UPM-Kymmene Oyj (OTCPK:UPMKF) Q3 2020 Earnings Conference Call October 27, 2020 7:15 AM ET

Company Participants

Tapio Korpeinen – CFO & EVP, UPM Energy

Jussi Pesonen – President, CEO & Head, UPM Biorefining

Conference Call Participants

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Alexander Berglund – Bank of America Merrill Lynch

Antti Koskivuori – Danske Bank

Lars Kjellberg – Crédit Suisse

Harri Taittonen – Nordea Markets

Robin Santavirta – Carnegie Investment Bank

Mikael Doepel – UBS Investment Bank

Cole Hathorn – Jefferies

Linus Larsson – SEB

Jussi Pesonen

Ladies and gentlemen, welcome to UPM’s Quarter three 2020 Result Webcast. My name is Jussi Pesonen. I’m the CEO of UPM. And I’m here with our CFO, Tapio Korpeinen.

Tapio Korpeinen

Hello to everybody.

Jussi Pesonen

So welcome to this meeting. In Q3, we delivered in several fronts. First of all, we achieved a satisfactory result in the highly exceptional circumstances resulting from the COVID-19 pandemic. Secondly, we took quite a lot of decisive actions and announced significant cost reduction measures to ensure our future performance.

In Communication Papers, we are rightsizing our production capacity and in support functions to level of expected demand for the actions. In several other businesses and global functions, we are further improving our cost efficiency. These cost efficiency measures means that in every corner of UPM, we take actions.

Our safety and health precautions continue to be successful. Our business operations continued without interruptions, and our transformative growth projects progressed according to our plans.

UPM is really in a unique position. We continue to take actions to ensure performance. We drive for performance in all our businesses. We have very attractive growth projects under construction in pulp and biochemicals. That will deliver significant earnings growth and change of the company’s position in the future once completed by the end of 2022. And we will continue developing our next growth opportunities in biofuels.

It is typically, when the times are good, you need to prepare yourself. You need to have a strong balance sheet. You need to develop projects and put lot of innovation. But when the times are bad, you are then able to continue with your strategy. But I would like to underline that in all times, you need to keep the cost competitiveness under check. And that’s what we are doing.

Let’s start with the Q3 figures. Our Q3 sales decreased 19% from that of last year quite significantly. This was mainly due to 21% lower graphic paper deliveries and 19% lower pulp prices and then 11% lower graphic paper prices as compared that to last year.

Our EBIT, comparable EBIT, decreased from that of last year. However, comparable EBIT increased slightly from Q2, and our EBIT margin remained clearly above 10%. Our operating cash flow recovered, and our financial standing remains very strong. Our net debt was only €89 million at the end of Q3.

Net debt-to-EBITDA ratio was 0.06x, and liquidity stood at €2.3 billion. This put us in a great position to proceed with our transformative growth projects with focus and determination.

So far, COVID-19 pandemic has caused little direct impact to UPM. With our extensive precautions, we have been able to keep the number of infections on a low level across the UPM operations. Our business operations have continued without the interruptions.

Uruguay, as a country, is really important to us, has implemented very stringent COVID-19 measures and has succeeded in keeping the overall level of infections at very low level in the country. This, combined with our own extensive safety measures, has kept UPM sites in Uruguay free of COVID-19 cases.

This is very important as we, today, have already more than 2,500 people working on our construction site in Paso de los Toros and also in the port. Our transformative growth projects, pulp project in Paso de los Toros in Uruguay and the biochemicals project in Leuna in Germany continue well on track, and the planned startup time is well also in plan.

While our business operations have not been directly impacted by the COVID-19 pandemic, the related lockdowns and containment measures around the world as well as change in consumer behavior have impacted demand for various UPM products.

On this page, Page 4, you can see the quarterly demand changes year-on-year in Europe for graphic papers as well as labeling materials. Like we discussed 3 months ago during the wide lockdowns of the businesses, offices and schools in Q2, graphic paper demand decreased by 32% from that of last year. In Q3, many of the more severe lockdowns have been eased. However, distant work continued in many places, and the overall economic activity remained well below pre-COVID levels. Graphic paper demand recovered, partly being 18% lower than that of last year.

In springtime, demand for self-adhesive label materials and specialty papers got additional boost, as consumers shifted from their spending from away-from-home categories to packaged daily consumed goods and e-commerce. In Q2, European demand for self-adhesive labels grew by 10% from that of last year.

In Q3, we saw some normalization of this additional demand. In summer months, there was destocking taking place, which is not typical for the label stock materials. But this year, because of the COVID, it happened in our customers’ value chain. As a result, the European demand for label materials decreased by 3% in Q3. However, we estimate that the underlying demand continues to be good and on a very solid level.

