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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Dear audience, welcome to UPM's Full Year 2021 Result Webcast. My name is Jussi Pesonen, I am the CEO of UPM. I'm here with our CFO, Tapio Korpeinen.
Hello to everybody.
Today, I would like to highlight 2 key messages. First one, our earnings are fully back on the strong pre-pandemic levels. This is a case both in full year 2021 and for the fourth quarter, and we expect 2022 to be another good year for the company. And secondly, our transformative growth projects continue to make progress. Most importantly, the investment cases in both are very much intact and highly attractive. 2021 was a strong year for UPM. The world's economy recovered quickly from the previous year's steep slowdown. Demand for our products was strong in all business areas. We improved our margins despite the significant raw material and energy cost increases and bottlenecks on the global supply chain. All-in-all, we succeeded well in the exceptional and fast-changing operating environment, delivering performance that exceeded our financial targets. Our sales grew by 14% and returned into a rough EUR 10 billion level. Comparable EBIT grew by 55% and our full year EBIT margin reached 15%. Operating cash flows strengthened, and our financial position continue to be very strong. The reliable cash flow and the consistently strong balance sheet are significant advantage for us, especially in the light of the ongoing transformative growth projects and unpredictable operating environment. And as you remember, our focus has been clearly during the pandemic and during this time related to really cope with the unpredictable operating environment. First, we are focused on ensuring strong performance, and that will continue for the future as well. In this, we have succeeded very well, in my opinion. Our second focus area has been successful implementation of our transformative projects. The successive waves of pandemic and the tight global supply chain and logistic networks have certainly posed severe challenges for the projects. Despite this, we can confirm the attractive investment cases in both projects, and they are intact. But ladies and gentlemen, I will come back to these projects later in our presentation. This slide is perhaps the best way of putting our 2021 performance into a perspective. Through our transformative -- transformation, we have been able to show an improvement trend in our earnings, returns and balance sheet. As you can see, our 2021 earnings were back on the strong level we had reached before the pandemic. Our return on equity is back above the targeted 10% level. Our balance sheet is very strong, as you can see from this picture. Looking business by business, the returns, 5 out of our 6 business areas exceeded their long-term return targets. Raflatac return on capital employed was 40% and in Plywood 25%, are our high-return businesses or were high-return businesses last year. Biorefining performed strongly as well, 18%, especially taking into account a capital that has been used for the growth project in Uruguay already. Communication Paper had very challenging year 2021. Even so, the business continued to contribute free cash flow to the company, but that was related to asset sales, especially the Shotton newsprint sales in the U.K. With all of this, we are very confident of our financial position and the future cash generation. UPM Board has now decided today to propose a dividend of EUR 1.30 per share for the year 2021. And now I will hand over to Tapio for the analysis of the fourth quarter. Tapio, please.
Thank you. Thank you, Jussi. So if we take a closer look at the fourth quarter results, one can say that also, fourth quarter results were back on the strong pre-pandemic levels. Sales for the quarter grew by 22%, mainly driven by higher sales prices in all business areas. Comparable EBIT increased by 83% to EUR 461 million. In the fourth quarter, demand for our products was good and the upward trend in sales prices and also in variable costs continued. Compared to the record quarter 3 of 2021, our businesses' performance was impacted by higher maintenance activity and also by the unprecedented energy market situation. The scheduled maintenance shutdown at the Kymi pulp mill affected Biorefining's EBIT by EUR 37 million in the fourth quarter. The extremely high energy prices enabled Energy business to reach its best quarterly result ever. At the same time, the high energy prices added to the other businesses' costs, especially in the 2 paper businesses. On net terms, the high energy prices had a negative impact on UPM's fourth quarter EBIT. EBIT in the fourth quarter includes a EUR 103 million increase in fair value of our forest assets. We have increased the estimates for wood volume and growth in our forests. Higher wood prices also contributed to the fair value estimate. And on this side -- this slide on the left-hand side, you can see our fourth quarter EBIT compared with the same quarter of the previous year. And you can see clearly how large the changes in sales prices and variable costs have been over the past year. Sales prices increased in all businesses. And in the same way, variable costs increased in all main categories: energy, fiber, logistics and so on. On the right-hand side, you can see the sequential comparison to the third quarter. In this time period, variable costs increased somewhat more than sales prices. This mainly comes from the already