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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, welcome to UPM's Fourth Quarter and Full Year 2017 Result Webcast. My name is Jussi Pesonen. I am the CEO of UPM and I'm here with our CFO Tapio Korpeinen.
Hello to everybody.
Q4 was an excellent quarter for UPM. Increased sales prices and growing delivery volumes boosted our earnings. In this quarter they clearly [ outweighted ] the impact of higher input costs and unfavorable currencies. As a result, our fourth quarter comparable EBIT grew by 29% from the previous year's. Fourth quarter was 19 consecutive quarter of growing EBIT. Our operating cash flow continued to be strong in Q4 and our net debt ended at year-end EUR 175 million -- sorry, EUR 174 million, which was almost EUR 1 billion less than a year ago.During the quarter we also announced important steps in terms our transformation and growth options and possibilities. First in November we reached an agreement with the Uruguayan government on local prerequisites for the possible new pulp mill. Now we have entered to the second preparation phase of the mill project. The infrastructure projects and preengineering of the pulp mill are in progress.In our previous earnings call, we described our plans for the possible industrial-scale biochemical refinery as you remember which could open totally new growth platform for UPM. On top of these longer-term perspectives, we started a new focused growth project in plywood and in specialty paper businesses. During fourth quarter we also complete 2 growth projects, i.e., the Kymi pulp mill expansion and the Raflatac expansion in Poland.We will come back to these growth plans later in our presentation. As we have many topics to discuss in this call, I summarize the fourth quarter market environment very quickly. The macro environment is currently positive and it is fair to say that we enjoyed favorable markets in Q4. Demand for our -- basically all our products was brisk, and the sales prices increased in several of our businesses.But with these words, I will hand over to Tapio, who will analyze our results in some more details. Tapio, please.
Thank you Jussi. Here we have the quarterly comparable EBIT by business area, and starting from the upper left-hand corner, biorefining reported a significant increase in comparable EBIT as compared to the previous year. The average pulp price in euros increased by 19% from 1 year ago, or 6% from the previous quarter 3. Both pulp and biofuels deliveries grew year-on-year.During the fourth quarter we completed the scheduled investment and maintenance shutdown of the Kymi pulp mill, and this had a negative impact on the fourth quarter EBIT as compared to the maintenance-free third quarter. However, the maintenance impact was smaller than in the fourth quarter last year. Last year we had both the maintenance shutdown at the Fray Bentos mill in Uruguay as well as turbine revisions at 2 pulp mills.Next, higher pulp prices represented increasing fiber costs to the paper businesses, both Specialty Papers and Paper ENA. However, both businesses succeeded well in mitigating the cost increases with price increases in fine and specialty paper grades, as well as through our own variable cost reduction measures. In specialty papers, product mix improvement continued. Specialty Paper EBIT increased and Paper ENA EBIT decreased slightly from the fourth quarter of last year.In Raflatac, fourth quarter EBIT was seasonally lower than in the earlier quarters. However, this was the first quarter where sales margins started to recover after being under pressure in the earlier quarters through -- or from the increasing variable costs. Good volume growth continued and EBIT increased from the previous year.In plywood, delivery volumes and comparable EBIT increased both year-on-year and seasonally from the previous quarter. Energy reported the best quarter in 2017 as hydropower volumes increased above normal levels during the unusually rainy and warm autumn. This unusual weather condition had also implications to wood harvesting and I'll come back to that later.This page shows our comparable EBIT development year-on-year by earnings driver, and here you can see that increased sales prices were the biggest contributor to the EBIT growth year-on-year. This includes the increased pulp prices, but also fine and specialty prices, plywood and a turn also in Raflatac's pricing. Variable costs were higher than in the fourth quarter of 2016. However, external cost increases were mitigated by our continuous variable cost reduction program.The stronger euro was a headwind for us. All in all, the positive impact from sales prices in the fourth quarter was larger than the negative impact of the increased variable costs and unfavorable currencies.Delivery growth had a clear positive impact on the fourth quarter EBIT. This was fully visible in earnings as also fixed costs were slightly lower than in the previous year. Part of it -- part of this was due to the smaller maintenance impact in biorefining as already mentioned.On the right-hand side, you can see the fourth quarter EBIT changed year-on-year by business area. Biorefining benefited clearly from higher prices and from growth in deliveries. At the same time, the other businesses succeeded in maintaining strong volume development while mitigating the variable cost increases.Page 6 summarizes the key financial indicators for the full-year 2016. And as you can see, we were able to continue strong performance through the turn to increasing variable costs. Our top line grew by 2%, EBITDA by 5%, comparable EBIT by 13%, and comparable earnings per share by 14%. Also our comparable return on equity increased by 1 percent point.Operating cash flow was strong, EUR 1.558 billion, although it was slightly less than the 2016 record cash flow. The biggest difference was in working capital. In 2017 we succeeded releasing working capital by EUR 91 