Finally, pulp demand has held up relatively well throughout the year. This has been supported by good demand for tissue and many packaging and specialty paper products. Pulp consumption in graphic paper production has decreased. Year-to-date, global pulp shipments are up 5% from that of last year.

UPM’s pulp deliveries continued on high level, one of the highest quarter we had actually, quarter three, in deliveries once again. Our business model is working well. Low pulp consumption in Communication Papers has not impacted our pulp sales.

But ladies and gentlemen, at this point, I will hand over to Tapio for some further more analysis on our Q3 results. Tapio, please.

Tapio Korpeinen

Thank you, Jussi. Here, we see the comparison of the Q3 comparable EBIT to Q3 last year and sequentially to the second quarter this year. So starting with the comparison to last year’s third quarter, we had two main headwinds: sales prices and graphic paper deliveries. Sales prices were below last year in all of the business areas. We did achieve a clear reduction in variable costs, but this offset only half of the price headwind. The negative volume variance that you see here comes from the 21% lower paper deliveries in Communication Papers. We achieved a €40 million reduction in fixed costs in the third quarter, which offset clearly more than half of the volume impact. One can say roughly that about half of the fixed cost reductions came from temporary measures.

When we compare sequentially to the second quarter, you can see the negative impact of 5% lower paper prices. On the positive side, variable costs continued to decrease. Paper deliveries increased sequentially as paper demand partially recovered. Fixed cost came down, partly due to seasonal reasons and also due to the closure of UPM Chapelle paper mill and Jyväskylä plywood mill.

On this following page, on the right, you’ll see the continued good performance in Raflatac and Specialty Papers, shown here in the quarterly development. As Jussi discussed, demand for labeling materials somewhat normalized in the third quarter. Earnings partly normalized as well but in both businesses remained on good level, thanks to good margins. In Specialty Papers, the prices of fine papers in China were lower than in the second quarter, but demand continued to improve. In the middle, on the upper row, you see Communication Papers’ performance. Paper prices decreased by 5% from the second quarter. However, thanks to the ongoing cost reduction measures and improved efficiency, the business was able to turn back to a positive EBIT in the third quarter.

In Biorefining, pulp production and deliveries were strong. Biofuels achieved a new quarterly production record. However, pulp prices remained at a low level, affecting the profitability of the business area as a whole.

Energy continued to deliver stable, good performance. As the hydrological situation normalized, then market prices improved. The business exceeded well in optimizing hydropower in the volatile markets. And Plywood delivered relatively stable performance. The market for spruce plywood was good, both in terms of demand and prices. However, the market for birch plywood remained clearly weaker.

In the third quarter, we released some of the working capital increase that took place in the first half of the year. And therefore, as a result, operating cash flow improved in the third quarter from the earlier quarters, totaling €365 million. Like Jussi already mentioned, our financial position continues to be very strong. Our balance sheet is almost debt-free with only €89 million of net debt at the end of the quarter. Liquidity reserves are high, totaling €2.3 billion. And there are no financial covenants in UPM’s debt or credit facilities.

This Page 9 shows our CapEx estimate for this year. Our latest estimate for this year’s CapEx is €950 million, including €650 million on the two transformative growth projects: Uruguay and Germany. This estimate has come down somewhat during the year, as the timing of the larger CapEx items gets clearer and closer in time.

As Jussi said, the projects proceed in line with the planned start-up schedule. And based on this estimate, as of this year, we will have invested about €700 million on the two transformative projects, and about €2.5 billion remains to be invested roughly over the two coming years. Our outlook for 2020 is unchanged from the previous quarter. So we confirm the outlook for this year, as is shown on this slide. The COVID-19 pandemic and the related containment measures as well as the economic downturn continued to cause high uncertainty. One thing to keep in mind here is that we will have significantly more maintenance activity in the fourth quarter than in the previous quarters of 2020. This is mainly due to the 2 pulp mill maintenance shutdowns at Pietarsaari and at Kaukas mills that were postponed from the second quarter this year. Now these shutdowns are proceeding with strict safety and health precautions. We expect about €50 million impact on the 2 shutdowns combined in our fourth quarter Biorefining results. And as always, in this figure, we include the maintenance costs and the impact of lost production during the shutdown.

And now I’ll hand over back to Jussi for some comments on the cost-cutting measures and growth projects.

