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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 colleagues, dear audience, welcome to UPM's Fourth Quarter and Full Year 2022 Result Webcast. My name is Jussi Pesonen, I am the CEO of UPM. And as always, I'm here with our CFO, Tapio Korpeinen.
Hello to everyone on the line.
So let's get started. 2022 was a pivotal year for UPM. We delivered all-time high annual sales and earnings driven by success across all of the businesses that we have. This shows UPM's resilience in exceptional environment marked by high inflation and Ukraine's war or Russian war in Ukraine and the European energy crisis. Fourth quarter results were excellent too. It was the second best quarter ever for UPM.
At the same time, our transformative growth projects proceeds well, getting ready to deliver growth in earnings, and of course, volumes already this year. At the same time -- and even though there are significant uncertainties in the world, we expect 2023 to be a year of strong financial performance as well. Our Board with confidence on our financial position and future earnings has today proposed a dividend increase of 15% for 2022 to the AGM. Looking at the annual indicators, our 2022 sales grew by 19%, and our comparable EBIT grew by 42%. Return on equity increased by 2% points to 14% level. Operating cash flow decreased from that of previous year due to working capital increase and the cash flow impact of the energy hedges. Tapio will come back to these energy hedges later.
Net debt increased, but the net debt-to-EBITDA ratio remained below 1x.As from here, you can see we got back to the earnings growth trend that we have had quite many years, which was interrupted by the COVID-19 pandemic in 2020. And maybe anecdotal, without the impact of the energy hedges, our net debt would have been EUR 1.6 billion -- around EUR 1.6 billion, so 0.66x EBITDA.4 of our 6 businesses exceeded their return targets last year. In addition, Biofuels reported in other operations achieved a record result as well. Fibers capital employed is impacted by capital related to the new pulp mill in Uruguay. This capital will start to contribute soon.
As to Paso de los Toros pulp mill is starting up by the end of this quarter. In Communication Papers, working capital increase impacted both cash flow and capital employed. Profits for the full year in Communication Paper were still on a high level. As I already mentioned, fourth quarter was the second best quarter for UPM ever. Sales grew by 21% year-on-year and comparable EBIT grew by 42%. Operating cash flow was EUR 1.576 million, which this time was positively impacted by EUR 886 million cash flow from energy hedges. Even without this positive impact of energy hedges, fourth quarter cash flow would have been very strong, being EUR 690 million. In most businesses, margin continued to improve even from the record quarter 3, as a result, prices and margins in the fourth quarter were very strong.
Towards end of the year, we saw significant destocking in many of the product areas and value chains, especially in Europe, which held back our delivery volumes during the quarter. But ladies and gentlemen at this point, I will hand over to Tapio for some more analysis of the result. Tapio, please.
Thank you, Jussi. So here, again, we see on the left-hand side the fourth quarter EBIT bridge compared to the fourth quarter of the previous year 2021. And in this comparison, you can see that the sales prices increased in all of our businesses and very clearly outweighed the impact of higher variable costs. Volumes were down in most businesses due to the year-end destocking that Jussi mentioned. Fixed costs were on the increase, partly due to the scheduled maintenance shutdowns at the Fray Bentos pulp mill in Uruguay and the Lappeenranta biorefinery in Finland. And finally, in the fourth quarter 2021, the previous year, we booked a forest value gain, which is then visible in the right most sort of negative difference bar here. On the right-hand side, you can see the comparison between the fourth quarter and the third quarter sequentially in 2022. And as you can see, the sales prices were still increasing, whereas variable costs largely were stable at the group level.
Therefore, our margins were still improving on the group level as compared to the previous quarter. However, here you can see the volumes impact of the destocking that I mentioned in many product value chains as well as the higher fixed costs, mainly to the maintenance shutdowns and other sort of seasonal variations. This maintenance impact between the third quarter and fourth quarter was a negative EUR 50 million. And then here, you have the comparable EBIT quarterly by business area. In most businesses, margins continued to improve even from the record strong third quarter. Towards the end of the year, we saw significant destocking in many value chains, especially in Europe, which held back our delivery volumes in Communication Papers, Raflatac and Specialty Papers. Raflatac is kind of a prime example here. Unit margins were on a good level.
