kind of things on top of what UPM is doing in the paper business. Decisions actions since autumn 2020 is already done and decided to reduce number of employees by approximately 1,000 people, excluding exit from Russia, which was, if I remember correctly, 800 people. This is not including the planned closure of Plattling, which is then approximately 400 additional.
The positive long-term drivers and growth prospects for UPM are intact, and they are really exciting. We continue to work on long-term growth, and our focus is -- focus area remains unchanged. Now we have completed major growth step in fibers and energy businesses as Paso de los Toros is ramping up and Olkiluoto #3 is in regular commercial production.
Next growth step will most likely be on the right and left wings of the picture starting and scaling up the biochemicals business, completing the basic engineering of the Rotterdam biofuels and looking into a growth options and timing of the next steps in Raflatac and Specialty Papers. In Fibers, we will continue to develop our competitive business platform to enable further growth later, i.e., meaning we will grow our raw material and focus on our raw material security for the future.
This slide is showing the CapEx estimate for this year. Our CapEx is estimated to be on roughly €950 million level, significantly down from that of last year as we can see from in this picture.
Even if we do not have official CapEx guidance yet for 2024, we'll come back to that in our third quarter reporting, but the CapEx will continue to decrease from that of that this year, and we expect that to be on a level of depreciations of 2024. So that is a kind of rough estimate as we speak.
Ladies and gentlemen, our transformation continues our biggest investment, the Paso de los Toros pulp mill is now ramping up nicely and coming from the investment phase to contribute and contribution phase.
Leuna, even if further delays is making progress, and we will continue to prepare next steps in our journey. Meanwhile, as discussed today, we continue to take care of the competitiveness, cash flow and our communication paper business profitability.
I'm not going to read this again. I guess that this is pretty clear to summarize that there has been a strong downturn in the markets, pushing the Q2 results to an exceptional low levels. Delivery volumes impacted by destocking in various product value chains.
Pulp and energy prices decreased Paso de los Toros, as already many times mentioned, is proceeding according to plan and so forth and so forth. Our positive outlook for the future is and transformation will continue in UPM.
This was the prepared part of the presentation, and now we are ready for Q&A session.
Question-and-Answer Session
Operator
[Operator Instructions] The next question comes from Justin Jordan from Davy. Please go ahead.
Justin Jordan
Thank you. Good afternoon, everyone. I've got two separate questions. Firstly, I suppose I have to say, well, don't everyone involved in the successful ramp up the Paso de los Toros, but just moving to another spearhead. Can you give us some more color on the challenges you faced in Leuna? And does this impact the 14% return that you expect from the project given you've seen the CapEx increase by €400 million? And secondly, just on your guidance of second half EBIT being similar or higher than the €470 million comparable EBIT in H1, have you seen -- sorry, I appreciate it's dependent upon using this -- sorry, destocking phasing out in H2, have you seen any evidence of destocking phasing out as yet in areas like Raflatac or the business units to support that guidance as yet? Thank you.
Jussi Pesonen
If I take first the Leuna, obviously, as I mentioned in my presentation that the kind of resourcing construction raw material prices have been exceptionally high, and especially during this COVID times, it has been those kind of topics. Of course, we do have had some difficulties with some of the suppliers, but that is quite normal in all projects. But those have been the major reasons for the deviation of the original plan. And of course, the commissioning is already starting and has already started in some of the areas of the project.
But pretty confident on the business case and of course, the 14% of return on capital employed target is not at the same time, floor and the ceiling, it is, of course, the kind of minimum that we want to see and we are still very confident that the business overall, going forward, when we are expanding the business as well easily is actually achieving that target. But remains to be seen, of course, this delay and increased budget is obviously causing some challenge for the first plant. But overall, the business is looking very good.
Tapio Korpeinen
And maybe on the sort of commercial development side, I can say that results have been quite promising so far, like I think Jussi was referring earlier. So and that is if anything, things look better than perhaps when we were first looking at the business case.