mentioned increase in energy costs. Fixed costs were EUR 69 million higher compared to the third quarter, which is due to seasonal reasons and due to the maintenance shutdown at our Kymi mill that I already mentioned. It, of course, impacted the volumes in the fourth quarter compared to the third quarter. In both graphs, the fair value increase in our forests contributes to the last bar of the chart. And then looking at the quarter-by-quarter performance for the 6 business areas, starting with Biorefining. Biorefining reported solid fourth quarter results, even though they were held by back the scheduled maintenance shutdown at the Kymi mill. Average pulp prices decreased by 2% from the third quarter. Timber and biofuels prices remained at good levels as well. Energy business benefited from the exceptional situation in the energy markets, and therefore, achieved its best quarterly results ever by far. This was the result of both record high prices of electricity and successful hydropower optimization in the very volatile markets. Then as you can see, Communication Papers continued to make losses in the fourth quarter. The main reason for this was the exceptional increase in energy costs. Due to the existing customer contracts, we could not adjust paper prices at the same time or at the same pace during the fourth quarter despite the current type paper markets. The average paper price of our deliveries increased by 6% from the third quarter, which was not enough to offset the additional energy costs. In previous years, we have booked energy-related refunds in our fourth quarter Communication Paper results. This year, we changed the accounting of these refunds from accrual-based to cash payment-based practice. As a result, we did not book the refunds in the fourth quarter 2021 results. Instead, they will be booked in our 2022 results when the payments are received. On the other hand, we sold some of our excess CO2 allowances during the quarter for a gain of similar magnitude as the refunds would have been. On net terms, the changed accounting of the refunds and the sold CO2 allowances did not materially impact Communication Papers' fourth quarter performance. Earnings for our Specialty Papers were also affected by high cost of fiber and energy. Demand for label, release and packaging paper remains strong, driven by fast moving consumer goods and e-commerce. Fine paper markets in Asia remain soft. Our Raflatac profitability once again was good and well above the pre-pandemic levels. Demand continued to be strong, and sales prices increases -- sales prices increased. However, performance was somewhat held back by the unexpectedly rapid cost inflation and supply chain bottlenecks. And then Plywood achieved a record quarter and a record year in earnings. Demand was strong and sales prices increased. In Finland, we have a new labor market situation as the forest products companies are, for the first time, carrying out negotiations directly with the unions. We at UPM, have a unique portfolio of versatile businesses in Finland. Therefore, we aim to negotiate business-specific agreements in order to support long-term growth and competitiveness of each business. Our focus is not on the next month or next year, but rather on pursuing mutually beneficial outcomes that will enable each business and the employees to prosper well into the future, into the 2030s. At UPM Plywood and UPM Timber, agreements benefiting both the employees and the businesses were signed for each of the businesses with their own agreements with Industrial Union in December 2021. Meanwhile, the Paper Workers Union is aiming to negotiate a single group level agreement with the corporation. Unfortunately, this has led to a strike lasting several weeks. The strike affects the finished units of UPM Pulp, UPM Communication Papers, UPM Specialty Papers, UPM Raflatac and UPM Biofuels.During the strike, we have been serving our customers from our mills outside Finland as much as possible. We do not disclose estimates of the economic impact of the strike. However, our best estimate of the impact is included in our outlook statement for 2022 and the earnings guidance over the first half of 2022. And the outlook is shown here. We expect 2022 to be another good year for the company. We expect good demand to continue for our products. In the early part of the year, the strike in Finland is affecting our production and earnings in 5 businesses. Sales prices are expected to increase in the beginning of the year, most notably the graphic and specialty paper prices. Sales prices for our pulp and energy are expected to continue at good levels in the early part of the year. Similarly, variable costs are expected to either to increase or stay at elevated levels. All-in-all, we expect our comparable EBIT in the first half of 2022 to be on a similar level compared to the first half of 2021. Here, I would also note that as is detailed in our quarterly release, the year 2022 is relatively maintenance-heavy year for us. We have planned 3 maintenance shutdowns at our pulp mills this year and a turnaround shutdown at Lappeenranta biorefinery as well. Obviously, then we have the annual shuts in the Olkiluoto power plant as well. Of the 3 pulp mill maintenance shutdowns; 2, Kaukas and Pietarsaari, are planned for the second quarter of this year, so that is obviously also in this guidance for the first half of the year. So here, I'll hand it back over to Jussi for the update on our transformation and growth projects. Jussi?