Jussi Pesonen

Thank you, Tapio. Our focus is clear. We know what we need to achieve in the coming quarters. We will run our businesses efficiently and take measures to drive good performance in everywhere in UPM. We will implement our transformative growth projects with determination and focus on timetables and costs and health and safety of our own people and also in our project people.

We continue to develop the next step of our Biofuels business. We are having a plan to grow that business with a 5 times bigger facility. This is how we aim to create value to our shareholders. That is very important. During quarter three, we took forward plans for decisive restructuring and efficiency improvements. Closing of the Jyväskylä plywood mill in Finland and the Chapelle paper mill in France were finalized early in the quarter. Plans to close Kaipola paper mill in Finland and to sell Shotton paper mill in Wales were announced. The Kaipola mill will be closed down in the middle of December.

Streamlining began in quarter three in business functions of the Communication Papers in the Finnish pulp mills at the Tervasaari mill and at the UPM Forest. In addition, UPM Raflatac and UPM’s global function announced efficiency improvement plans in October. Unfortunately, many UPMers are suffering of all these actions, but the measures are necessary in the long run. UPM has taken extra measures to support transition from job to job. And I’d like to thank all UPMers for their work to secure our future commitment and pragmatism during these times. All of us in the company is highly appreciative. Thank you.

All of these measures, combined with — expected to result in annual cost savings for approximately €130 million. With the conversion of the Nordland PM2, we are also reducing Communication Papers’ capacity by almost, with these all actions, 1.2 million tonnes in 2020 or more than 1.4 million tonnes after the divestment of Shotton paper mill.

Here, you can see the quarterly postcard presentation from Uruguay. At the pulp mill construction site, civil construction works are proceeding according to the plan. Construction of the chimney is its final phase, and the foundation for the other process buildings are proceeding. Underground piping is proceeding as well in — very well. The project office and canteen have been finalized as well.

At the pulp mill terminal site in Montevideo, pier and tank areas are well proceeding on construction. And the pulp warehouse and unloading areas, steel frames are ongoing. So we are proceeding as we planned.

The biochemicals refinery project in Germany is also progressing well, and the construction has begun at the site. The pictures are from the groundbreaking ceremony early this month. On the right, you see the Saxony-Anhalt Prime Minister, Dr. Reiner Haseloff, is giving his speech at the event, welcoming our innovation and investment. The investment was awarded The Bio Act of the Year 2020 by the World BioEconomy Forum in September this year.

Ladies and gentlemen, UPM’s long-term value creation is driven by our spearhead of growth strategy. These are the sustainable businesses with strong long-term fundamentals for demand growth and high-entry barrier. This year, we have achieved record earnings in Raflatac and Specialty Papers. We continue to see attractive growth opportunities in the specialty packaging materials businesses for the coming years.

Our highly competitive pulp mill investment in Uruguay is proceeding, as I have been telling, in line with the planned start-up schedule. With the low-cost position and large scale, it represents the step change in UPM’s earnings when it is up and running.

The biochemicals refinery investment in Germany is also proceeding well. This is an attractive investment which will open totally new markets for UPM’s long-term growth. Development work continues regarding to our next step in biofuels.

Ladies and gentlemen, this page is illustration of UPM’s transformation over the past decade and in the coming years as well. We discussed this among many other topics in our Capital Markets Day, and you can find the CMD recording in our website in case you missed the event.

In the transformation phase 1, we set up an efficient and agile operating model. We improved our strong focus on performance, and then we strengthened our balance sheet so that we can now implement also large-scale growth projects. But on top of that, we were launching early enough a lot of innovations to be prepared. We have prepared the growth projects truly to achieve the target returns. This is really the interesting part of the transformation phase 2. This has taken years of preparation and innovation, not to forget sustainability work that we have been doing together.

We continue to take actions to maintain good performance in all businesses, particularly in our Communication Papers business. Even though we have a strong track record in Communication Papers earnings, EBIT margin in the growing businesses have been clearly higher than that of mature paper business. Thus, the changing business mix drives both earnings and perception of the company. The new positioning is there.

This page shows our kind of a track record on key sustainability ratings and recognitions. We believe sustainability forms an important part of the competitive advantage and is a growth driver in many of our business areas, particularly in spearhead of growth businesses. As an example, we have signed the UN 1.5°C climate target, committing ourselves to a significant reduction of the emissions and practicing climate-positive forestry, innovating products that are replacing fossil materials and contributing climate change mitigation throughout emission reductions.

In Q3, as one of the 41 companies, only 41 companies worldwide, UPM was again recognized as a UN Global Compact LEAD Participant for our strong commitment to responsible business. We greatly value this recognition. Among some other recognitions, I would like to highlight the CDP where UPM is one of only 6 companies worldwide that have achieved A rating in the 3 categories: climate, forestry and water. In MSCI ESG Ratings, we have highest AAA rating.