Then to your second question around the destocking, any evidence, obviously, like also Jussi was commenting already earlier, not enough to sort of translate into deliveries during the second quarter of this year, but we have seen when it comes to the order intake, for instance, in Raflatac, a kind of steady sequential improvement, whether we look at Q2 compared to Q1 or, let's say, on a monthly basis. So the recovery is happening. We do have that evidence from the order intake then remains to be seen in a sense when it is to the point that then we start seeing the same in the deliveries.
At the same time also, we can say that what we can see with the immediate customers of ours in various businesses that any sort of excess that they may have been holding has started to be depleted, then visibility to the further stages is obviously more limited, but those kinds of signs in any case give us, in a sense, the sort of basis to say what we are saying that we believe that the kind of recovery will happen during the second half.
Justin Jordan
Thank you, Jussi and Tapio.
Operator
The next question comes from Robin Santavirta from Carnegie. Please go ahead.
Robin Santavirta
Thank you very much and hello everybody. I have two questions as well. First, on the Leuna delay. What about further expansion in biochemicals. I understand sort of previously, you have said you want to see Leuna well up and running and working before you can take decision to further expand in biochemicals. Is this sort of delay now also delaying potential further capacity expansion in biochemicals? So that's the first one. And the second one I have is related to good raw material costs in Finland, especially gone up quite significantly the pulpwood prices, what is the latest that you can see in the market? And how should we expect this market to develop in H2 and in 2024? So those two. Thanks.
Jussi Pesonen
If I start with Leuna and then Tapio talks about the raw material cost. The Leuna delay doesn't have a necessarily direct impact on either or the biofuels kind of basic engineering that we are having or even the biochemicals preparation. We have separate teams, as I have said to you earlier, also in biochemicals that is preparing for the next growth project. But of course, we would like to see that it works and all the technologies are working as we expect them to work where we’ve a high confidence. So basically, I wouldn't actually say that it would delay anything at least the preparation with a separate kind of project teams is very clear that that we do actually run with the full speed, all of the preparations when it comes to biochemicals and fuels.
Tapio Korpeinen
And maybe if I continue on the wood cost and maybe perhaps some sort of comments on variable cost also in general, but kind of referring back to this Slide #4, where we have the year-on-year and sequential comparison there. So again, if we look at the second quarter figures compared to 1 year ago, so costs were up. And as I said, of this bar here shown on this slide, then less than half in a sense accounts for the increase in wood cost, and that obviously primarily coming from Finland, as you were indicating.
But then in the second quarter compared to first quarter, variable costs were already a tailwind for us or a tailwind showing through, actually, as we discussed this at the point in time of our first quarter release, then I said that we expect to see a positive impact from variable costs in this second quarter, as we already knew at that time that we were purchasing various inputs at a lower price than previously. And obviously, it takes some time before it kind of translates to the bottom line. The time lag is the longest as we have discussed in the past in wood.
But what we are seeing in the Finnish market is that the costs are starting to stabilize. We’ve had some news even here in the sort of newspapers today that some of this research organizations are expecting market prices to start coming down already during the second half in Finland in the Finnish wood market, how significant that will be, that remains to be seen.
And obviously, again, there is that delay maybe 6 months before it will impact. So it won't impact in a sense, our wood cost here in Finland this year yet in terms of the result, but I would say that the kind of stabilization is happening. And of course, like Jussi was pointed out, 60% of our pulp businesses in Uruguay where wood cost is very well under control.
Maybe a last point I would make here is that we would expect a positive contribution on this slide when we look at it next quarter and the quarter after that or in the next release and the release after that, and I would expect that the kind of positive impact would be somewhat higher, better compared to this second quarter sequentially.
Robin Santavirta
Thank you very much. [Indiscernible]. Thanks.
Operator
The next question comes from Charlie Muir-Sands from BNP Paribas Exane. Please go ahead.
Charlie Muir-Sands
Yes. Good afternoon, gentlemen. Thank you for taking my questions. I have three quick ones, please. Firstly, on Leuna, can you just confirm that in terms of raw materials availability, there's no concerns in that regard. It's purely as of engineering construction delay and cost increase?