But then the market-wide destocking led to clearly lower quarterly earnings in the fourth quarter. On the other hand, in UPM Communication Papers, the effects of destocking were offset by declining input costs, especially energy costs, which brought an excellent earnings level for the fourth quarter. And Specialty Papers performance is sort of in between these 2 mix extremes. Energy reported excellent results. However, they were down from the third quarter and from the same quarter of the previous year. The energy crisis in Europe eased somewhat during the fourth quarter. And during the quarter, also the nuclear power unit Olkiluoto 3 generated only limited volumes. Fibers quarterly results reflect high pulp prices, but were also impacted by rising input costs and also the maintenance shutdown of the Fray Bentos mill in Uruguay.
Sales prices in sawn timber were affected by the slowdown in construction end-uses.And then Plywood finished its record year with a solid last quarter. The markets in industrial applications remained strong, whereas the markets in construction end-uses slowed down. Then in Other businesses, reported as part of the other segment, UPM Biofuels achieved excellent quarterly earnings. The business achieved record results for the full year despite the fact that Lappeenranta biorefinery only had production during 7 months. Briefly, again, on the cash flow impacts of energy hedges, which we have discussed in the previous 2 quarter releases. As mentioned, the energy crisis is somewhat during the fourth quarter, and therefore, also the electricity futures prices moderated. This turned the cash flows from energy hedges significantly positive for us. During the fourth quarter, energy hedges released EUR 886 million of cash flow, reversing about half of the cash outflows that we had reported during the 9 first months. For the full year of 2022, the cash flow impact of energy hedges was therefore EUR 896 million negative, this cash flow will be later offset by a similar cash flow coming in from hedges or then from energy production as the hedges mature and power generation goes to delivery. And this slide shows the full year cash costs.
EBITDA first, starting from the left-hand side, reached a new record, exceeding EUR 2.5 billion. Working capital during the year increased by EUR 479 million. And as I said, the energy hedges resulted in a cash outflow of EUR 896 million. And then finally, our growth projects were in an intensive phase, meaning that investing cash flows totaled EUR 1.585 billion as expected for the year. All-in-all, free cash flow was EUR 1.077 billion negative for the full year, but EUR 1.191 billion positive for the fourth quarter. As Jussi already pointed out, our financial position continues to be very strong. Net debt totaled EUR 2.374 billion at the end of 2022, coming down by EUR 759 million from the third quarter.
Net debt to EBITDA then was 0.94x, and our liquidity totaled EUR 6.4 billion at the end of the year. And here you have our outlook for the current year 2023. As we have already discussed, UPM reached record earnings in 2022, a record year. This year is expected to be another year of strong financial performance. In the first half of the year 2023, our comparable EBIT is expected to increase from the first half of 2022.In the year 2023, our delivery volumes are expected to benefit from the ramp-up of the Paso de los Toros pulp mill and the Olkiluoto 3 nuclear power plant unit and also in comparison to the last or the previous year 2022, having no strike impact on volumes. In the early part of the year, however, demand for many UPM products is expected to be held back by the destocking that we have discussed in various product value chains. But the opening of the Chinese economy from the COVID lockdowns and easing inflation in other key economies represent potential for increasing demand as the year progresses. Year 2023 is starting with a high level of costs for many inputs, while the lower demand is exerting pressure on product prices.
However, several input costs have also progressed at their peak. We continue to take measures to manage margins in this environment. Finally, it's good to note that there are some significant uncertainties, both positive and negative, in the outlook for 2023.So I'll now hand back over to Jussi for some discussion on our strategy and growth projects.