But ladies and gentlemen, this page is concluding our prepared part of the presentation. And dear operator, we are ready for the Q&A session. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Alexander Berglund from Bank of America.

Alexander Berglund

Two questions from my side. I’ll start with the first one, which is on graphic paper. So my question is, if in the current environment, if you think that there is a need for more capacity closures to balance the market going into next year, and also how you see UPM’s growth here. Do you think that UPM will make further closures? Or are you happy with the industrial footprint that you have right now with the measures you’ve been taking? And how do you think that might be up to others or potentially higher-cost producers to go ahead and close capacity? That was my first question. I’ll let you answer that, and then I’ll follow-up on my other question.

Jussi Pesonen

Thank you for the question. This was a surprising question. When you have been taking 1.2 million tonnes of capacity in last 12 months, I was expecting this has been the case in last 15 years, as I have been the CEO of the company. Obviously, we take measures when there is a need for taking measures. And basically, with these measures that we have been taking, our internal operating rates are coming to be, at least short term, on a good level. We are talking about more than 85%.

Of course, everything is very much related to out of how the paper demand in Europe especially in Europe, will develop. And may I only remind all of us that in May, we saw a 40% decline in demand year-over-year, June 25, July 22, August 19 and September 13. So we have seen the normalization in that as well. But quite firmly, I can say, and we take actions when there’s a need to take actions. It is what I have been saying for the last 15 years. And I don’t remember a year after 2006 when UPM has not closed capacity.

This is for the reason that we keep our cost competitiveness under check. So like I said in the beginning of the call, in the good times, you prepare yourself. In the bad times, you deliver with your — and you can maneuver throughout the difficulties. But in all times, you need to take care of the cost competitiveness. Obviously, this is related to paper. Your question is to paper. But for me, the euro earned in every business is as important as in the paper business. And therefore, we take actions in all businesses and in all functions. So every corner of UPM is contributing to improve our cost competitiveness.

Alexander Berglund

My second question is on dividend, and I know it’s a question for the Board, and we’ll have to wait for the Q4 results. But I just wonder if you could share a bit your thinking here because we’re getting a lot of questions on dividend and how you think about payout ratio versus the balance sheet and CapEx. And you have given that €3.5 billion to €4 billion illustrative example. But if any comments, how you’re thinking about the potential phasing of that.

And another question that come up as well that I wanted to ask you is, in these tough times, has there been any political pressure that we should be aware of against paying large dividends, given it’s a tough time for the economy and the industry?

Jussi Pesonen

Now if I start from the latter part, have we seen any political pressure on dividend. I could understand the kind of challenge if our balance sheet wouldn’t be strong if we wouldn’t invest. But if you take UPM, we have a €3 billion investment portfolio ongoing. So we are putting a lot of effort to our future and future earnings growth and the value of the company. And then the balance sheet is rock solid. Therefore, I have not seen any further than maybe public statements that it is not good to pay dividend during these kind of times. But I have not seen any particular point that it would have affected our kind of consideration for these two reasons. As I said, we have all the money to develop the company as in the best way possible with €3 billion investment money and then the rock solid balance sheet.

When it comes to dividend, obviously, you’re very right that it is Board to make a proposal for the Annual General Meeting. But obviously, we need to think about long term and a bit kind of over these kind of exceptional times as well, looking this bigger picture where, of course, the cash flow and the balance sheet are important considerations.

We work on that basis in management that we drive for performance. We drive for the implementation of the projects, and then at the same time, building a platform for very solid, predictable dividend for UPM. So the guidance that we have given is not a hard floor or not a hard ceiling in that respect. We need to have a bigger picture. But that discussion obviously comes early next year.

Operator

Our next question comes from Antti Koskivuori from Danske Bank.

Antti Koskivuori

It’s Antti Koskivuori from Danske. Three questions from my side. First one, a follow-up on Communication Paper and the market balance. You mentioned your operating rates to reach 85%. I was just wondering, how does that compare to the total European market? Would be very interesting to hear your views on that.

Jussi Pesonen

Yes. I don’t have a figure for — Antti, I don’t have a figure for you. At least, I’m working for UPM, and for me, the efficiency comes — it has always come from that, that you are in all — every minute, every day, you are cost competitive and run your asset efficiently. And therefore, I’m concentrating on keeping the kind of our assets running and take actions when there’s a need for that. Maybe call me, call later to discuss. I have no statistics.