Yes. Thank you, Tapio. Let's deep dive into the transformation, which is proceeding at full speed. Here, you can see our transformation slide updated with the numbers and figures from the year 2021. From 2009 to 2020, '21, our growth businesses have grown at the compound average growth rate about 6%. Over the same period, our Communication Paper business has rightsized significantly. Over the past 5 years, the average EBIT margin in our growth businesses has been 17%. Communication Papers achieved on average EBIT margin of 5%, including the -- including 2 very difficult pandemic years. In this way, the changing business mix is driving our earnings growth structurally over time. On top of that, we have been able to improve performance of each business over the time, supported by operating model and group synergies, of course. Now we are in a more growth-focused phase of our transformation. Our spearheads for growth are expected to add to the top line and more importantly, to be even more profitable than the past performance of the growing businesses. The transformation drives our earnings and our shareholder value. Let's then deep dive into, I'd call, to the large investment projects. The construction of Paso de los Toros pulp mill is now at the point where we can fine-tune the project completion plan. The main equipments and key resources have arrived Uruguay, and so most material uncertainties have been resolved. At the same time, successive wave of pandemic and tight global supply chain has continued to challenge the project. A minor delay in start-up schedule is inevitable, and the mill will start production by the end of first quarter 2023, with a 10% increase in investment estimate. In such large and complex projects in the current very challenging operating environment, I'm very proud of the work that the project team has done in Uruguay and here in Helsinki. We are also fortunate that our project got a good start before the pandemic began. If you remember, the kind of FID, final investment decision was made in the middle of 2019. But most importantly, the investment case remains very strong. We can confirm that the cash cost level of approximately $280 per tonne -- delivered tonne of the pulp is intact. So basically, Paso de los Toros will be one of the most competitive mill in the world. Here, you can see some pictures from the various sites in Uruguay. There are now more than 6,000 workers at the construction site in our mill site in Uruguay and also in the harbor. At the pulp mill site, the installation phase is -- with the mechanical erection continues. Majority of the large civil work has been now completed. Power boiler pressure tests were done successfully in December, and commissioning works will proceed in the coming months. So proceeding as stated here. Then let's move to Leuna. The business preparation for the UPM biochemicals is moving at a good pace. There is keen interest on various products of the Leuna -- new Leuna biorefinery, and this really confirms the business opportunity and long-term growth strategy in biochemicals. The biorefinery construction started just before the corona lockdown. Therefore, we were a bit unfortunate of the decision phase when the decision was made in January -- late January 2020. The pandemic slowed down the completion of the detailed engineering in the early part of the work. In normal operations environment, this was recoverable through the mitigation actions. So we were putting after that lockdown a clear, good mitigating action plan. However, the successive waves of the pandemic and the disruption of the global supply chain have now made this unfeasible. And as a result, we have -- we are now updating our schedule and estimate that the startup will take place in the end of 2023. And in this picture, here you can see construction at the biorefinery site in Leuna and how it is progressing. And meanwhile, as we see in the picture, the R&D facilities on site are being extended and the application development center for rubber and glycols are now operational. This enables us to continue the commercial activities and testing at the full speed with our future customers in various end uses. All-in-all, our CapEx is totaling in 2021, it is -- it was EUR 1.5 