UPM Interim Report Q1/2019: UPM continues to grow sales and earnings

UPM-Kymmene Corporation                        Interim Report         26 April 2019 at 09:45 EET

UPM Interim Report Q1/2019: UPM continues to grow sales and earnings

Q1 2019 highlights

• Sales grew by 7% to EUR 2,693 million (2,512 million in Q1 2018).
• Comparable EBIT increased by 5% to EUR 374 million (355 million).
• Sales prices were higher, outweighing the impact of increased variable costs.
• Operating cash flow increased to EUR 320 million (214 million).
• Net debt decreased to EUR -5 million (41 million).
• UPM announced a plan to close paper machine 10 at UPM Plattling, Germany.

Jussi Pesonen, President and CEO, comments on Q1 results:

"The first quarter of the year lived up to our expectations, and we are thus able to report the 24th consecutive quarter of increased earnings. In five of our six business areas, prices increased more than offsetting the higher costs and keeping overall margins healthy.

Our sales grew by 7% and comparable EBIT increased by 5% to EUR 374 million. Operating cash flow was strong, and our balance sheet remained debt-free even after all leases (EUR 495 million) were recognised on the balance sheet in accordance with the new IFRS16 accounting standard.

UPM Biorefining reported another excellent quarter. As expected, pulp prices were somewhat lower than the historically high prices seen in the latter half of the previous year. Pulp, Biofuels and Timber all enjoyed good customer demand and consequently deliveries developed favourably in an operationally successful quarter.

UPM Communication Papers had a strong quarter with improved earnings due to year-end increases in sales prices. To ensure our long-term success in declining markets, we continue to implement measures to improve cost competitiveness and adapt capacity to the profitable customer demand. The conversion of PM2 at UPM Nordland, Germany, to release liner is proceeding well and in April we announced plans to close PM10 at UPM Plattling, Germany.

Good demand continued in the label paper and release liner businesses of UPM Specialty Papers. Destocking in the Asian fine paper market appears to be over and margins are turning. We aim to restore profitability with various cost, growth and product development initiatives.

UPM Raflatac regained upward momentum in sales and profitability after last year's challenge with rapid increases in raw material costs. In January, the new product line for specialty labels was completed in Tampere, Finland, and in March we began a fixed-cost reduction programme to further improve earnings.

Margins remained good in UPM Plywood and market demand in Europe was solid. The expansion project at the UPM Chudovo plywood mill in Russia proceeded to the production trial run phase.

UPM Energy is back on track as electricity prices have improved. Hydropower generation is still hindered by the dry hydrological situation.

Furthermore, we look forward to our transformative prospects that are set to provide us with unique opportunities for significant long-term earnings growth. In Uruguay, preparations for the potential new world-class pulp mill are proceeding. While encouraging progress has been made in many areas, several important conditions stated in the Investment Agreement are still pending. These include e.g. the execution of the Railway Contract in relation to the Central Railway Public-Private-Partnership (PPP) project. Labour protocols, conflict mitigation regulation and certain material outstanding items as specified in the Investment Agreement are all critical for UPM. If the ongoing second preparation phase is concluded successfully, UPM will initiate the company's regular process of analysing and preparing an investment decision on the potential pulp mill project.

Preparations are also ongoing in our attractive biomolecular businesses. In UPM Biochemicals, we have completed the basic engineering of the potential biorefinery. We are currently assessing two alternative industrial parks in Germany, in Frankfurt and in Leuna, to select the optimal set-up for our facility. Also, the commercial studies need to be concluded before starting UPM's regular process of analysing and preparing an investment decision.

UPM Biofuels is evaluating the growth opportunity in Kotka, Finland, and new sustainable feedstocks in order to scale up the business. The development work is expected to continue into next year, as we aim to create a competitive next generation biorefinery in terms of production, products and feedstocks.