Antti Koskivuori

Yes. I was just trying to get a sense of the overall market balance at the moment or going to ’21, and that was the reason for asking that. But yes, I can take it up with Mika later on. And then, the second question on the businesses that has kind of benefited from the COVID-19 during the first half of this year. And now you said that in Q3, in labels volumes, there is — the destocking impact is visible in Q3. I was just wondering, how do you see the inventory levels at your customer side at the moment? Should we expect kind of similar type of negative impact on deliveries also in Q4?

Jussi Pesonen

First of all, in label stock materials, we have not typically seen any of this kind of inventory kind of buildups and then — or swings in inventories. That is not typical for the business. But when the lockdowns came suddenly, there were quite many customers thinking about that, hey, let’s call in extra stock. And that has been now the reason for the minus 3%. If I look at the order inflow in UPM, it is in a good level. So that’s how we see it today.

And then when it comes to Raflatac’s performance, it is great to see now 3 quarters, consecutive quarters, above 10% of EBIT margin; whereas last time Tapio explained that we — 60% of the good result is in our own doings, and then 40% was the kind of supported by the tailwind.

Antti Koskivuori

For sure. All right. And the last question, just a clarification on the maintenance cost you see for Q4, just to get it right. Is it the maintenance, as a total, now seemed to be €50 million higher as a cost versus Q3? Did I get it right?

Tapio Korpeinen

Well, as said, we have the two pulp mill shutdowns, maintenance shutdowns, Kaukas and Pietarsaari, and also, in the case of Pietarsaari, some days longer than usual maintenance shutdown there. So that €50 million relates to the impact of those, both in terms of the actual cost of the maintenance and the impact of the lost production as such.

Antti Koskivuori

Yes. But that €50 million is including all the maintenance that you are going to do in Q4, not just those two mills?

Tapio Korpeinen

Well, main part is from those two mills.

Operator

Our next question comes from Lars Kjellberg from Crédit Suisse.

Lars Kjellberg

Of course, there’s quite a lot of growth projects coming and, I guess, starting up in ’22, really impacting in ’23. In the years between, what sort of measurements or actions are you taking to safeguard profitability? You’re, of course, rightsizing your capacity. But do you have any high-yielding sort of quick win investments in the process to drive profit improvement over and above what can happen in the market? First question. And the second one, I just wanted to hear you, the status report from Shotton, where you are in the process of divesting that mill. And finally, are you seeing any pressures, up or down, on operating costs, raw material costs in any particular part of your business?

Jussi Pesonen

Lars, I take the first two, actually, the Shotton case and then the CapEx. Obviously, as it is actually stated in our presentations as well, we continue with the kind of operative investments and that CapEx as well, obviously, trying to save some of the money as well, do the kind of transformative projects as well. But obviously, short-term competitiveness investments, they are not in the same size as we had in the previous years when you were talking about like pulp mill debottlenecking that we have done. But obviously, cost-related and maybe some of the quality and product-related investment as well, which are the high-yield investments as well. So basically, that part is typically very cost-competitive and improving our profits and securing — ensuring the profits as well.

When it comes to Shotton, it is early stage. We do have interested parties already. They’re actually discussing with. But we will update you when the things are proceeding. Now it is early stage, but quite a lot of interest has been.

Lars Kjellberg

Got it. Look, you mentioned pulp mills and debottleneck, and of course, your paper capacity is shrinking and your sort of long position in pulp is growing. Just wanted to hear your views on where this pulp is going. Where else can we find an address as paper mill shutdown and pulp mill stay open, which seems to be a bit of a theme? And specifically, how you think about this as a company?

Jussi Pesonen

UPM, when we made the kind of decision 2008 to make the separation between pulp and paper, ever since that, it has been pretty clear to us that the majority of the pulp is sold to the market. If I remember correctly, we are roughly 1 million tonnes using our own pulp today in our own operations in papermaking. So basically, the business has been growing pretty fast in 3 segments. It is in packaging areas that we sell roughly 1/3 or even more today; tissue, hygiene, another 1/3 or more; and then the rest in the graphic paper segment, where it is shrinking as well as a delivery.

So basically, this very well positioned when we made a decision that pulp business is separate business and the kind of commercial strategies based on the long-term targets and long-term success of the pulp business and preparing a lot of actions when the Uruguay Paso de los Toros project is completed by 2020 — end of 2022. Very actually solidly considering that and happy with the progress that our people are doing to prepare the growth step as well. So basically, this is quite good decision that we made 2008.