Thank you, Tapio. As already mentioned couple of times, the year 2022 was a pivotal year for UPM as a whole. We did have a -- year beginning in 2022, we had the strike over 4 months. We were able to renew the CLA practices, i.e., the kind of labor practices, and that is actually important. We made a profit that we have not seen in 20 years. The profitability of UPM was great.
We were able to really be successful in our front line, i.e., the sales, we were able to pass the cost increases in all product areas, including paper business. But 2023 -- let's come back to 2023. I feel that 2023 will be as well a pivotal year for UPM and in a bit different way, i.e., we are ramping up huge projects in our transformation, and that is continuing firmly in this stage. And this picture, the spearhead of growth is really valid today and is having a guideline for the future.First, we have large important projects coming to a ramp-up during this year into next year. Paso de lo Toros pulp mill will start -- is in starting up phase. Commissioning is in full speed, and it will start by the end of the quarter, and will increase our pulp output to more than 50% and highly competitive cost level, $280 per delivered tonne. Olkiluoto 3 nuclear power plant is scheduled to start up the commercial production in March and is starting in the test phase again pretty soon.
And once again, it will increase our CO2-free output of energy by nearly 50%.The Leuna biochemicals refinery project progressed well and it will open new very attractive growth opportunities for UPM when it's up and running. And finally, small but not -- it's very important is the AMC acquisition in Raflatac, good growth step for Raflatac and the integration has gone well. But second part of this discussion around this spearhead of growth is, of course, the future, the next steps and the next plans that we have. We have further growth projects under planning and preparation, the basic engineering of the potential biofuel refinery in Rotterdam is currently in a very intensive phase. We are looking into a next step in biochemicals, while the first refinery Leuna is still under construction, but of course, the focus now is in the construction. We study opportunities in Power-to-X, whether it's a synthetic fuels source, synthetic chemicals to potentially complement our bio-based biofuels and biochemicals businesses in long term. And then we are looking, of course, all kind of opportunities in our specialty packaging materials businesses, i.e., the Specialty Papers and Label materials. So another pivotal year in UPM's actually future.
This slide shows the progress of our transformation. You have seen this many times. Over the past years, we have been able to grow our attractive growth businesses quite significantly. At the same time, we have maintained good performance, both in our Communication Papers as well as in the growth businesses. So that has been our kind of aim. That we run -- we have the operating model that will actually keep the good performance, whether the business is growing or whether there is a decline in demand.
And that way, we have been successful. I feel that the operating model of UPM is a secret source why, like the Communication Papers, was performing extremely well during 2022.Over the past 5 years, the growth businesses have been, on average, 3x more profitable than the mature communication papers measured with EBIT margin. But, of course, we know that the Communication Papers business has really performed well when it comes to free cash flow. As you know that since 2019, we have increased our CapEx significantly. However, those investments will only start to deliver growth and earnings from this year onwards. This is another way to look at our transformative growth. The fair value of the forest and energy assets in our balance sheet has increased by EUR 2 billion in the comparison period shown here, 2019-2022 to EUR 7.2 billion.
We will continue to manage and develop these assets for sustainable value creation and supporting our strategy. At the same time, capital employed in our industrial operations has increased even more significantly to EUR 10.7 billion level and the majority of this increase is related to our transformative growth projects. At the end of the year 2022, almost a quarter of the capital employed more than EUR 4 billion was related to the growth projects that are not yet contributing to our sales or bottom line in 2022. They are, of course, expected to generate attractive returns once fully ramped up. This represents significant earnings potential for UPM. Ladies and gentlemen, UPM Board of Directors has to-date renewed our dividend policy to be based on earnings instead of cash flow. This aligns dividend policy with the company's transformative growth strategy. According to the new policy, we want to pay attractive dividends, targeting at least half of the comparable earnings per share over time.Effective capital allocation is key to attractive long-term returns as well as developing the business portfolio.
