UPM Interim Report Q3 2020: Driving performance and transformative projects under highly exceptional circumstances

UPM-Kymmene Corporation    Stock Exchange Release (Interim Report)  27 October 2020 at 09:45 EET

UPM Interim Report Q3 2020:
Driving performance and transformative projects under highly exceptional circumstances

Q3 2020 highlights

• Sales decreased by 19% to EUR 2,028 million (2,493 million in Q3 2019) due to lower deliveries of graphic papers and lower pulp and paper prices
• Comparable EBIT was EUR 215 million, 10.6% of sales (342 million, 13.7%), down 37% year-over-year
• Operating cash flow was EUR 365 million (500 million)
• Successful health and safety measures enabled uninterrupted business operations and progress in transformative growth projects
• Some normalization of the COVID-19-related demand impacts, both positive and negative, in graphic papers and in labelling materials and specialty papers
• Closures of UPM Chapelle paper mill and UPM Jyväskylä plywood mill
• Announced the closure of UPM Kaipola paper mill, plans for selling UPM Shotton paper mill and streamlining in several businesses and functions

Q1–Q3 2020 highlights

• Sales decreased by 18% to EUR 6,392 million (7,791 million in Q1–Q3 2019) due to lower deliveries of graphic papers and lower pulp and paper prices
• Comparable EBIT was EUR 697 million, 10.9% of sales (1,061 million, 13.6%), down 34% year-over-year
• Operating cash flow was EUR 659 million (1,256 million)
• Net debt was EUR 89 million (-2 million)
• Cash funds and unused committed credit facilities totalled EUR 2.3 billion at the end of September
• The COVID-19 containment measures significantly decreased demand for graphic papers, while demand for labelling materials and specialty papers increased during the lockdowns
• UPM's transformative pulp project in Uruguay and biochemicals project in Germany are well on track with the planned start-up timeline

Key figures

Jussi Pesonen, President and CEO, comments on the Q3 2020 results:

“During Q3 we delivered on many fronts: performance, cost reduction actions, transformative projects as well as safety and health of our personnel. We are taking action to ensure competitiveness, and our businesses delivered satisfactory performance under the highly exceptional circumstances resulting from the COVID-19 pandemic. Despite weak paper markets and low pulp prices, our profitability improved slightly compared to the previous quarter, our cash flow recovered, and our EBIT margin remained above 10%. UPM Raflatac, UPM Specialty Papers and UPM Energy continued to perform well. Our financial standing is strong and puts us in a unique position to proceed with our transformative projects with determination.

Compared to Q3 of last year, sales prices were lower across all of our business areas, and graphic paper deliveries were down by 21%, resulting in sales of EUR 2,028 million, a decrease of EUR 464 million in a single quarter. Comparable EBIT decreased by 37% to EUR 215 million. Operating cash flow totalled EUR 365 million. At the end of Q3, our net debt was very low at EUR 89 million, and cash funds and unused credit facilities totalled EUR 2.3 billion.

During Q3, UPM took forward plans for decisive restructuring and efficiency improvement. Closing of the UPM Jyväskylä plywood mill in Finland and the UPM Chapelle paper mill in France were finalised. Decision on closing the UPM Kaipola paper mill in Finland was taken in October and the plan to sell the UPM Shotton paper mill in Wales was announced. Streamlining began in the business functions of UPM Communication Papers, in Finnish pulp mills, at the UPM Tervasaari mill and at UPM Forest. In addition, UPM Raflatac and UPM’s global functions announced efficiency improvement plans in October. All of these measures combined are expected to result in annual cost savings of approximately EUR 130 million.

The implemented and announced measures are unfortunate to many UPMers, but they are nevertheless necessary to ensure performance in the short term and competitiveness in the long term. UPM is also taking measures to support transitions from job-to-job.

Demand for UPM Communications Papers has been most severely affected by COVID-19-related measures. As expected, demand in Q3 partly recovered compared to the lockdown part of Q2, but still remained low. Market prices decreased by 5%. However, thanks to the ongoing cost reduction measures and improved efficiency, the business was able to turn back to positive EBIT in Q3.

During the spring, UPM Raflatac and UPM Specialty Papers benefited from exceptionally good demand in many end-use areas, especially those related to daily consumer goods and e-commerce. During Q3, the markets somewhat normalised, but the businesses continued to perform well.
UPM Biorefining had a strong quarter in terms of pulp production and deliveries. UPM Biofuels achieved a new production record. However, pulp prices remain at very low levels, which are affecting the profitability of the business area.