million, while at the same time as our businesses were growing, we were still able to improve efficiency and working capital turnover. In the previous year however, the working capital release was more than EUR 100 million larger.As a result of the strong cash flow, our net debt decreased by 85%, or almost EUR 1 billion and at the end of the year, our net debt to EBITDA ratio was 0.11x.Here we have the summary of the business area returns and long-term return targets; 5 out of 6 businesses exceeded their long-term targets in 2017. I'm pleased to note that in an environment of increasing pulp prices we were able to show good returns in biorefining, but also strong performances in Specialty Paper and Paper ENA, or still further down in the value chain in Raflatac. We increased the business area return targets 1 year ago. These targets are valid over business and investment cycles and they are relevant when we are considering new growth investments.Page 8 shows the group-level financial targets and the leverage policy also set 1 year ago. We were able to continue to grow earnings and improve return on equity. Regarding leverage we obviously have significant headroom to the policy limit of 2x net debt to EBITDA.Page 9 shows our outlook. We reached record earnings in 2017 and the fundamentals for 2018 continue to be favorable for UPM businesses. We expect healthy demand growth to continue for most businesses and in Paper ENA modest demand decline is expected to continue. We expect sales prices to increase in most businesses in 2018 as compared to 2017. There are also headwinds. We expect input cost to continue increasing in 2018 as compared to last year. 2018 also starts with less favorable currencies than in 2017.In Q1 we expect results to be impacted by temporary wood harvesting limitations in Northern Europe. As a background on this, the weather in Northern Europe was unusually warm and rainy, record rainy actually during the fourth quarter and in the beginning of 2018. In many locations the forest floor and forest roads were too soft and wet for heavy vehicles. This made it difficult to harvest wood in the forests and to transport wood from the forests to the mills. So the availability of wood was good, but the logistics of harvesting and getting the wood to the mills was hampered by the wet conditions. This situation is now getting better. However, before the situation normalizes, the temporary harvesting limitations are expected to have roughly EUR 30 million impact on our first quarter result.Now I would like to hand it over to Jussi for the dividend proposal and discussion on our capital allocation plans.
Yes. Thank you Tapio. Let's turn to the dividend and then the capital allocation discussion. This was clear that the outlook -- and let's move on.Page 10 you can see the situation UPM is in better standing than ever. In 2017 we delivered record earnings and consistently grow strong cash flow. Our net debt is close to 0. Our outlook for 2018 continues to be favorable. We have 6 strong business areas which provides us with a wealth of the future opportunities. These factors are taken into account in the board of directors dividend proposal for '17, and that is presented on Page 11. The board has today made a proposal for the AGM that UPM's dividend would be increased by 21%, i.e. on to the EUR 1.15 per share and this is representing 39% of our operating cash flow per share in 2017. So that's the board's proposal for the dividend.Then let's look at first backwards, so 5 years. When we have met investors during the past years capital allocation has been among the most common and the most important discussion topics. Of course, we have been talking about the performance and how well UPM can improve the profitability year-in, year-out. 19 consecutive quarters we have been able to improve the performance. But capital allocation of course has been quite in the center point.So let's spend a few minutes discussing this important topic. First I would like to take a step back and look at our achievements and capital allocation over the past 5 years from 2013 until end of 2017. You probably remember that we have introduced the current business model of 6 separate businesses and business areas in 2013 and I believe that is one of the -- one of the crucial points of turning UPM to the growth and especially having a better focus on profitability and performance.At the same time we launched some of the continuous improvement programs on a corporate level, but also in every business area. And as well we started to invest on growth through focused well-performing growth projects. Since then we have achieved a market improvement -- a marked improvement in our business performance. We have delivered attractive returns for our growth projects and we have achieved truly industrial-leading balance sheet.The Slide 12 shows you our cumulative capital allocation over the 5-year history. During that time UPM generated EUR 6.4 billion of operating cash flow. EUR 1.9 billion or 30% of the cash flow we paid out as a dividend to our shareholders. Another EUR 1.9 billion we invested back into the business where EUR 1 billion is growth investments and less than EUR 900 million is maintenance CapEx. And remaining EUR 2.6 billion or 40% of the cash flow we allocated to debt reduction. Now we have our house in order with strong competitive and growing business to build on. This gives us new opportunities for coming years.Page 13 is pretty much repeating our focus for going forward. Performance focus continues. We will pay attractive dividend and shareholder returns. Capital allocation to growth, but I would here always underline high standards for the return requirements. As you remember we renewed our return targets only 12 months ago and for this reason we believe that all of the investments and growth opportunities need to and has to meet those targets. And we will maintain headroom in our strong balance sheet.Then I would go to