Dividends are an integral part of the capital allocation. We plan to allocate capital to 4 purposes: Invest to growth, grow the company and its earnings. We invest in sustainable businesses with strong long-term fundamentals for demand growth and clear competitive advantage or high barrier to entry. We target growth in comparable EBIT and comparable return on equity exceeding 10%.Pay attractive dividends. The target earnings growth drives dividend growth over time.
Maintain strong balance sheet. According to UPM's leverage policy, net debt to EBITDA ratio is to be less than 2x.And then finally, share buybacks. Share buybacks are complementing tool that may be used relative to investment opportunities and the company valuation. Next one, over the past 5 years, we can see how UPM has been allocating capital and EUR 4.6 billion has gone to investments. Dividends totaled EUR 3.4 billion, representing 64% of the cumulative comparable profit for the respective period. Net debt increased by EUR 2.2 billion.
The balance sheet continues to be strong. Net debt to EBITDA ratio being below 1%.And then this is an illustrative capital allocation for next 5 years. We will -- compared to previous 5 years, our cumulative dividends will probably increase, while the total CapEx will probably remain, although somewhat -- or being somewhat lower than that over the last 5 years. We will continue to drive growth, and we will have an attractive investment ideas under consideration and planning. There's a lot of planning ongoing as we speak. However, none of these plans are quite as large as Paso de los Toros investment has been in the last couple of years. With confidence in UPM's finance position and future earnings, the Board of Directors has proposed today a dividend of EUR 1.5 per share for 2022 to the Annual General Meeting.
This is a 15% increase from last year and represents 49% of the comparable EPS from 2022.Ladies and gentlemen, this slide shows our CapEx estimation for this year. In 2023, our CapEx will start to decrease. Our CapEx estimate for this year is EUR 950 million, of which EUR 750 million is related to remaining CapEx for ongoing transformative growth projects. Depreciation will increase this year when Paso de los Toros is up and running. And then the Paso de los Toros adds about EUR 40 million per quarter when it is up and running depreciation. Let's have a short, kind of, visit on both projects that we have ongoing -- or 3 projects: Paso de los Toros, Leuna and Olkiluoto. This is a very good look at the Uruguay project.
And as you can see, that it is well proceeding and looks very good. Work at the pulp terminal in Port of Montevideo have been completed, and the port terminal is already operational, in use. The construction works at the Paso de los Toros mill were finalized in December. So that work has been now done. The project is now in the final phase, commissioning and putting kind of last pieces of the instrumentation and automation in place. The auxiliary boilers and the power boilers have been commissioned already, the water intake and water treatment process as well as the process of air systems are already in use. The recovery boiler testing is advancing well and the commissioning is progressing in all process areas as well.
The mill is ready for startup by the end of this quarter. Leuna biochemicals, refinery project in Leuna is proceeding. And you can really see from these pictures that how much of the work has been done there. And the business preparation and commercial activities continues at the same time. Olkiluoto 3 nuclear power plant continues its testing program pretty soon and then hopefully -- not hopefully, but will actually be in commercial use in March this year. UPM's transformation is visible in shareholders' value. 2022, we reached a record earnings. We believe 2023 will be a year of strong financial performance as well.
We have invested heavily in our transformative growth projects. We expect attractive returns from these investments and this capital allocation once the projects are fully ramped up. We continue to drive growth and portfolio improvement beyond the current projects, and we discussed in the capital allocation part -- or as we discussed this in our capital allocation presentation part. This way, we aim to drive shareholder value through earnings growth, dividend growth and valuation growth in long term. We do this in a sustainable manner and many of our growth businesses are driven by sustainability and megatrends of the world. Our sustainability work continued to gain external recognition 2022 as well. AAA rating in MSCI ESG Rating; AAA score in CDP, industry-leading; and participation in Dow Jones Sustainability Indices; Platinum rating in EcoVadis just to name some of them. Ladies and gentlemen, I will not read the summary again and repeat myself, we are ready for the questions.