UPM is in great shape and ready to grasp the opportunities for value creation and business growth offered by bioeconomy. We firmly believe in growing sustainable businesses that offer solutions to global challenges such as climate change and resource scarcity. Our innovations create value and business opportunities for an era where the world is no longer dependent on fossils."

Outlook 2019

The global economic growth is estimated to continue in 2019, albeit at a slower pace than in 2018. There are, however, significant uncertainties related to this, including trade negotiations between China and the US, growth in China, the undefined nature of Brexit and political uncertainties in several countries. These issues may have an impact on the global economic growth and on UPM's product and raw material markets during 2019.

UPM reached record earnings in 2018. UPM's business performance is expected to continue at a good level in 2019.

In 2019, favourable demand is expected to continue for most UPM businesses. Demand decline is expected to continue for UPM Communication Papers.

In the early part of the year 2019, pulp prices are expected to be lower and graphic paper prices in Europe higher than in Q4 2018. Input costs are expected to stabilise after the significant increases seen in 2018. UPM will continue measures to reduce both variable and fixed costs.

Fair value increases of forest assets are not expected to contribute materially to comparable EBIT in 2019.

Webcast and press conference

UPM's President and CEO Jussi Pesonen will present the financial results in a webcast and a conference call for analysts and investors, held in English language, today at 13:15 EET.

Later in the afternoon, Jussi Pesonen will present the results in a press conference held in Finnish language at the UPM Group Head Office (The Biofore House) in Helsinki, Alvar Aallon katu 1, at 14:30 EET.

Webcast and conference call details:

The conference call can be participated in either by dialling a number in the list below or following the webcast online at www.upm.com or through this link.

Only participants who wish to ask questions in the conference call need to dial in. All participants can view the webcast presentation online. We recommend that participants start dialling in 5-10 minutes prior to ensure a timely start of the webcast.

The presentation is available at www.upm.com for 12 months after the call.

Conference call title: UPM Interim Report for January - March 2019

International telephone numbers with a pin code 90517318#

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It should be noted that certain statements herein, which are not historical facts, including, without limitation, those regarding expectations for market growth and developments; expectations for growth and profitability; and statements preceded by "believes", "expects", "anticipates", "foresees", or similar expressions, are forward-looking statements. Since these statements are based on current plans, estimates and projections, they involve risks and uncertainties which may cause actual results to materially differ from those expressed in such forward-looking statements. Such factors include, but are not limited to: (1) operating factors such as continued success of manufacturing activities and the achievement of efficiencies therein including the availability and cost of production inputs, continued success of product development, acceptance of new products or services by the Group's targeted customers, success of the existing and future collaboration arrangements, changes in business strategy or development plans or targets, changes in the degree of protection created by the Group's patents and other intellectual property rights, the availability of capital on acceptable terms; (2) industry conditions, such as strength of product demand, intensity of competition, prevailing and future global market prices for the Group's products and the pricing pressures thereto, financial condition of the customers and the competitors of the Group, the potential introduction of competing products and technologies by competitors; and (3) general economic conditions, such as rates of economic growth in the Group's principal geographic markets or fluctuations in exchange and interest rates. The main earnings sensitivities and the group's cost structure are presented on pages 135-136 of the 2018 Annual Report. Risks and opportunities are discussed on pages 30-31 and risks and risk management are presented on pages 106-109 of the report.

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UPM-Kymmene Corporation
Pirkko Harrela
Executive Vice President, Stakeholder Relations

UPM, Media Relations
Mon-Fri 9:00-16:00 EET
tel. +358 40 588 3284
media@upm.com

UPM
We deliver renewable and responsible solutions and innovate for a future beyond fossils across six business areas: UPM Biorefining, UPM Energy, UPM Raflatac, UPM Specialty Papers, UPM Communication Papers and UPM Plywood. We employ around 19,000 people worldwide and our annual sales are approximately EUR 10.5 billion. Our shares are listed on Nasdaq Helsinki Ltd. UPM Biofore - Beyond fossils. www.upm.com

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