Lars Kjellberg

Just a final question on pulp and specifically to China, and considering that you have operations in China, you’ve seen a bit of pricing pressure, I guess, in fine paper. So I just wanted to hear a bit how you think about China now. And there’s been a flurry of announcements from some Chinese companies building pulp mills, which from the outside doesn’t necessarily make a great deal of sense. Can you make any sense of that? And then just also, how do you think China is doing right now and certainly in your own business?

Jussi Pesonen

Yes. China is, in my opinion, clearly back on growth track. So it is visible in all businesses that we are having a significant role in China. Volumes are growing, and even the statistics are saying like in the fine paper business, we have seen lately a price increases, and there’s a lot of kind of announcement of the Chinese players and all of us to improve prices.

Raflatac is having a solid position and then the specialty papers and pulp. So China is back on growth and quite a lot of activities is ongoing. As we can see from many other businesses as well that China is clearly growing and on a growth track.

Lars Kjellberg

And China building its own pulp mills, if that is a consideration for how you think about pulp markets going forward?

Jussi Pesonen

Yes. Sure, Lars. It’s a kind of where China typically is building pulp mills based on imported raw material. And we’ll see how many and how big the volume increase will be in net-net effect. I wouldn’t rule out that a lot of old pulp mills are still to be closed as well for the environmental reasons, for the climate reasons and for the efficiency reasons. So we’ll see what happens but quite challenging to consider to build a pulp mill without having a kind of domestic raw material. But that has been the typical way of — in Asia, like the Japanese have been making that many years. We’ll see.

Operator

Our next question comes from Harri Taittonen from Nordea.

Harri Taittonen

Harri Taittonen from Nordea. Just a couple of questions on the near-term sort of outlook on that. I mean, a year ago, you said in Q4, the energy refunds were — that amounted to a reasonable number. I think you said that they were up by 20% from the previous year then. I mean, can you just sort of give a bit of color of the dynamics and the quarter-on-quarter sort of implications? Now you didn’t have any this quarter in Q3, but there should be probably something coming in, in the fourth quarter. So some color on that will be useful.

Tapio Korpeinen

Well, it’s the pattern that we have had, like you said, last year. It’s in the fourth quarter when, then, these are accounted for in the result, primarily in the Communication Papers. No number to give on that or any kind of guidance further. But of course, one thing to keep in mind that they are both in Finland and Germany, partly also in some other European locations. But let’s say, the most significant, Finland and Germany, there are sort of different sort of mechanisms in place, gritty refunds and so on, but also, this CO2 compensation, which is also related to the CO2 price in the emissions trading market. So if you look at the development of the CO2 price, that will also give you some idea about kind of the direction — directionally, what can be expected.

Harri Taittonen

Right. So basically, there’s lower volumes and somewhat lower prices that the impact would be negative year-on-year but still you would have quarter-on-quarter. There is a sort of sequential impact on a positive side. But on the sort of the paper price erosion, you reported about that 5% decline in the average pricing, and that was pretty much what the list price is also set. Is that price erosion now in earnings? Or do you see like the average selling pricing in the Communication Papers side? I mean, should it be more or less flat now? Is it sort of come straight through all at once?

Tapio Korpeinen

Well, that was implemented from the beginning of the quarter. So from that point of view, I think, kind of the third quarter performance is reflective of that.

Harri Taittonen

Right, right. And the final question, the wood costing sort of specifically. At least, the list prices have been coming down, and there’s been comments on the kind of very good availability of that sort of wood in Continental Europe at low prices with the sort of the bark beetle damages. But I mean, was that sort of driving that cost tied a lot in Q3? And how do you see the Q4 versus Q3, if there is that, sort of, still? Or is it sort of moving plateau? Or what’s the direction that you see at the moment?

Tapio Korpeinen

Well, maybe I’ll comment. I think Lars also had the question earlier, which we didn’t have a chance to comment. I think, obviously, if you look at the sort of comparison that we had between the quarters earlier in this presentation, obviously, there’s been benefit of lower variable costs that we have had year-on-year and also sequentially from the second quarter, partly because of our own measures, as we always do, to improve efficiency partly because of tailwind. It’s been, I would say, quite broad in a sense, fiber costs, including wood and recovered fiber and then other sort of inputs like, for instance, the labeling materials, have been, let’s say, deflationary for us.

And I would say that, in a sense, that is the outlook for the remainder of the year as well. So obviously, wood cost has been part of it. But obviously, there are many other factors there as well. If you kind of look at our kind of developmental curve in terms of how the wood cost develops, obviously, the wood is sourced over time. So I wouldn’t sort of expect big swings quarter after quarter in a sense here, but relatively, let’s say, continuous trend there for the remainder of this year.