Secondly, you mentioned some start-up costs in Paso de los Toros. I wondered if they're material, whether you could quantify what they were in the second quarter and would you expect the same quantum to recur in the third quarter or not?
And then the last question relates to CapEx. I just wanted to clarify your comments, and I appreciate you said no formal guidance yet on CapEx for 2024. But did you mean to imply that you would envisage CapEx being in line with depreciation next year, accepting obviously, the depreciation will be higher than this year's level?
Jussi Pesonen
I guess that these are pretty simple to answer first, Roger, that it is not related to raw material cost or raw material availability at all, the materials that I was referring was more or less steel and metal prices. Start up costs, we do not see any start up costs anymore in Q3. So they were only on Q2. We do not have guidance for that. And the CapEx, as I said, is expected to be on the depreciation level of 2024, which is around €600 million.
Charlie Muir-Sands
Right. Thanks.
Operator
The next question comes from [indiscernible] from Nordea Markets. Please go ahead.
Unidentified Analyst
Yes. Thank you for taking my question and thank you for the good presentation. My question is kind of you mentioned several times in report and during this presentation about the current bottom of the cycle of pulp prices. Could you elaborate that a bit more [indiscernible] we've understood this that the pulp inventory volumes are at a record high, and they have been increasing doing early on the summer. But is there any some indication or evidence that makes you think that the -- we might have seen the bottom of the cycle of pulp prices at the moment? Thanks.
Tapio Korpeinen
Well, let's say, we’ve seen, obviously, as far as inventories are concerned, still high inventory levels here in Europe volumes have been moving in China. So let's say, even if some increase there as well, more still, let's say, normal level of inventory, but the evidence that we’ve seen is that what you can read, obviously, in the public domain, which is that in China, in hardwood pulp, the first sort of small $20, $30 increases in pulp price have gone through.
So that actually is indicating, let's say, some stabilization their pulp prices, obviously, in Europe still have come down because they have been in a higher level than in China, but kind of the price difference in a sense, meaningfully between China and Europe is starting to be sort of neutralized if you put it that way.
We know that downtime, both temporary downtime and permanent shutdowns are taking place in the Northern Hemisphere, which obviously is due to the fact that those mills are generating negative cash flow at the levels we are seeing in the pulp business at the prices where we are kind of arriving at the moment. So those are the reasons why we think that we are in this sort of bottom of the cycle territory at the moment. And then we will see how the pulp cycle -- price cycle then evolves during the coming months.
Jussi Pesonen
And to add on that, you know that we’ve already heard as well that some of the integrated pulp paperboard manufacturers in China has been stopping the pulp facilities and being -- buying pulp from the market. So at least it is actually indicating that the cash cost level is pretty tight.
Unidentified Analyst
All right. Appreciate the color. Thanks very much.
Operator
The next question comes from Lars Kjellberg from Credit Suisse. Please go ahead.
Lars Kjellberg
Thank you for taking my questions. I just want to go back to Leuna to understand what you're talking about you said that the bond will generally ready and started commissioning in phases to the end of the current year, but kind of the real start up really not until end of '24. Just trying to understand what that really means in terms of potential costs incurred as these various phases start up and indeed you've sort of commissioned the mall of the plant.
The other one is on guidance for this year and the second half specifically, tailwinds from variable costs, improving deliveries is another topic. You would, of course, have now a new pulp mill profitable and EBITDA positive in H2 and yet we are not expecting any sequential improvement in second half profitability. I just want to try to understand how to square the tailwinds and the new pulp mill, et cetera, with no change in H2 EBIT?
Jussi Pesonen
If I start with the Leuna, the new investment cost guidance is including, of course, the commissioning and the commissioning in this kind of facility is different to what it is in the paper mill or in pulp mill and therefore, section by section, we are commissioning these separate processes, and there are quite several of them. And then finally, by the end of 2024, the kind of all are put together and then they are operating. So this is the sequence, there will be a longer period of the commissioning compared that to the pulp mill.