Page 14 which is summarizing our current investment portfolio to grow. On the left-hand side we have the kind of ongoing things which has been ever since 2013 pretty similar. There you can see the completed once in fourth quarter of '17 Kymi pulp mill expansion, Raflatac expansion. Then things that are -- or projects that are in construction phase and stage Kaukas pulp mill, Raflatac expansion in Finland. Just started Jämsänkoski label paper expansion in Finland and then Chudovo plywood investment. And then we are conducting a feasibility study in -- to increase our capacity in release liner and label papers.This is like revolver, new opportunities arise, and it has been many times always asked that, hey, whether this is actually drying of these kind of opportunities, but maybe this is a good showcase that these kind of opportunities we do have as mentioned on the left-hand side. And new opportunities rise.Right-hand side is we have a prospect that could be more transformative by the nature. The first of these is a possibility for a new pulp mill in Uruguay and why could this be transformative for our pulp business, the potential mill would mean a step change both in business and in earnings estimated 2 million tonnes versus our current capacity of 3.7 million tonnes and investment which will meet the high return requirements.Another opportunity for transformation comes from our emerging biomolecules businesses, i.e. biofuels and biochemicals. In fourth quarter we started a basic engineering study regarding a potential industry-scale biochemical refinery in Germany. And why could this be a transformative again can be the question. Entering to the biochemical business successfully could provide UPM with significant new growth platform for decades to come.And we have all, as I have been many times explaining we have also -- we are also exploring the next steps in biofuels, our Lappeenranta biorefinery which is in operation is now running at full capacity and has achieved good profitability and returns.Ladies and gentlemen, Page 15 shows an overview of the potential pulp mill project in Uruguay. As you know we have long experience in running big pulp and plantation operations in Uruguay, creating significant value to our shareholders. In November we really got into the point when we were able to sign an agreement with the Uruguayan government on a local prerequisites of the possible new pulp mill including infrastructure development initiatives.I will not go into more details of the agreement whereas it is a public document. Examples of the infrastructure initiatives includes operating the railway, connecting ourselves to the Central Uruguay. The possible pulp mill would have an annual capacity of about 2 million tonnes of eucalyptus market pulp. The preliminary estimate for the pulp mill investment is approximately EUR 2 billion. The planned site where we are locating the possible mill is close to city of Paso de los Toros in Central Uruguay. You can see the location on the map. The wood supply into the plant mill would come from really sustainably managed eucalyptus plantations in Central and east -- and northeast Uruguay and as we have stated that we already have a critical mass of the plantations in place.Next page is more or less repeating ourselves so that there are 3 phases of the whole project. Now we have entered the second phase, development of the infrastructure and pre-engineering permitting unnecessary conditions and that phase is now on development and moves on. We expect that the second preparation phase to take 1 to 1.5 years to 2 years before we could then possibly get into the potential decision making of the final investment.So that's where UPM's growth initiatives are all in all. And then finally before summarizing myself I would actually have to talk about Page 17. And this is an illustrative capital allocation for next 5 years assuming the Uruguay pulp mill investment as well.Please note I would like to underline here that this is not a forecast, but this is a kind of giving a kind of perspective where we are, how well UPM is standing today and how we look for the future. As we discussed here, the potential capital allocation for long-term period 5 years. However, 5 years is a very long period of time and therefore let's treat this as a kind of illustration.So what can we say about the issue? I believe strongly on the left-hand side that our business model is -- and our performance culture is in good shape going forward as well. It has been for the last 5 years, but -- so I have a kind of strong belief that so it is today and to us it means that we have a capability to generate a strong cash flow. I believe our business portfolio offers attractive opportunities for us to grow now and in the future. And then finally we aim to be attractive long-term dividend payer.Regarding our balance sheet we do not need to allocate capital to reduce debt. On the other hand we want to maintain headroom in our strong balance sheet so that we can seize unique opportunities if they become available. This all means that compared with the previous 5 years, we can simultaneously increase our shareholder distribution and allocate more capital into transform and growth of the company. But here again I would like to underline it needs to be meeting those improved targets that we set a year ago.Ladies and gentlemen, I would like to then summarize my presentation with Slide of 18. UPM is today better standing than ever. We have strong business and portfolio, attractive growth opportunities. In the 5 -- in the coming years we can simultaneously increase capital allocation to transform and grow the company in a profitable manner, increase distribution to the shareholders as the board proposed already today and then maintain headroom in our strong balance sheet.With these words, ladies and gentlemen, we are ready to take your questions. And dear Operator, we are ready to start the Q&A session. Thank you.