billion. And we expect that to be in 2022 on the same level, about EUR 1.5 billion. And 2023, we'll see our CapEx coming down, as you can see from this picture. Then moving on with the projects, now let's take a short update on biofuels growth plan. We do have 2 clear messages. The basic engineering of our next-generation biofuels refinery has now reached to that point where we have completed a site assessment in Kotka and Rotterdam, and now works are continuing in Rotterdam, where the operating environment is more favorable for the biofuels business. The current investment environment, however, when we talk about costs, resources and time scale and time kind of horizon is very challenging for making and taking a new decision as we speak. And therefore, we are not aiming to take the decision before the end of this year. The cost environment, especially, is so high. But also, when it comes to resources and when it comes to still continuing logistical constraints. Ladies and gentlemen, meanwhile, we continue to build the business platform for our new innovation-driven businesses. As the next step or first step, we are forming a new business unit by combining biofuels, biochemicals, biomedicals and biocomposites to under 1 business unit. The aim is to speed up the business growth and to leverage the capabilities and competencies across the project efficiently. The new unit will inherit the name of UPM Biorefining and will be reported as part of our other operations for time being. As the name Biorefining is now taken, UPM Pulp and Timber will be reported as a new BA called UPM Fibres business area. These changes will take place in the beginning of 2022. You can find our restated financial figures in the results report as well as in the background slides of the presentation. And finally, we are here on very familiar picture of a spearhead of growth. These are the focus areas where we see significant growth in the coming years, specialty packaging materials, fibers and biorefining. And last but not least, I will actually go into 2021 stakeholder interest mitigating climate change and fostering biodiversity, which has now reached a new level. At UPM, we have ambitious science-based targets and strong track record in taking tangible actions in both areas. During the first half of 2022, we will publish our new, even more ambitious Global Forestry Responsibility program. Ladies and gentlemen, I will summarize now the presentation by saying that the year 2021 was strong in returning back to the pre-pandemic profit levels and our performance exceeded and, in our businesses, we exceeded the financial targets. 2022, as said already, is expected to be another good year for UPM. Of course, the labor negotiations in Finland, where we are aiming a mutual benefit outcomes for supporting future growth and competitiveness. Finland is a good platform for growth as well, we need to also have kind of business specific CLAs and support for growth in that respect as well. It's one of the key cornerstones of the success. The investment cases for UPM Paso de los Toros and Leuna biochemicals project remain very attractive for the future. UPM also updates completion schedules owing the successive wave of the pandemic and global supply chain bottlenecks. Ladies and gentlemen, this concludes the prepared part of the presentation. Dear operator, we are ready for the questions.
[Operator Instructions] Our first question comes from Robin Santavirta with Carnegie.
Now I have 2 questions. The first one is related to the guidance for H1. When I look at the Page 2, 2021 comparable EBIT, and if I exclude the ForEx valuation gain, and then I compare it to the performance in H1 2021, obviously, your H2 earnings were quite significantly higher last year. And how you expect the H1 earnings this year, the underlying earnings to be at the similar level than H1. So quite a significant drop from last year's H2. I do understand the strikes, but are there any other key moving parts that we should understand when it comes to profitability in H1 this year other than the strikes? It would be helpful if you would highlight the key moving parts. And the other one is related to the Olkiluoto 3. When do you expect that to start to contribute into your P&L? So those 2.