And obviously, early to say too much about next year, but maybe to what Lars was also asking about, we don’t see any kind of a strong reversal of that kind of a trend next year. So relatively calm cost environment perhaps, but that remains to be seen.

Operator

Our next question comes from Robin Santavirta from Carnegie.

Robin Santavirta

Regarding China, you probably thought that the quarter with lower fine paper prices after the declines we had in the spring. You said demand is better in China now. Did you see increasing prices in fine papers during the quarter of Q3? And what is the market balance at the moment? There’s been some price increase announcements. Do you see balance good enough for higher prices still? Or is this the price we should expect for the end of the year?

Jussi Pesonen

The volumes recovery has been pretty solid. And like I said that China is back on track on growth as well. So we’ll see how then the prices will be seen in the future. But there are attempts already of increasing prices in short term as well in fine papers.

Robin Santavirta

All right. Then also related to China. I guess, China now will stop importing recovered paper as of 2021. Do you see any changes to sort of your operations or the market environment for you guys, either in China or then in Europe on the back of that decision?

Jussi Pesonen

Not that I know actually at this point that what will be the kind of dynamics of it. But obviously, China has been taking volume from Europe as well. So basically, this might be positive. But on the other hand, we have seen that a lot of recovered paper will be then processed somewhere else, and then the fibers will be delivered to China as well. So it’s kind of zero-sum game maybe in that respect. We’ll see. But it takes time, of course, and short-term effects are there, which is difficult to predict what will be the short-term effects.

Robin Santavirta

All right. And then finally, related to — you mentioned the European graphic paper decline sort of 13% in September, which is a large number but clearly less than in the spring. Now we see lockdowns sort of tightening again in Europe. Is this something that you can see now from order intake at the moment or already now in October? Or how has the graphic paper order intake develop for you guys now post Q3?

Jussi Pesonen

Actually, these lockdowns that are in the minds and hearts of the decision-makers are pretty much as we speak. Therefore, it is hard to say what will be the consequences. And as I have understood, in many countries, like here in Finland, that we are not going to make similar type of lockdown as we made in springtime, so remains to be seen how does that affect. But like I said that it is early to say anything. It is just rapidly actually proceeding thing at this point of time. We’ll see. But obviously, the positive development has more or less normalized things somewhat actually more than the springtime or stuff. But we’ll see, don’t know yet.

Robin Santavirta

Okay. Can you comment on sort of so far what you have seen after September in terms of order intake?

Jussi Pesonen

No, I won’t. No we won’t comment on that.

Robin Santavirta

All right. I understand.

Jussi Pesonen

Yes. Sorry, sorry.

Robin Santavirta

Yes. And then finally, if I just may, one more on this €130 million cost-cutting, can maybe Tapio comment a bit on the back of that? How should we expect that sort of fall down to the bottom line during 2021? So when will this be sort of fully implemented?

Tapio Korpeinen

Well, let’s say, the actions are being implemented during this year, of course. But the biggest sort of step, which we have talked about, is the Kaipola shutdown. And in practice then, how it will start impacting our — or when the savings start to come, obviously, kind of we will be at a full run rate, I would say, relatively soon by the sort of during the first half of the year or certainly sort of during next year.

Let’s say, some of these savings still will not sort of fully materialize from January on, obviously, but let’s say, we will sort of get to the full annual run rate during the year and should be, as said, coming there by the halfway of the year.

Operator

Our next question comes from Mikael Doepel from UBS.

Mikael Doepel

Just continuing a bit on the cost savings and just to be clear there. Are there any benefits that you expect to see already in Q4 this year? Or is everything coming next year?

Tapio Korpeinen

Well, let’s say, of the new actions, of course, that is materializing next year, we do have actions that were impacting already the third quarter fixed costs positively as well, like the Chapelle and the Jyväskylä plywood mill closure. But of the new decisions that have been now announced or plans that have been announced during the third quarter, then there, the impact will be next year.

Mikael Doepel

Okay. And in terms of the working capital, you mentioned the release that you saw in Q3. What do you expect for Q4? Do you expect to see a further release there? Or how do you think about that?

Tapio Korpeinen

Well, let’s say so that typically, we do release cash from working capital in the end of the year or in the fourth quarter. This is not a typical year, so we’ll see. But typically, that’s what you would expect.

Mikael Doepel

Okay. All right. Good. And then just a final question on the pulp market right now. How do you see it? And what’s your take on it in terms of the inventory situation, the value chain? How do you see demand and pricing tracking right now?