[Operator Instructions] And our first question comes from the line of Mikael Jafs from Kepler Cheuvreux.
And then I have 2 questions. One, it's around paper, the paper pricing. I know that this is not the focus area for you anymore, but we can see in various trade magazines that paper pricing for newsprint and magazines and uncoated magazines seems to be among the -- going up. Could you please shed some light on that? And then the second question would be around maintenance stops in the coming 2 quarters, if you could just sort of highlight what your plans are there?
If I take paper and then Tapio talks about the maintenance issues. I would like to still come back to paper is important business for UPM and it is generating excellent free cash flow. I believe that if one company is having a great good focus in paper business, it is us, and therefore it is not -- it is every business of the 6 are focused businesses for us and we are taking best out of the platform, but that was not the question. Paper prices, yes, there is, in this end of the year last date so that the paper prices are on increase. And it [ variates ] from business to business, but if we talk about Europe and Asia, we can talk about the graphic papers we have seen 5% minus or 5% plus in different grades price increases and that's a very good achievement. But same applies in Asia that we have been able to pass the increase of the costs, especially the pulp cost, but other cost as well into the paper prices. Other areas we have seen slight price increases as well in other regions. So basically, yes, there is a increase on paper prices.
Yes. And if I answer to the second question actually, we flip to Page 23 which is in the materials that gives you some background on the maintenance activities. We will have this year somewhat more maintenance activity than what we had in 2017. We will have a maintenance shut at 3 of our 4 pulp mills. Also we will have a maintenance shut this year at the biorefinery, the biofuel plant in Lappeenranta where we did not have a maintenance shutdown last year and then as usual in Olkiluoto there will be some maintenance work done in the second quarter. So first quarter no major maintenance activities there, but then the second quarter then we have Fray Bentos shut down. Again last year Fray Bentos did not take a maintenance shut, Kaukas, this Lappeenranta biorefinery and then the work in Olkiluoto. So that is kind of the list for this year and you can see the difference to the previous year as well.
Our next question comes from the line of Justin Jordan from Jefferies.
I just -- first question is a really simple one which is the CapEx guidance you have given this year EUR 350 million, I'm assuming that includes the projects that you've announced this morning?
Yes.
And then just going back to Uruguay for a second, it [indiscernible] you were sort of second phase where you've guided to 1.5 years to 2 years or so. In terms of news flow from that potential second quarter now in calendar '18, are we to be expecting any real news from UPM, I'm sure you're looking for perhaps development from the Uruguayan government in terms of any progress that might be sort of planned, but not projected in 2018?
The line was cut, I don't know if you, Tapio, got the idea, but to me it was a bit kind of there was a cut on the line.
On the news flow, I mean I think as we have said, what the government is obviously focused on now is basically putting the infrastructure --
Yes.
-- projects on track, they have started with tendering out of the railway project and one would expect that we will get some news flow in terms of how that progresses and is sort of concluded during this year, and then decisions from there forward as well as some of the other infrastructure developments, the harbor included. On our side the main kind of focus will be on planning -- permitting work so in that sense let's say that is perhaps less sort of lacking major events this year as such, but obviously important work that will continue and will obviously also involve people locally as the plans for the site and permitting and impacts on the environment are made.