Pulp mill is something that you just -- like in our case, we -- we ended instrumentation erection actually in February this year. And then finally, we were starting up in a month's time actually, but this is not the case in this kind of facilities as the chemical plants are. So that's the nature. And the investment cost of 1.180 is including all of the commissioning costs as well.
Lars Kjellberg
Got you. So they're going to be capitalized this operating cost, and so to your point, as part of the CapEx itself?
Jussi Pesonen
Yes.
Lars Kjellberg
So there's no operational cost that would be incurred in '24 until you normally start up?
Jussi Pesonen
There is, of course, there are some -- there are people and there are fixed costs as well that are already in the operational costs as well as -- as it is --has been this year as well.
Lars Kjellberg
Okay, got you. Thank you.
Tapio Korpeinen
And maybe on the guidance, I think, Lars, you sort of summarized well the reasons why the guidance is that sequentially we will see similar or improved second half.
Lars Kjellberg
What I'm trying to understand though is why it doesn't actually improve more materially considering the sort is turning EBITDA positive as opposed to start ups and tailwinds from cost. So it seems as if up to that as opposed to the down.
Tapio Korpeinen
Well, let's say, of course, we are living uncertain times, very big sort of moving parts that we have seen in the business during the sort of last 6 to 12 months, as we all know. But I think, again, the sort of direction of travel, what we are indicating here is that we, again, expect the profitability to be similar or improve.
Lars Kjellberg
Got you. Thank you.
Jussi Pesonen
And basically like Tapio was talking about that from quarter 1 to quarter 2, still the prices of pulp and energy went down.
Lars Kjellberg
Sure. Very good. Thank you.
Operator
The next question comes from Ephrem Ravi from Citigroup. Please go ahead.
Ephrem Ravi
Two quick questions. Firstly, energy, the prices have decreased to around €42 per megawatt hour in the second quarter. Is there any way to see what the mix effect of OL3 coming in on that number going forward? Again, I suppose that the Finnish market will have excess supply of power. So that should also kind of impact kind of power pricing going forward as someone who is not familiar with the Finnish power market?
And secondly, again, in the event that the cash flow is negative, and there's no particular improvement in the EBIT in the second half, do you still kind of intend to pay out the €1.5 per share dividend if net debt-to-EBITDA goes about 2x?
Tapio Korpeinen
Maybe if I start from the most important question, which was the last one. And obviously, we’ve the decision of Annual General meeting to pay a dividend. And it is not a kind of a decision that would be conditional to net debt-to-EBITDA or any kind of a metric like that. So as we have said the dividend, second half of the dividend will be paid in the beginning of November. And I think as I've pointed out, the financial standing of the company is very strong. So no risk to that, that I would see.
Then on the energy business we have not been sort of giving information on a unit-by-unit basis, not for Olkiluoto 3 either. What we saw in the second half, of course, was an exceptional month of May during the flooding season in Finland when we saw negative -- meaningful negative power prices in the Finnish market.
Then in June, let's say, power prices recovered again the Finnish market, in a sense, will have some volatility going forward as well because like you said, Finland will be a net exporter of electricity when we have let's say, strong hydrological conditions and windy days, when there is no wind, we will import electricity, and that will cause obviously then possibly some volatility during the coming months and quarters as well, but then towards the sort of fall and winter, the expectation still is for prices to sort of come seasonally up and not to discuss the geopolitical uncertainties.
Ephrem Ravi
Thank you.
Operator
The next question comes from Linus Larsson from SEB. Please go ahead.
Linus Larsson
Thank you very much, and good afternoon, gentlemen. My first question relates to your production planning, how you're looking at Q3 compared to Q2. You said that the maintenance impact on a group level was €95 million in the second quarter, what do you expect for the third quarter. And also maintenance stops aside, what do you expect in terms of -- what are you planning for in terms of market related downtime in your various production areas Q3 compared to Q2? Are you seeing increased market related downtime or decreased market related downtime? Thank you.