Maybe I'll take those 2. And Robin, to your first question and perhaps for the benefit of the others as well, kind of perhaps preempting some questions that might still further come on the same topic. On the strike, I hope it's clear for everyone that what we have done in contemplating the guidance that we give for the first half of this year is that, as we always do, we look at sort of the scenarios on various vertical variables moving parts as we kind of call them and then both up and downsides. And then based on that, we give the guidance this time. Of course also, the strike has been one where we have considered various scenarios. And based on that, then we have now given guidance on what our comparable EBIT as we will report it, then after the first half of the year by the current estimate would look like based on -- compared to the first half of last year. So in that sense, as said, it includes our best estimate at this time also concerning the strike. And then I would say on these other moving parts, of course, you can -- let's say, note what I mentioned about the maintenance shuts. So we have actually now, as we have detailed in the report, 2 pulp mill shutdowns for the -- planned for the second quarter. And we can sort of compare that Kymi pulp mill shutdown in the fourth quarter. I mentioned the impact was EUR 37 million. So maybe that's on the guidance. And as Jussi said, we think and expect that this year is another good year for UPM, meaning that the sort of underlying business performance for UPM is continuing, if you look at UPM as a whole at a good level as what we saw during last year. Then on your question on Olkiluoto 3, of course, right now, we are close to the point in time where the power plant will be connected to the national grid for the first time. You can find it on the Teollisuuden Voima, TVO website, where they actually on a daily basis, update the timing. There will be some power output. Then before June from the test runs, which will also mean that we will get our share of that power to be sold to the market. Then in June, as has been publicly stated before, still on track to start commercial operations, so running the nuclear power plant at full power. And then obviously, also the impact or, let's say, the volumes flowing to UPM and impacting our Energy business area result will be obviously more meaningful. So during the second half of the year, if everything goes as it is now announced by TVO.
Can I ask a third one, a quick one. You have previously frequently providing an indication of how the graphic paper prices have evolved for your -- in your contract portfolio in Europe? Are you willing to do that this time? Share some light on the prices that we should look at for H1 or start of the year.
Of course, majority of the deals are done not all, but majority of the deals are done, and there is a significant increasing prices in various businesses. We do not give a guidance, a particular number, but it is actually an increase that we have not seen in at least during my 15 years being here in CEO position that kind of magnitude. So it is a significant increase. But as we all know, the significant has been the cost escalation as well when it comes to fibers, when it comes to energy prices, especially.
Our next question comes from Lars Kjellberg with Credit Suisse.
I'll just jump back on to the pricing. I appreciate you may not want to comment exactly on the price directory. But what we can see from the outside, prices for publication papers were up, broadly speaking, 50% in the published prices with some surcharges maybe in that you may or may not charge. But can you give us any sense of how you view the spread for your price versus cost? You talked about 6% up in average prices in the fourth quarter, which, of course, was insufficient. But to your point, you see the -- this is unprecedented price increases we're seeing. So again, a bit curious about that guidance because these prices certainly seems to jump out strongly versus what you saw in cost development during the fourth quarter.
Yes, that is correct, Lars. This is a good question. But of course, it is very much related to how the power prices, i.e., the electricity prices are. Yes, 6% was not sufficient. It was inefficient to cover the costs. This is more doing so, that is for sure, that we are seeing a sufficient kind of better balancing between costs and prices. And especially, as you have seen that the December energy prices were rocketing here in Finland, but also especially in Central Europe as well. And paper business, if any of our business, is very much kind of related to energy prices as well. So basically, the margin is very much dictated how the energy prices and the fiber prices will continue to develop.
And Tapio, maybe you can share with us what you saw in the net negative impact of energy in Q4? And then I'd like to have or hear your view on what's happening in China? Because of course, you're a bigger operator in China. What are you seeing there? Any change in trends that we should be aware of, positive or negative?
Well, yes, of course, let's say, if we look at the energy, the question on energy, of course, what we saw was that let's say, in November, December, the energy prices continued to go up. And that, of course, also explains and sort of, let's say, has enabled exceptionally good performance of the Energy business in Finland. It was, let's say, at least that's a high sort of development in Germany, which, of course, affected our German paper business, in particular -- for paper mills in Germany, in particular. Then I would say, as was pointed out that, on one hand, this accounting changes that we implemented here, shifting some of these items that we typically book in the fourth quarter. And let's say this sort of downside short-term surprises on the energy costs. We have been then able to, on the other hand, compensate for or cover with -- through the sale of excess CO2. So in that sense, roughly speaking, that has been kind of counterbalancing all these factors altogether each other in the fourth quarter when you look at communication papers as such. But as said, overall UPM level, the net impact of energy price increases in the -- or cost increases and price increases in the fourth quarter was negative. No sort of figure to sort of disclose on that as such. Maybe I can shortly comment on China that we have like you can see in the pulp markets, for instance, or even for graphic fine paper prices in China, which are public information. We have seen, let's say, some pickup in the sort of business and business activity in China here in the short term. So in that sense, there are some green shoots, so to speak, that are visible also in our businesses.