[Operator Instructions] The next question comes from Linus Larsson from SEB.
Starting off with Communication Papers, prices have skyrocketed, you're presenting a spectacularly strong fourth quarter. What's your outlook in this division? Could you give us a view of the status in the European graphic paper markets, how are your customers doing? And also maybe give us some sort of insight as to how your Continental European operations are doing compared to your Finnish operations. And in this context also, with regards to energy, what's your hedging level or hedging rate, should I say, in 2023 for the division, please?
Hopefully, Tapio took some of the questions; they were pretty many. First, if I would like to start with the Communication Papers. Thank you for the question because I feel very comfortable with the business. And as you can see that even in declining business like paper businesses, if you are having an operating model that we have in UPM, you can generate extremely good results. And when saying that, it is -- what we have seen during the year, which has been pivotal year in that respect as well that there has been many companies that they have actually stopped producing paper, they have withdrawn from the business. So the consolidation has become more evident.
And therefore, with the kind of operations that we have, we are managing the capacity and at the same time, being successful on passing costs to the prices. I feel very comfortable for going to the future with the paper business. Especially, when the consolidation has now happened, there's a plentiful of capacity that people want to and companies want to convert to the packaging grades. And having a low-cost assets in Finland and in Germany, feel very comfortable that we can manage the margins in the future as well. But then there was quite many other questions, maybe, Tapio, if you took some of those at least.
Yes, maybe I took a few notes here. So maybe first of all, let's say, on the outlook. As said, Linus finished the year at very strong margins, and now going forward from here, of course, we are -- as we have also mentioned in our outlook statement, we're starting to see and already in the fourth quarter started to see some tailwinds also as far as availability and costs of inputs are concerned. And that obviously includes energy, but does include many or many other areas as well like logistics, chemicals, we have seen some of the world commodities already easing during last year and therefore, then starting to sort of impact the kind of downstream producers of our inputs. Energy cost, where you had the question on the hedging as well, of course, is still a moving target.
As you all know, I'm sure, in the short term, there's been significant relief in Europe on energy costs and therefore, also in Continental Europe. Many of the sort of short-term factors obviously are behind it. We have had an unusually warm winter. Gas availability has been good therefore gas prices are down. So that, of course, is really for the Continental operations, in particular. But then we do have, I would say, let's say, a good position in the sense that we have both the Finnish and the Continental capacity available for Communication Papers as then we see how the remainder of the year unfolds as far as far as, particularly energy costs are concerned, so we can sort of optimize between the 2 sort of manufacturing locations. As far as hedging is concerned, roughly speaking, about 40% at the moment is the ratio of -- hedging ratio for our inputs in Communication Papers as far as energy is concerned.
That was a lot of detail. Very helpful. And then just one more question, if I may. And it's what you're saying both generally and in some cases, specifically on significant value chain destocking. Can you give us any sense of where you think we are in that process?
Has it just started? Are we starting to see the end of that destocking cycle? And maybe specifically on Raflatac, if you could, with maybe some extra detail on that process, please?
Yes, I would say -- well, first of all, this sort of destocking, I'm sure you have sort of noted that it's something that is happening across many or most industries. In many industries or most of them, there is, first of all, a typical seasonality that destocking happens at the end of the year. And the commentary, I would say, quite broadly has been that this time around, this destocking has been clearly stronger than usual. And I think it's coming, of course, to a large extent from quite understandable reasons. As I already mentioned, for many sort of inputs also concerning then our customers, in a sense, the safety stocks have been sort of higher than usual because there has been concern over availability and that concern has been going away. We have had, let's say, also relatively high prices for many inputs in anticipation of still -- let's say, during the last year, still sort of significant increases on prices, which perhaps that is sort of tailing off. Interest rates rising means that financing working capital is more expensive.