Tapio Korpeinen
Well, it's on the question on maintenance cost. So we have the Kaukas shutdown and that is about €40 million. So compared to the compared to the €95 million in the second quarter, and the timing of that actually will be more in towards the fourth quarter. But then, let's say, market downtime, we will see, in a sense, what is needed to manage inventories. We’ve been taking curtailment in plywood business in specialty papers, in Communication Papers, even in the Finnish pulp production. So we will do it as is then required to keep the inventories in a sort of reasonable or good level. But beforehand, no kind of guidance that we will obviously give on that.
Jussi Pesonen
And managing the margin is a very important part of the decision making of various businesses.
Linus Larsson
And related to this in Communication Paper, you announced a big restructuring mill closure today. So that's kind of a step change. And it's nothing unique. You do that continuously. But do you think if you look at a single quarter like the third in isolation, will you manage margins as well as you’ve been doing in, say, the second quarter in Communication Papers specifically?
Jussi Pesonen
That is the plan.
Linus Larsson
From where do you expect to see the benefits of that most recent restructuring?
Jussi Pesonen
That is actually coming when the most recent, of course, the -- now we are having two paper machines that have been shut down by the end of the quarter. So basically, those volumes have been now moved to another mills and fixed costs [indiscernible] and the efficiency are improving in the other mills. And then basically, the plan of closing Plattling is only the plan as we speak. And when the decision -- final decisions will be done by the end of the year, then it is actually starting to contribute when the mill is then finally then in the situation, what is decided then.
Linus Larsson
Great. And then just one quick final on Paso de los Toros. It's ramping up nicely. As you say and fully optimized, you’re targeting $280 per ton production cost. When do you expect that to occur when are all the pieces in place for that very competitive cost position?
Jussi Pesonen
Linus, as you remember that we’ve been guiding that the whole Uruguay platform will be $280 per ton cash cost level. Obviously, Fray Bentos will start to benefit immediately the kind of towards that target for the synergies that we are having. And of course, it takes time when we are on the nominal capacity, and we’ve been trimming all the possible kind of efficiency points into a good situation. By the end of the year, we are on nominal capacity, but it doesn't mean that we are at that moment already on that cash cost level. But of course, working on it in every day actually trying to minimize the operating cash costs.
Linus Larsson
Great. Thanks a lot for the color.
Operator
The next question comes from Martin Melbye from ABG. Please go ahead.
Martin Melbye
In order to get the numbers right on fibers, you state that you'll have EBITDA breakeven in Q3. So what is the EBIT improvement quarter-over-quarter from Paso de los Toros, including depreciation?
Tapio Korpeinen
We don't give those details.
Martin Melbye
Could you state what was the EBIT loss in Q2?
Tapio Korpeinen
No, we haven't. No.
Martin Melbye
Okay. Thank you.
Operator
The next question comes from Harri Taittonen from Nordea. Please go ahead.
Harri Taittonen
Hi. Yes. Good afternoon and thanks for taking the questions. On the specialty papers, it looks like the average price came down quite a bit on a sequential basis. I mean did you get -- what was the sort of a specialty component or the fine paper component or sort of FX thing? And also on the same note, and the same division, it's a very pulp intensive sort of cost base for that division. And I suppose you will be getting an increasingly positive impact in Q3 than in Q2 because pulp prices sort of came down and you have a lag there. But if you can sort of comment on the Specialty Paper division, both on the price and the cost point of view.
Tapio Korpeinen
Yes. Well, as you said, in a sense, it's kind of a mix of several factors because both obviously fine paper in China and then the label paper business for us and competitors is, let's say, business based on chemical pulp. So when pulp prices have been coming down, then it does have an impact on the paper price as well. So let's say that sort of price movement has been happening. But then the game is about defending the margins when we get the benefit on the cost side as well.
Harri Taittonen
Yes. On the Leuna CapEx, I mean the estimate has been raised by €430 million. How much that will be in '24? Is some of it already included in this year's CapEx estimate. Just kind of trying to figure out how much that is kind of space for other CapEx within your sort of indicative guidance for next year, but ...