Maybe adding what Tapio said that in Specialty Papers, fine papers, pulp and Raflatac, which are most relevant businesses for us, the demand outlook is more solid, as Tapio already said, but it is actually positive development that we see.
One final question for me. Just on the big price increases, again, in publication paper. Last time we saw good pricing. I guess, late '19, we saw a -- or '18/'19, we saw deterioration of demand. How -- what is your sense that your customers are doing now in terms of coping with such huge price increases? Or are you seeing anything in the order flow or anything that has changed?
No, that is not typically even happening so far with this slow process. Hard to say, it is typically, you are -- if you are having very high costs in any business, you are basically sometimes seeing that it cuts even solid business for the future, i.e., some publications or so. But typically, there is also new publication committed as well. So difficult to say, Lars. That is the kind of Paradigma always said that higher the prices more, it cuts the demand. But I -- it's very difficult always to find a correlation that what is coming from what kind of reasons. Mainly, I believe that it is our readers' behavior that is driving the kind of demand. But also, in some cases, if the costs are escalating and paper in some publications is high-cost factor. So basically, this is a kind of combination of various things.
Our next question comes from Johannes Grunselius with DNB Markets.
It's Johannes here. I have a question on Paso de los Toros. Now you're keeping the all-in OpEx guidance intact $280 per tonne. I mean, it's quite high inflation in most areas these days. Could you just elaborate why you still -- you remain confident in that guidance?
It is for the reasons that what the whole project was built on. So it was built on a forest that we own majority of the forest land. It is long-term kind of logistical kind of operations. All of the -- and it is self-sufficient when it comes to energy or over supplying energy. So basically, there has not been any factor that has moved. And that was the reason that it took so long to develop this project because we wanted to have very few variables whatever the kind of -- this kind of changes in the global economy is to be always on the low cost, and that's the reason that it has been all of the parts, which is, of course, forest and wood supply, the mill itself, then the whole inbound, outbound logistics is very relevant on that. And that is -- has been the name of the game ever since 2010 when we started to develop this project, so almost 10 years or more than 10 years ago. I'm happy to say that it is absolutely kind of intact number, this $280 per tonne.
Very clear, very clear. Then I was just thinking about how we should expect volumes ramping up in this mill. Of course, I understand you cannot provide exact details. But just roughly speaking, in Q2, for example, next year, what kind of capacity utilization is realistic? And then for the second half 2023?
That I do not have the information. I don't know if Tapio is having any view on it. But of course, pulp mill is pretty known technology, and therefore, the ramp-up is pretty fast.
Yes. I was thinking about it, if there should be a meaningful earnings contribution 2023 from this project.
Absolutely. There will be a meaningful contribution. Absolutely.
But I mean, could you help us but maybe to think about capacity utilization for the full year 2023 or something like that?
That is something that we don't disclose, unfortunately.
Okay. Okay. Okay. Fair enough. And then, I was also curious about plywood normally not in focus in UPM so much. But now the earnings trend is very favorable. It starts to be a good contributor for UPM, of course. Is this a new normal? And how should we think about 2023 and onwards in terms of earnings from that division?
Plywood is actually has done a tremendous job in UPM from all respect. It's the cost structure. We have been, over time, investing in low-cost countries like Estonia and Russia, where we have now significant operations that are on full speed. And what we have done here in Finland now, which is great, the CLA, this labor agreement is really enhancing the earnings potential because we are getting more capacity out of the mill and the people are having better annual earnings. So the CLA especially has been opening some issues that we have had actually in the past CLA. So in this front, plywood is actually has taken a step to a kind of, I don't know whether this is a new normal, but it is not just 1 year. It is a gradual improvement over many, many years now, efficiencies, cost base. The end uses that we provide, we have all the time targeted to the high end of the quality, which means higher prices. So basically, it is coming from all fronts, commercially, successfully implemented kind of thing. Operationally low cost, even the organizing the work, which is the CLA type of thing. Happy with the plywood progress and therefore, we already made an investment decision to even improve the cost efficiency of 1 of our plywood mills here in Finland. So good progress.