And then, of course, we have a general sort of slowdown in the economic environment. So all these reasons in a sense now -- again, now kind of pointing to the same direction. And therefore, we are seeing this sort of unusually large destocking. In Raflatac's case, like I think was mentioned here also one can say that, again, this has been particularly strong here in Europe, less so perhaps, but also the case in the North American markets, but clearly less so. We are, I would say, seeing already the sort of order intakes picking up again in the month of January. Perhaps it's sort of safe to comment that not to the kind of starting off right away to the level that the destocking would take kind of behind us completely.
But clearly, we are -- I would say that is indicating that we are sort of over the hump on that.
The next question comes from Lars Kjellberg from Credit Suisse.
Just to follow up on the last comment. The order intake you're talking about was that specifically on Raflatac? That was my -- just a follow-up.
Say more broadly as well.
Okay. Just coming back to your Communication Paper, of course, that was an outstanding performance in particular in Q4. You've also been going to provide a marginal cost of production consistently, but you're also calling out costs falling. And clearly, that marginal cost have been a driver for pricing and your advantage cost base, of course, has been really beneficiary. Sort of where do you see marginal cost now coming in the next couple of quarters as to your point, chemicals, logistics, energy and maybe fiber on balances coming down? And if I'm looking at the Fiber division in the quarter, it was quite a bit below current expectations anyway.
Was there any particular disruptions going on at Fray Bentos that was more difficult than normal? Or is this -- if you can actually quantify that number, that would be helpful. But also, is this also a combination of that big drop we've seen in sawn goods that was a meaningful driver to that relative weakness?2 more technical, maybe guidance questions. D&A you guided EUR 40 million per quarter for Fray Bentos when it was up and running. How should we think about D&A for the whole group in the year? And the final question really comes from the energy hedges.
You commented, of course, on Communication Paper, but just to help us out, there are so many uncontrollables here. So can you share with us your hedge levels in your Energy division and the percentage of what has been hedged? I mean, for example, to you provide that sort of number it would be extremely helpful to understand the potential for earnings in that division with Olkiluoto coming out.
Well, maybe I'll start. At least if there's something Jussi wants to add, then obviously, please do so. But starting on the Communication Papers and the sort of marginal -- or the cost -- cash cost of the marginal producers. So yes, obviously, if there is a tailwind on the cost, then that will benefit the marginal producer. Like we have discussed, I would say, several times in the before, still the fact is that we have more tools in our toolbox than the small guy who is on the margin over there. So of course, we think that this will benefit, relatively speaking, more us than the marginal producer.
So typically, when we have a sort of phase of the cycle where costs are coming down, then also our ability to manage margins is good and better than it is for the producers who are at the high end of the cost curve or reason being why they are at the high end of the cost curve are sort of structurally disadvantaged compared to our mills. Your question on fibers, of course, we have, as part of the fibers business area reporting, we have the sawn timber business. And as was mentioned already, I think it's obviously widely known that the construction markets have slowed down significantly. Sawn timber prices have come down, and that is affecting the results of our sawn timber business as well, which is, let's say, particularly the case in the fourth quarter and sort of visible in the figures. Maybe not, let's say, in the pulp business. A kind of a perfect month from a production point of view as well. But certainly, the sawn timber performance volume-wise and, let's say, profitability-wise was affecting the fibers business area. The depreciation figure, let's say, for the company as a whole, then will be slightly less than EUR 600 million depreciation, which this chart in the materials is kind of indicating at the annual level. And then on the energy hedges, what I can sort of repeat what we have discussed in the previous quarters that we have not hedged any Olkiluoto 3 volumes and with the kind of hedges in place in relation to the old capacity, the existing hydro and -- hydro and nuclear we're sort of somewhere around 80% for this year.
Did you comment the Fray Bentos shut down already.
Well, just generally, that another perfect month from a production point of view.
Yes, exactly.
And in terms of the 80%, can you comment at all what sort of levels you've been hedged in?
We don't disclose that.
All right.