Jussi Pesonen
That is something that, like I said, that we’ve have not officially guided yet, but of course, there will be room for other investments as well. It is not going to be not only Leuna in 2024.
Harri Taittonen
Sure. Okay. Then two really quick questions. I mean one is that I was surprised to see the depreciation has come up just well less than I thought for the fiber division. Is there -- and overall, is there going to be kind of a run rate increase still in depreciation charge when we move on to Q3? And the other one -- quick one is that have you already started hedging Olkiluoto 3 electricity prices?
Tapio Korpeinen
Well, the depreciation -- the kind of full run rate depreciation coming from the Paso de los Toros plant will be, let's say, in round figure is about €40 million per quarter, and that was not yet fully in the second quarter. So that explains the difference in a sense to a large extent that you were asking about. Then in terms of, let's say, hedging in the energy business as a whole. Of course, there's still some uncertainty in the Olkiluoto 3 volumes, but we are, let's say, hedging going forward in a sense, as the market liquidity allows also in a sense, implementing part of the hedging of risk management through bilateral contracts.
Harri Taittonen
Okay. Okay. Thank you.
Jussi Pesonen
Ladies and gentlemen, I guess that this was the quarter [technical difficulty].
Operator
The next question comes from Ram Kamath from Barclays. Please go ahead.
Ramachandra Kamath
Hello. Hello.
Jussi Pesonen
Yes, go ahead.
Ramachandra Kamath
Thanks for taking my -- yes, thanks for taking my questions. I have a couple of, please. Pulp inventory days at elevated levels and destocking continuing in all the product lines, do you see any sign of higher cost capacity closure? And how long it would take to balance the market in your view? Yes, that's my first.
Tapio Korpeinen
Well, like we already discussed earlier here that we have seen, in a sense, obviously, temporary curtailment from perhaps the higher cost producers, but let's say, fairly broadly, but then also permanent closures that have been announced. So in that sense, yes, we’ve seen those actions taken by the producers. And time will then tell as said how the sort of price cycle then evolves from here.
Ramachandra Kamath
Okay. And on the OL3, I mean, the previous -- on the hedging part, I understood if it is correct to my understanding, the volume for -- from OL3 was not hedged earlier, but does this have any impact on 2Q results? And as the full production, full commercial production are added in the future, do you plan to hedge this completely? Or what would be your overall hedging position as a group?
Tapio Korpeinen
Well, I'd say the way we look at hedging generally speaking is, of course, we kind of build our position over several years. And again, like we’ve informed earlier when Olkiluoto 3 was still in the commissioning phase, none of the Olkiluoto 3 volumes were hedged as they were uncertain. Now we start to look at, let's say, total capacity, total production portfolio like we’ve seen or done in the past, but now including Olkiluoto 3 volumes as well. But then time will tell in a sense how we sort of take a view and build up the hedge position during the coming quarters and years, including both, like I said, futures contracts and bilateral contracts.
Ramachandra Kamath
Okay. And possibly the last one, if I can sneak in. In the previous quarter presentation, you’ve this buyback under your distribution as well as capital allocation policy. If at all, you were considering it, what would be the parameter you would consider before taking a decision on buyback?
Tapio Korpeinen
Well, what we’ve said is that buybacks is one of the tools in our toolbox as you sort of refer, and obviously then it's a question of what is our kind of cash flow profile going forward during the time, perhaps where the cash outflow is less to these CapEx projects. And obviously, then whether we think it's a good investment to actually invest into the company shares. So, again, that is something that I'm sure the Board will sort of consider then in the future. At the moment, obviously, we are still in the phase of ramping up and finishing the projects that we’ve in hand. And let's say, then also looking to improve performance in the second half of the year.
Ramachandra Kamath
Okay. That’s helpful. Thank you.
Jussi Pesonen
And now I try again. Thank you for joining us this afternoon. Thank you. Bye now.
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UPM-Kymmene Oyj (UPMKF) Q2 2023 Earnings Call Transcript