Tapio Korpeinen

I think Jussi gave some comments on that already, but I would kind of just reiterate that, let’s say, as far as our volumes are concerned, we have been able to find good demand for our output throughout the year, also in the third quarter, and particularly in the end, Jussi’s — that also Jussi talked about. And I think we have seen kind of a business recovery in China but in — across the board of the businesses that are relevant for us. So eventually, that will support the pulp market as well.

Then as far as the prices are concerned, that I won’t sort of forecast here. Inventories — and the producer inventories kind of remained sort of flat during the summer months now. So we don’t obviously see. There is no sort of statistics on what the inventory is that the customers are holding. But again, if the volume development is positive on the customers’ business, then that should actually dig into the inventories and/or deplete the inventories as well.

Operator

Our next question comes from Cole Hathorn from Jefferies.

Cole Hathorn

Just focusing on the Specialty Paper division. And I know your Nordland conversion has started to ramp up from the beginning of the year. With demand being quite a bit stronger in labels and specialty paper, do you see opportunities for further conversions there in the future? It’s the first question.

And then, the second question on a number of pulp projects that have been announced in Latin America. Could you just give a little bit of color between the difference of pulp projects being announced to those that actually come to be completed late into the future? Because I know that your Uruguay mill, you spend a lot of time making sure that you’ve got access to sell energy, transport, links are in place, et cetera. So just some color on the ability for announced projects to actually end up being built.

Jussi Pesonen

Those were very good questions. First of all, Nordland is now, as we speak, ramping up. And obviously, we think about the Specialty Papers in a broader view then, only not in a class in, but also some packaging rates. And obviously, when there’s a time for further conversions, we definitely can consider that. But the focus today is clearly ramping up Nordland. So when the time is right for the next steps, we’ll see that.

When it comes to Latin America, it is — of course, for us, it took 10 years to develop the project. And the main aim was $280 per tonne cash cost. So we were doing and developing things into the states that we have a high security for the lowest cost possible project in Uruguay. And therefore, it takes time. It is not — it’s not happening with just making an announcement and then starting to build the pulp mill. A lot of actions in the plantation, a lot of preparation on the grid and energy and the port and what have you. So it takes time to really make competitive facilities, and that’s the UPM way.

Operator

Our next question comes from Linus Larsson from SEB.

Linus Larsson

I’d like to ask on Lappeenranta and your remark about all-time high production. I wonder if you could share with us what the production was in the quarter. And also, I’d be curious if you were willing to indicate what kind of run rate return you have on that facility with this improvement that we have seen on output.

Jussi Pesonen

Thank you for the question, Linus. It’s quite — it was an impressive move that we made. We changed the catalyst in the springtime. We had the kind of stoppage — maintenance stoppage, and we changed that. And we got quite a good setup for the balance for the mill. We definitely not disclose the capacity increase, but it was a good step-up in production and volumes as well, which is a great news. And when coming into the financials of the mill, it is still performing very well. Unfortunately, we do not give the numbers, but the profitability is good.

Linus Larsson

And what — and the reason that I am asking is with the thought of future projects as well. And do you — and I know there are a lot of decisions, including locations, for the location to be made. But are you expecting that the next project will be even clearly more profitable than the current? And how are you seeing that decision-making going, given the uncertainty in the overall macro outlook, et cetera? Yes. And how you’re weighing different possible location against each other?

Jussi Pesonen

Yes, we do have the plan for everybody to — who are on the line, that we have a plan to make a 5 times bigger biofuels operations. And consequently, of course, we are kind of looking after more efficient mill as well when it comes to how to use raw materials and fixed costs and what have you, so basically, obviously, trying to make even at the same level or better. But with the current level, I would be happy for the next step as well, if that would happen.

Then we are now, as we speak, we are close — coming to the closure of the next step or next decision, which is then the kind of basic engineering step, FEL-3, as we call it. And — but we have not made the decision. And hopefully, in the coming months, we can actually take that step. And during that process, then everything will be reviewed in several locations for the — where the best possible return on capital employed will be delivered. And that will be then the decision where it will be located. But that work is not decided to start yet. But hopefully, in the few months, we will be there.

Linus Larsson

And so just the final question on that, if I may. When the earliest would the definite go-ahead decision be made?

Jussi Pesonen

If the FEL-3 takes a minimum 12 months, so when that decision is made, then we are starting the basic engineering. And typically, it takes 12 months. That is our kind of guidance for the investors as well. And then, the final investment decision comes. So the window for the final investment decision is opening.

Jussi Pesonen

Ladies and gentlemen, I think that we have spent our time, and thank you for coming and joining us this afternoon. Thank you. Bye now.