UPM Interim Report Q3/2019: UPM reports good performance and strong financial position – Uruguay decision drives significant future earnings growth

UPM-Kymmene Corporation                   Interim Report               24 October 2019 at 09:55 EET

UPM Interim Report Q3/2019: UPM reports good performance and strong financial position – Uruguay decision drives significant future earnings growth

Q3 2019 highlights

• Sales decreased by 6% to EUR 2,493 million (2,650 million in Q3 2018)
• Comparable EBIT decreased by 19% to EUR 342 million (420 million)
• Sales prices decreased in pulp, outweighing the impact of lower variable costs in all business areas
• UPM announced the transformative investment in Uruguay for significant future earnings growth, and further plans to safeguard competitiveness in UPM Communication Papers
• Operating cash flow increased to EUR 500 million (405 million)
• Net debt decreased to EUR -2 million (4 million)

Q1–Q3 2019 highlights

• Sales grew by 1% to EUR 7,791 million (7,752 million in Q1–Q3 2018)
• Comparable EBIT decreased by 4% to EUR 1,061 million (1,109 million)
• Operating cash flow increased to EUR 1,256 million (947 million).
• In July, UPM announced a USD 2.7 billion investment in a 2.1 million tonne eucalyptus pulp mill near Paso de los Toros, Uruguay
• In July, UPM closed Paper Machine 10 at UPM Plattling, Germany
• In September, UPM announced plans to close Paper Machine 2 at UPM Rauma, Finland, to sell UPM Chapelle newsprint mill in Grand-Couronne, France, and to establish a new Business Services Hub in Wroclaw, Poland.

¹⁾         The 2018 comparative figures have been restated due to accounting policy change of forest renewal costs.

Jussi Pesonen, President and CEO, comments on the Q3 results:

“Q3 was a milestone quarter in our strategic transformation. The biggest news during the quarter was the decision to proceed with the new, highly competitive pulp mill investment in Uruguay, which represents a step change in the scale of our pulp business, as well as in UPM’s future earnings. We are in a unique position as we proceed with the execution and preparation of major future growth projects. At the same time, we are continuously taking action to ensure our competitiveness.

UPM’s good business performance continued during Q3. The decelerating economy, especially in Europe, is impacting our product markets, and sales prices decreased in line with our expectations. We succeeded in maintaining margins at the same level as in the first half of the year.

In comparison to the corresponding quarter last year, which saw record-high pulp prices, our sales decreased by 6% and comparable EBIT by 19% to EUR 342 million. Compared to the previous quarter of the present year, earnings stayed at the same level. Operating cash flow was very strong, totalling EUR 500 million. Consistently strong cash flow and a debt-free balance sheet provide a solid foundation for our growth investments.

In UPM Biorefining, earnings were affected by lower pulp prices as expected. Operationally, however, the quarter was strong. Both UPM Pulp and UPM Biofuels achieved record production, and UPM Biofuels reported its best quarterly result ever.

Once again, UPM Communication Papers achieved a solid result. Through continuous fixed and variable cost management, we succeeded in countering the headwind from the market demand and prices. To ensure competitiveness going forward, UPM closed PM10 at UPM Plattling, Germany, in July, and in September we announced plans to close PM2 at UPM Rauma, Finland, and sell UPM Chapelle newsprint mill in Grand-Couronne, France.

UPM Specialty Papers succeeded in making a profitability turnaround. The business benefited from lower pulp costs and strong customer demand, especially in Asia. Our internal cost-management measures also had visible results.

UPM Raflatac’s margins are recovering gradually, due to disciplined management efforts. To stay on this positive track, various margin, product-mix and cost-management initiatives will be continued.

UPM Energy reported another excellent quarter thanks to higher market prices and skilful optimisation of hydropower generation in the extremely dry hydrological conditions of Finland.

UPM Plywood faced strengthening headwind in the markets. Adjusting to slowing demand led to labour co-operation negotiations and temporary layoffs in Finland. On a positive note, production commenced at the mill expansion in UPM Chudovo, Russia, which is further improving competitiveness.

After careful preparation, we made the decision to build a new, world-class pulp mill in central Uruguay. We are swiftly proceeding from preparation to planning and execution. Construction permitting and preliminary works on the mill site and in the Montevideo port have begun. The state of Uruguay has commenced construction of the railway, and suppliers are recruiting workforces. The USD 2.7 million investment in a highly competitive 2.1 million tonne eucalyptus pulp mill will raise UPM’s pulp capacity by more than 50% and significantly contribute to future earnings.

Our other transformative projects are progressing, too. Release-liner expansions in UPM Nordland and UPM Changshu will be completed by the end of the year, and technical and commercial studies into biochemicals and biofuels are ongoing in Germany and Finland. In these businesses, we are driving the change towards a world beyond fossils. They represent exciting business opportunities for UPM in vast new markets.

UPM firmly believes in growing sustainable businesses that offer solutions to global challenges. During the quarter this commitment was recognised with top ratings by the Dow Jones Sustainability Indices, United Nations Global Compact LEAD and MSCI ESG Ratings. I am very proud of these recognitions from respected institutions.”

Outlook 2019

The global economic growth is estimated to continue in 2019, albeit at a slower pace than in 2018. There are significant uncertainties related to global economic growth, including global trade tensions. Growth has slowed down in Europe, particularly in Germany. These issues may have an impact on the global economic growth and on UPM’s product and raw material markets.

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

In 2019, demand growth has continued for most UPM businesses, albeit at a modest pace. Demand decline has continued for UPM Communication Papers.

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

In Q4 2019, the average pulp price for UPM businesses is expected to be lower than in Q3 2019. UPM Biorefining is affected by the scheduled maintenance shutdown at the UPM Fray Bentos pulp mill. UPM Communication Papers is positively impacted by the annual energy related refunds.

Invitation to UPM's webcast and press conference on third quarter 2019 results

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, on 24 October 2019 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 the event in order 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–September 2019

International telephone numbers with a pin code 22096714#

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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 from 9:00 to 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 OMX Helsinki. UPM Biofore - Beyond fossils. www.upm.com

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UPM presents certain measures of performance, financial position and cash flows, which are alternative performance measures in accordance with the guidance issued by the European Securities and Markets Authority (ESMA). The definitions of alternative performance measures are presented in notes to the consolidated financial statements in UPM annual report.