Our next question comes from Linus Larsson with SEB.
You disclosed pretty well your variable cost development in the fourth compared to the third quarter. I wonder on the first compared to the fourth quarter on a group level and maybe on a unit cost level would be easier given the strike. But how do you see variable cost development in the first compared to the fourth quarter? Is it still rising? Is it even accelerating or something completely different?
Well, if I comment on that. So what we saw last year was, let's say, the prices for many sort of variable cost inputs sort of continuing to rise throughout the year. And then, of course, energy, as mentioned many times here already, having this kind of unexpected jump then in the end of the year on top of everything. So obviously, we are starting, I would say, as an overall picture this year at a relatively high-cost level across many or most sort of supply markets while there's sort of bottlenecks that we have seen during the last year and are, in many cases, let's say, behind this sort of cost increases where we don't see those bottlenecks to sort of disappear all of a sudden here. So we will have some sure. The commentary in general now in the world is we will continue to see these bottlenecks in place, at least during the first half of this year. So therefore, I would not, at this point, at least the acceleration by any means, but not a deflation setting in either in the shorter term here. Of course, there are some items like once again, coming back to energy, if we look at the sort of forward curves for most energy items, they are kind of pointing downwards towards the summer, and we have seen some downturn in some of the energy fundamentals from the very high picks. But I would say also that remains to be seen. So we are, at the moment, in a relatively high-cost environment, and that is something that, in a sense, we need to be able to manage during the first half of the year. And I think as we have commented here, we have good results on that let's say, from last year, communication papers being the exceptions there, but that we have already discussed.
Okay. But you're not expecting a further increase then Q1 and Q4, if I understand you right.
Well, again, I won't go into forecast I said I don't expect sort of -- any sort of acceleration in a sense, at least based on what we know today. But well, let's say, overall, we're in a high-cost environment. And it's, let's say, of course, possible that for certain inputs, the prices continue to go up. Again, if you look at kind of comparison sort of the first quarter, first quarter or first half, first half, of course, given the development during last year, we are at a higher cost environment now than we were 1 year ago.
Sure. No, that's clear. And then maybe, which is partially related, I guess, if you could give us an update on your energy hedge situation because there are some changes. So one question would be, to what extent, if any, have you hedged your share of Olkiluoto 3? And also, to what extent -- sorry, to what extent have you hedged your electricity consumption now that you're presumably consuming a lot less electricity with the ongoing strike? So maybe for the first quarter and I guess for the remainder of the year, if you could just give us a brief update as to what degree you are hedged on energy, please?
Well, let's say -- and we don't disclose exact numbers on that. But to your first part, as far as Olkiluoto concerned, of course, what we are -- what we have considered in our hedging portfolio, which again, we build up over several years' time is then the Olkiluoto 3 volumes as part of our total output and the, let's say, volume or share of that, that we want to hedge that we have been building over time. And of course, allowing for any uncertainty as far as the volumes are concerned for the Olkiluoto 3 because we don't want to be overhedged. So that is, of course, in a sense, now we have been looking at it building up then to this point where the connection to the grid is soon taking place. I think we have earlier stated that our consumption of electricity has been around 50% hedged. And of course, now we have been without again, going to the numbers as such anticipating in a sense the estimated impact of the strike to sort of manage those hedges.
Our next question comes from Justin Jordan with BNP Paribas.