[Operator Instructions]
Robin from Carnegie. 3 short ones. First, related to the China opening. Have you seen any changes in the sentiment among your pulp and fine paper customers in China already now? Or how do you expect that to evolve? Number two, regarding the Paso de los Toros mill, was there already some expenses booked in the fourth quarter?
And what kind of start-up costs should we expect for Q1 and Q2 on the EBITDA level? And then the third question I have is regarding the possible biorefinery in Rotterdam. Do you expect the investment decision to go ahead or not to go ahead, to be made during this year? And if the scope still the same as before?
May I actually take the first and Tapio second, and then I -- the final as with the biorefining in Rotterdam. But China is, obviously, now opening, and that is clear for us as well. And that what we see that the -- every time you talk to the Chinese team, there's a more positive outlook for the business is how it will evolve. Maybe an anecdotal that we are having some 1,200 people in China. And in 3 weeks' time end of December the COVID actually was hitting almost 1,000 of them, and they are all quite quickly afterwards back in business. So basically, it is opening.
There are positive kind of talk every day when you talk to the team in -- both in paper business and also in pulp business. And then the biorefiner, like I said that we are in the very intensive phase of the basic engineering of the Rotterdam. Nothing really has changed when it comes to technology and the task that we have raw materials, technology, market's regulation. All of that needs to be completed before we are taking the final investment decision. And then on top of that, I remember that I have been guiding all of you that we are not prepared to make the investment if there is a scarcity of resources or high cost in raw materials and this and that. And when these all are coming together, then obviously we are taking the decision, not saying that whether it will be 2023 or beyond that. But as soon as possible and as soon as we are ready and the circumstances are favorable for taking the decision, not to go or to go in that investment. And Tapio was actually then -- then did you talk about the...
Yes, about -- there was the question about Paso De los Toros and actually a kind of a good additional point to what Lars also was raising, which is that, yes, of course, now when the ramp-up has started to kind of take place and preparing towards the startup of production at the end of the first quarter, then we do have costs that are expensed already in the fourth quarter and will have on the -- in the current quarter. Won't have a number to give you on that, but it has also had an impact on the fourth quarter fibers reported figures. Then the positive EBITDA contribution, which was the question, will start in the second quarter. So we will start getting a sort of a positive impact on EBITDA from the Paso de los Toros production very quickly when the start-up happens.
The next question comes from Harri Taittonen from Nordea.
Well, maybe you talked to sort of fiber division cost base already a couple of times and gave a lot of color on that one. Maybe just one additional question on that. Is the pulpwood, I mean the raw material, the wood cost going up in such a way that, that's something which is sort of speaking? Or was this sort of increase in the unit cost mainly driven by the, as you say, some sort of loss of efficiency after the very efficient Q3 and the Paso de los Toros and Fray Bentos.
Wood costs in Southern Hemisphere doesn't go up. Quite contrary, we can optimize that. So 3.5 million tonnes when Paso de los Toros is up and running, is intact on that. We don't see any of that. Of course, in Finland, then where we have the kind of 2-point-some million tonnes of capacity, definitely, the wood cost is relevant and the wood cost development is relevant, but 3.5 million tonne is intact on that perspective.
Okay. Then on the cash flow side, in addition to the around EUR 900 million energy hedges that are still in the way in the balance sheet and then your net debt. But in addition to that, there was quite a lot of absorption in working capital last year, almost EUR 700 million, even if you released quite a bit in the fourth quarter.I mean, what's the kind of the best guess for this year? I mean, because, obviously, you need to scale up the operation and Paso de los Toros will be absorbing working capital. But then on the other hand, there are some probably sort of price declines and normalization.
So is there any -- is it possible to give some sort of color on how you're thinking on the working capital development for this year?