Just one question on Kymi; also you've got 170,000 tonnes. Is that fully producing -- will be fully producing in calendar '18. And then just can you remind us then post that increase, is your net long pulp at the group level now probably about 700,000 tonnes or so?
Kymi will be definitely in full speed for 2018, so that's clear. Of course, we have had some of what Tapio described in early January, these wood shortages or the logistical problems, but out of that, excluding that, yes, Kymi will be on that level that it should be absolutely. And then the second part of the question was?
On the --
Your group net long position in pulp post the...
Yes, we are -- yes, we are some 600,000 tonnes or so.
And then you've previously guided to a sensitivity of a 10% pulp price move impacting profit -- sorry, EBIT post [indiscernible] by some EUR 33 million. I'm assuming that will be moving higher because of a) higher level pulp prices and b) of course euro increased net long?
Yes, obviously it's a function of the kind of net long position as you call it the difference between our production of chemical pulp and our internal consumption.
Just one final thing just on capital allocation. I'm intrigued by your Slide 17 by reference to Slide 12 in your deck today, you're assumed to be hinting at potentially an increase in the dividend payout ratio to perhaps some 50% of operating free cash flow, but there's obviously no formal change in your dividend policy being announced today. Can you sort of update us on the board thinking or is there at some point that you might expect some change in the dividend policy?
I think that the illustration that we made on that Page 17 is pretty clear what we are considering and that's how we think that future looks like, but you know I don't have anything else to convey a message, any considerations on top that, but this is pretty clear what we think and how the company is considering of the future.
And our next question comes from the line of Linus Larsson from SEB.
First question on pricing, we did talk about UPM graphic paper business, but if we look at the specialty papers business for a moment, you had very strong price development in the fourth quarter, some 4% or 5% up sequentially and year-on-year. And you did mention that mix or the factor is that the lion's share of that improvement or could you maybe talk a bit about potential price hikes that you've made in your release liners business or in your fine paper business in specialties papers please?
Fourth quarter if we talk about the specialty paper business, it is -- as you remember it is 2 businesses. There's the fine paper business in Asia and then the specialty papers in both in APAC and in Europe. Obviously, during the fourth quarter as the all the kind of statistics and curves are showing that we have been able to increase the prices of the fine paper business there in Asia quite nicely and that's one of the reasons that we have been reporting higher prices for the fourth quarter. And then when it comes to other specialty paper businesses, we have been able to improve the prices also for the -- during the end of the year. So that's how it goes in Europe and in Asia as well.
So you did hike release liners prices in the fourth quarter if I understand you right then, and then are those prices trending up also in the first quarter?
We -- actually by the end of the year we have seen some price increase as well on that area as well.
And also on the FX side given the weakening of the dollar and given the hedges that you have in place would you be willing to share with us the headwind that you see in FX in 2018 versus '17 as it stands today?
There you have let's say -- again if we look at Page 22 as the kind of a background, you have the exposure that we have in currencies and let's say considering what we have seen as change in the euro and dollar and euro-dollar exchange rate in particular during the let's say past 12 months to 15 months or 12 months to 13 months, one can say that this sort of level of change obviously again the policy is to hedge about half and as you can see 10% change in the dollar rate means about EUR 80 million in terms of euros. So if this trend is -- or this situation is where we are for the full-year, then we can be somewhere in a sort of range of EUR 100 million.
And then just one final question if I may, I mean looking at the biorefining division over the past 2 years you've been able to grow volumes -- I think you partially answered this question before, but you've been able to grow volumes by 5% to 6% per year. Given the raw material constraints at the beginning of the year, but on the other hand side the new capacity of Kymi and later Kaukas, do you think you will be able to grow volumes at the same magnitude in '18?
That is something that we definitely don't disclose. Of course, we do have this maintenance shutdowns as well, but obviously Kaukas -- we'll have an addition to Kaukas pulp mill shutdown is also the investment shutdown and then the Kymi will be in full speed during this year. So that's -- that are the 2 things that are positive, but then we do have one more pulp mill shutdown comparing that to last year.
Our next question comes from the line of Alexander Berglund from Bank of America Merrill Lynch.
Two questions from me. I'll start with the first one, which is on -- I believe you said we had a -- you were expecting EUR 30 million headwind due to the issues with the harvesting and so a bit more color on that is that just due to increased cost or is it because of you getting lots of shipments in the quarter?