I've got 2 very separate questions. Firstly, I guess, on spearheads for growth. I fully approve that we're in a major global pandemic with huge inflation that we haven't seen for many decades. But I just wanted to double check just on the existing 2 major spearheads clearly in Uruguay and Germany. The Board's hurdle rate of 14% return on category, that still is clearly applicable despite the delays and the costs implications that, that has led to. And then I suppose just thinking about the Board's decision perhaps at the end of 2022 on the biofuel refinery. I'm assuming that I sympathize with any Board trying to make a major investment decision in the current climate. But I'm assuming that returns discipline that UPM has had for many years still applies to any future investment decision that the Board will be taking until '22, 2023. And then separately, a separate question completely on, shall we call it, Raflatac and shall we call it the European Specialty Paper business, so the non-Asian portion. Clearly, those businesses have been a star within UPM in 2020, 2021 enjoying stellar margins. But I'm just noting that EBIT margins or comparable EBIT margins in both Specialty Paper and Raflatac have been easing successively in recent quarters. Are those businesses, do you believe they're now sort of past their peak in margins? Or if you think about something like Raflatac where pre-2020, you were talking about high single-digit comparable EBIT margins, you had 13% plus EBIT margins in 2020 and 2021 but easing to 10% in Q4 2021. Was 2021 one sort of exceptional period for those businesses? Or really what I'm asking, I suppose, is what are their pricing power against what is clearly an inflationary cost environment as we think about 2022, 2023 for both Raflatac and Specialty Paper? So I'm sorry, 2 very separate questions, but I appreciate your answers.
Yes. I guess let me first start, and Tapio will add on. Spearhead of growth. Returns for these 2 projects are intact. So the 14% is the same for these 2 projects. And as we said that the kind of the cash cost for the Paso de los Toros is intact as well. So they will have a very good return. So that is intact. And then when it comes to biofuels, it is -- if I am only looking the numbers, by the way, that you can almost calculate yourself after this restatement, what the biofuels was turning for UPM in last year. So we are talking about the numbers that are very much on the level that we were doing in '19 and previously that we were kind of commenting those numbers. So like I said that we -- you can really calculate those. And if I help you in that respect, that the sales for the Lappeenranta biorefinery was EUR 203 million; EBITDA, EUR 55 million, 27% of the sales; EBIT, EUR 37 million, 18% of sales; and return on capital employed was EUR 23 million. So basically, as this is highly attractive. But like I said, in current kind of cost environment, it is difficult also resources and what have you, it is difficult to take any decisions. And therefore, as we guided that before the year-end, we are not most probably taking any decisions. Then when it comes to Raflatac and Specialty Papers, the fourth quarter definitely was still, we were having a -- in Specialty Papers, we saw quite a significant power and electricity price increase. So that was affecting Specialty Paper business here in Europe. And Raflatac, of course, the cost inflation has been there. Raflatac now reported 10% margin in quarter 4, but it is significantly higher than that previously in these kind of circumstances, we would have been falling from that 7%, 8% downwards. So basically, I think that we have been taking firm steps of higher profitability going forward actually in these 2 business areas. And why it has happened, there's multiple actions: investments, cost cutting, commercial success on commercial strategy. So there's multiple actions that we have been taking in both. I wouldn't draw any big conclusions out of our fourth quarter result.
And maybe just to sort of add on that to sort of Justin' s question, which we have discussed earlier as well, that the unusual or exceptional year was 2020 for this sort of self-adhesive value chain, meaning Raflatac and the label paper part of Specialty Papers, where demand was very strong and high, but that did not impact the supply markets for the input. So the input costs remained very benign. So the kind of negative impacts of the COVID restrictions were keeping the input costs low. And I would say that last year performance has been excellent in that area that now we have seen because of the increased activity in the world and bottlenecks and everything else that we have discussed, a totally different cost environment for these businesses. But still, if you look at Raflatac, we are for the full year, like you pointed out, at similar level of EBIT margins. So perhaps not to extrapolate from the best quarters of 2020, but not to focus on one single quarter at the end of the year -- last year, either. So I think, as has been pointed out by Jussi and earlier as well, I think -- we think that we have a new level of, let's say, margin performance for Raflatac in particular.
[Operator Instructions]
Operator, I might actually, we do have the press conference coming after this. So I might thank you all and say goodbye for now and see you soon. Thank you.