Well, let's say, of course, if you look at the working capital turns in terms of days of sales outstanding, then still, let's say, the efficiency from that point of view during last year, on the kind of normal working capital, excluding these energy items continue to be very good. So in other words, what has been, like you said, driving the working capital up is the fact that when there's been inflation, then it means that the -- and when prices have been on the rise, then it means that, of course, the value of inventories and receivables goes up and so on. So then, when there is perhaps tailwind, you would expect some release then now coming. And, let's say, obviously, presuming and believing that the sort of efficiency as such, the turnover continues the same, then that means cash should be released from the regular working capital. That will be it in the sense, like you also suggested offset by the fact that when starting up a huge mill and a new, in a sense, production unit and the volume into the market from Paso de los Toros that will, at the same time, tie up some capital in terms of working capital in the new operations. So those are the dynamics, but no guidance in a sense that what the end result will be.
Yes. I understand. That's good. So the final question on the Communication Papers and then just sort of wondering what sort of visibility do we have for the paper prices now for the first quarter and for the first half of the year. I think you have sort of shortened the contracts during last year for a good reason.
But what -- can you -- is there anything you can say about the sort of price negotiations, how advanced they are and are there still a lot of negotiations pending and sort of color on that situation?
Unfortunately, Harri, as you know me, that I have never been in the position to comment on the future prices. We will talk about those when everybody sees those numbers and the market prices. Of course, what has been one of the reasons that we have been able to implement price increases during the escalating costs has been that the contract validities has been shorter. And of course, we are keeping very, kind of, good grip on it that if the costs are going down or up that we can react early enough in this business as well. But as I said, let's talk about them when there is a market prices available. What was the kind of process that we went through.
Let's do so.
The margin management in a way how the team is doing the work.
The next question comes from Cole Hathorn from Jefferies.
Just a bit of color on your capital allocation priorities. I see you're calling out buybacks ahead of special dividends. I just like your thoughts how you think about buybacks versus special dividends once you've invested in CapEx, maintained your strong balance sheet, et cetera, just the split between that? And then following up on Communication Paper and how you're able to manage downtime in that business, if necessary. I see you've announced some effectively standard negotiation practices with unions to take 90 days of down, maybe just talk about that how you can manage costs and flex your system to protect profitability?
If I take the latter, Tapio might talk about the capital allocation still on top of that. But Communication Papers, it is clear that we have been preparing ourselves to how to manage the capacity. And therefore, we have negotiated kind of very standard, temporary layoff where you can take in half a year time, 90 days if needed. And that is actually a tool that you can utilize to take the cost down when there's no orders for the particular machines.
If I continue on the capital allocation. So basically, what we have indicated here, what Jussi described in the dividend policy is that, on one hand, as far as dividends are concerned, there, we want to have a kind of a consistent positive development over time, dividend growth as the earnings growth is sort of materializing over time. Then we have highlighted share buybacks here as a kind of a complementary tool for the Board, where the Board has no decisions yet to sort of communicate on that. But again, let's say if you look at like what, now the recent years show these large investments then mean that there is a kind of a certain cycle of CapEx. And then there is a certain sort of incubation or development time before the next wave of larger investments will be ready. So it's likely that we'll see some sort of cycle as far as the investment in bigger way into building the business and sort of generating the earnings growth will be.
So in those points in time, in between the good return investment for the company can be to invest in the company itself, meaning buying back shares.
And then, maybe just a follow-up on Paso de los Toros. When will the volumes be visible in the global pulp market? I imagine if you start up in Q1, will the volumes be delivered to customers kind of later in the Q2 period just considering the shipping times. And then you mentioned a bit of startup costs on the pulp mill. Is there anything we should think about for the start-up costs for your biochemicals plant later in 2023?
Well, to the latter part, yes, we will have, as the -- then start-up for the biochemicals in Leuna comes closer, then we will have additional costs that are expensed as well. So that will have some impact later in the year.
And for the first question, I don't know whether I have really information, but of course, it actually takes several months to fill the pipeline before we are starting to see the customer deliveries. Thank you for being hour -- and 50 minutes with us. Thank you for your time. See you.