Well, obviously it's to some extent both, but it's in practice during the quarter limiting production in some of our sites and that is then meaning lost margin on the lost production.
And then my second question is a bit -- is more on the capital allocation. And thanks a lot for going into detail. Just to push you a bit on it, because 0.1x net debt to EBITDA I mean can't be really an optimal leverage ratio. I understand you want the headroom going in to the Uruguay investment, but looking at the EUR 3 billion to EUR 4 billion it seems like the bulk of that will come from Uruguay and you still have as you say 1.5 years in phase II and you're probably not going to see that money spent until 2 years and like maybe another year until you get a return of that. Is your thinking why not give that out more to shareholders so they can allocate that money because it is a long time for that cash to be on the balance sheet?
I think that this is representing pretty much the consideration that we have in our minds today and obviously time will then tell that how the life goes on and how it will proceed, but this is I think now the consideration that we have in our minds today.
And our next question comes from the line of Mikael Doepel from Handelsbanken.
Couple of questions. First of all on Uruguay, I guess what you're saying there is that the investment for the pulp mill per se will be about EUR 2 billion, but could you give an assessment of the overall investment that you need to do there including then I guess forest-related things?
We -- like I said that of course we are not even putting that accuracy at this point of time. The final numbers we know when then the final decision will be taken, but that's the kind of mill investment. We have quite a lot of the land already and the forest standing as I said that the -- the kind of the bulk of the forest land is already existing, so the critical mass of the plantations are already existing. But I do not have any figure for you to give more what it requires from us, but it will require some.
But I guess it's fair to assume that's not going to be a huge number on top of the EUR 2 billion?
We'll tell.
Then another question on the pulp market. Pulp markets have been quite strong recently and prices continue to go up there. What's your thinking on the pulp market going forward? Do you see these price levels as sustainable throughout the year?
I guess that this is the point to somehow put our kind of consideration for the pulp market. I think that looking for only '18 is quite shortsighted. Yes, the pulp prices are quite high at this point. Time will tell how that will develop. But considering more the supply balance, demand balance '18, '19, '20 gives the kind of what pulp market situation more and having a 3% annual growth as we have experienced more than last 5 years more or less, i.e. meaning 1.5 million tonnes to 1.8 million tonnes extra demand every year. And no new capacity coming. Of course there are some pulp mills now currently ramping up and coming into the business, but then looking '19 and '20 there is no new capacity coming on-stream. And therefore one should always consider also the kind of supply-demand balance for '18, '19 and '20. But time will tell how the market will continue, but all the kind of long-term aspects are pretty favorable for pulp. There's a lot of discussion about replacing plastics and so forth and so forth meaning that natural fibers will be definitely one of the solutions and therefore I have a very good view on long-term pulp demand. So time will tell.
And then just finally on the prices and cost, you talked price increases and you're also saying that you're seeing some cost inflation out there. The bridge that you show on Slide 5 there in the deck shows that the price increases have been higher than what the costs have moved up. Is this a trend that you expect to continue into 2018 or do you expect the situation to get a bit tighter now if inflation is accelerating?
Well, maybe I would put it this way, that if you look at the cost piece, they are variable cost, and if you look at the impact, actually if you look at the same chart for 2017 as a whole compared to 2016, our variable cost was up by somewhat more than -- I think it's coming here -- by somewhat more than EUR 150 million. And that part of the equation, that is the net impact for us meaning that there has been increase in the market prices for inputs, but then obviously again we have had our own cost efficiency programs on the variable cost side. So this is the net impact and probably the order of magnitude one can expect for this year is similar. Then as far as prices are concerned, obviously our target is to more than compensate for that on the sales prices.
Our next question comes from the line Lars Kjellberg from Credit Suisse.
Most of my questions have been answered, just a couple of follow-ups. You mentioned in Q4 an energy-related refund. Can you give us some sense how much that was and if we should expect something like that recurring again in 2018? And also if you can call out in any way the maintenance cost step-up you expect given your increased maintenance activity in 2018 versus '17?
Well, on the first question it is something that we do have -- which we do have regularly in the fourth quarter because that's when the sort of refunds are known and recognized, so in that sense it's let's say similar. Also one can expect this year as last year. We don't have any sort of -- don't disclose numbers on that, it does obviously have impact, but let's say compared to this maintenance figures that we talk about, it's not as high an impact as that. And then again when looking at the maintenance activities of this year, as we have said before, if you consider the additional fixed cost and the sort of volume loss that comes from a shutdown of a major pulp plant, it can be in the sort of round figures of EUR 20 million. So looking at the list you can sort of estimate from there.