For UPM Plywood, the market for spruce plywood was good, both in terms of demand and price. The market for birch plywood, on the other hand, remained highly competitive in some high-end products.
UPM Energy continued to deliver good results. As the hydrological situation normalised and market prices improved, UPM Energy successfully optimised production in the volatile market.

We are on track to deliver long-term earnings growth and sustainability-driven new business. Our transformative projects in Uruguay and Germany proceed on schedule. Construction in the Paso del los Toros pulp mill site is making good progress, and a long-term service agreement on rail cargo operations was signed. The construction of the biochemicals refinery began in Leuna, and infrastructure leases were signed with the chemical park operator InfraLeuna.

The work on these construction sites, as well as production at all existing UPM facilities, has continued uninterrupted throughout the COVID-19 pandemic thanks to high health and safety standards. As part of the UPM Biofore Share and Care programme, we helped Finnish officials in procuring 30 million protective face masks. In addition, we donated 500,000 masks to health care and educational facilities and nursing homes in UPM’s operating countries.

As one of the 41 companies world-wide, UPM was once again recognised as a UN Global Compact LEAD Participant for our strong commitment to responsible business. We greatly value this recognition, as responsibility is at the core of our Biofore strategy. We have signed the UN’s 1.5°C climate target, committing ourselves to reducing emissions, practising climate-positive forestry and innovating products that replace fossil materials and contribute to climate change mitigation.

UPM’s value creation is based on offering sustainable products and solutions to consumers and businesses and strong focus on performance. Our Biofore strategy has delivered results in all circumstances and enables growth of sustainable businesses for a future beyond fossils.”

Outlook for 2020

The COVID-19 pandemic, the related containment measures and the economic downturn continue to cause high uncertainty for H2 2020.

The COVID-19-lockdowns had a significant negative impact on graphic paper demand. The lockdowns also supported the strong demand for self-adhesive labelling materials and specialty papers in H1 2020. In Q3 2020 there was some normalization of these demand impacts, both positive and negative. However, the development going forward remains uncertain and is likely to be gradual, depending on the pandemic, the related lockdowns and changes in consumer reactions.

Demand for most UPM products is influenced by overall economic activity and hence, also depends on the shape and rate of the economic recovery.

In Q4 there will be significantly more maintenance activity than in the earlier quarters of 2020, as two pulp mill maintenance shutdowns were rescheduled from Q2 2020 to Q4 2020.

UPM will continue to implement measures to decrease fixed and variable costs.

UPM’s comparable EBIT is expected to be significantly lower in 2020 than in 2019.

Invitation to investor webcast and press conference on Q3 2020 Interim Report

A webcast and a conference call for analysts and investors in English language begins at 13:15 EET. UPM’s financial results will be presented by the President and CEO Jussi Pesonen and CFO Tapio Korpeinen. All participants can view the webcast online at www.upm.com or through this link, but participants who wish to ask questions must attend the conference call by dialling a number in the list below:

Conference call title: UPM Interim Report for January – September 2020
International telephone numbers:

Australia Toll: +61 284058549
Austria Toll: +43 19287907
Belgium Toll: +32 24035814
Denmark Toll: +45 35445577
Finland Toll: +358 981710310
France Toll: +33 170750711
Germany Toll: +49 6913803430
Hong Kong Toll: +852 30600225
India Toll: +91 2271279610
Ireland Toll: +353 14311252
Italy Toll: +39 0236013821
Japan Toll: +81 344556492
Netherlands Toll: +31 207095189
Norway Toll: +47 23500243
Singapore Toll: +65 64298349
Spain Toll: +34 935472900
Sweden Toll: +46 856642651
Switzerland Toll: +41 225809034
United Kingdom Toll: +44 3333000804
United States Toll: +1 6319131422

PIN code: 34661817#

We recommend that participants dial in 5-10 minutes prior to ensure a timely start of the webcast. The webcast will be available at www.upm.com for 12 months after the call.

Later in the afternoon, at 14:30 EET, CEO Jussi Pesonen will present the results in a press conference held in Finnish language both at the Biofore House and online. Due to the Covid-19 pandemic, participation to the Biofore House event is restricted to members of media only. Others are asked to follow the presentation online. To register to the live or online event, visit this link. Only the registered will receive the link to the online press conference.

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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 160–161 of the 2019 Annual Report. Risks and opportunities are discussed on pages 28–29 and 129-131, and risk management is presented on pages 189–195 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. As the industry leader in responsibility we are committed to the UN Business Ambition for 1.5°C and the science-based targets to mitigate climate change. We employ 18,700 people worldwide and our annual sales are approximately EUR 10.2 billion. Our shares are listed on Nasdaq Helsinki Ltd. UPM Biofore – Beyond fossils. www.upm.com
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