Looking at the wood situation in Northern Europe as you called out the EUR 30 million, you made some explanation of course, but it sounds as such there would be possibility to source wood from third parties, i.e. import wood. Is that something you are considering in part of that EUR 30 million cost increase?
Yes. Obviously there has had to be kind of rebalancing of sources which is impacting the cost and is part of that sort of bigger that game, but at the moment obviously weather is colder here in the Nordic area, so the situation is let's say normalizing. So in that sense wood is starting to flow from our regular sources.
And 2 more questions from me just to clarify what is the earliest possible time you can start to spend money in Uruguay? And second thing also relating to Uruguay, do you expect to have a meaningful sourcing of wood from non-owned sources, i.e. third party sourcing of wood in Uruguay?
Obviously like I said that the second phase is lasting 1.5 years, so now we entered in fourth quarter in the second phase, so basically only when the final decision is made then the main outflow of the kind of funds will start only. And that will last 1.5 years from quarter 4 last year. And then Uruguay, yes, we do have the Fomento -- we call it Fomento program where we have third party kind of partners that are also part of the wood sourcing. So we have a kind of quite good basket of different type of sources for the Fray Bentos mill, and -- but also plan for the new possible mill.
And our next question comes from the line of Harri Taittonen from Nordea.
Two questions. One is about what you are -- sort of how would you like to comment the market dynamics overall in the Chinese market in the paper side because obviously we have been reading in the trade press that there's been a bit of a slower period over the last month or two, probably seasonal, but just because you are also seeing price increases there at the same time, so it seems that it's a bit sort of conflicting or contradictory information, so your comments there would be appreciated? And the other question is about the U.S. dollar exposure, it seems that you have revised down your exposure estimate in -- from the previous presentation by about EUR 200 million and also raised the exposure to other currency I wonder if that's related to the Chinese currency that you have sort of recouped that or what might be behind the revision there?
Harri, Jussi here. Tapio will come to that, but Chinese paper market and the relevant market for us is obviously high-quality copy papers and card-size papers and then on the other hand the specialty papers and those are the markets that we have not seen any softness in demand, so demand has been pretty brisk for those qualities. So I do not have even comment to other qualities and other grades, but for our kind of grades that we produce and sell in China, it is still pretty brisk and good demand.
And then on your second question, this table that we had here, it shows the currency net cash flow in euro, so the same amount of dollars is worth less in euros when the euro-dollar rate is for a stronger euro. I think that's the -- maybe the main explanation. There are no other sort of major changes as such.
Our next question is a follow-up question from the line of Justin Jordan from Jefferies.
I'm just looking at Page 29 which is a slide that we see you've quoted many times which is for Paper ENA the paper price versus the cash cost to the marginal producer. And of course the big headwind and I suppose is obvious for this industry is the higher pulp prices that we're seeing globally as a raw material cost for any graphic paper producer, whether it's in Europe or globally around the world. Have you been surprised by we haven't seen as it were more closures in let's say European graphic paper industry in the last 6 months given that pulp prices is not a new thing in the last week or so. And I guess in your view because I'm aware of some of them maybe shutting in Germany, but it's pretty immaterial on a group context, but I'm just wondering do you expect further capacity closures in the graphic paper industry in Europe in calendar '18 assuming current pulp prices were in any way sustained?
It's definitely not that I know actually when looking for the future. What is relevant to us to see that this is a good illustration how the business is, and therefore if you are greatly better on the cost curve in this business, then you make a decent good cash flow and that has been our strategy ever since 2011 or '10 when we realized that this is going to be purely a cost game. But somehow I feel that there will be a kind of shift in the business as well. I have been always surprised that there are not more closures because this is tough business as you can see from here. And therefore we have been taking our cash cost down to greatly lower than that to make that EUR 300 million of free cash flow year-in, year-out. This is a cost game and you better be very prudent on what you do.
And the next question is another follow-up question from the line Alexander Berglund from Bank of America Merrill Lynch.
My questions was already answered.
And as we have no more questions registered, I now hand back to you speakers.
Ladies and gentlemen, thank you for your interest and it has been great to meet you again and have a nice day. Thank you, bye.