Upm Kymmene Corp

Welcome to UPM's Quarter 3, 2024 results webcast. My name is Massimo Reinaudo. I am the CEO of UPM. Here with me is Tapio Korpainen, the CFO. Hi to everyone on the line. Together, we will illustrate the main elements of the UPM performance last quarter and year to date. Let me start with the key elements that characterize the quarter. Our Q3 results improved both year on year and quarter on quarter, with a good contribution from the fully ramped up Paso de los Toros pulp mill. The earnings improvement, albeit good, was lower than earlier expected, as the market demand of our products slowed down after a strong start of the year. In this slower recovery environment, we are taking decisive actions to ensure the competitiveness of our businesses. While this is important for our profitability, it will also support our growth ambitions going forward. Let's see now these more in detail. Our quarter free sales decreased by 2% from last year. In fact, during the quarter, our volumes realized lower than earlier expected, and this impacted both sales and comparable EBIT in the quarter. Our comparable EBIT totaled 291 million euros, or 11.5% of sales, and it grew 32% year-on-year, or 60% sequentially from quarter two. So, what happened during the quarter? Let's start with the situation in Europe. As said before, and most visible in Europe, the demand has slowed down for most of the UPM products after the strong start of the year. In presence of significant uncertainty, European consumers have remained very cautious with their spending, despite the declining inflation. This led to lower than expected volumes in our consumer-driven businesses. As an example, you can see the familiar graph for self-adhesive label material shipments in Europe. There, you can see that after the strong rebound of the demand in quarter one, the market shipments declined in quarter two and quarter three. Whilst they are still 7% above last year, they were sequentially down 9% versus quarter two. The demand in construction and industrial production related end users as well for the renewable fuels stabilized, but stabilized on a low level during the quarter. In China, On the other hand, the demand continued to be robust for our advanced materials, such as label materials, specialty papers, or plywood for energy vessels. However, the pulp market has been soft during the summer, and this resulted in lower pulp deliveries and decreased prices. Similarly, the fine paper markets in Asia were soft during the quarter. When it comes to North America, consumers have continued to be active. Demand grew modestly for our products and specifically for label materials, specialty papers, and graphic papers. Given our business mix, the slower demand in Europe and the summer slowdown on the pulp market in China have been the two main factors impacting our performance during the quarter. But now I'll hand it over to Tapio for some analysis on the result.

Thank you, Massimo. So here on the left-hand side, you can see our third quarter results. comparable EBIT compared to the same quarter year on year or last year, 23. Two main positives here. First, on group level, sales prices had a positive impact on EBIT. Changes in variable cost had a minor positive impact as well. Fibre costs increased, pulp, recovered paper and wood cost in Finland, whereas other variable costs decreased. And the other point is that we have been able to drive down fixed costs meaningfully, as earlier guided in the third quarter. Our fixed costs were 56 million euros lower than last year. Volumes increased from last year, but less than we had expected. Then on the right-hand side, you can see the EBIT comparison sequentially to the second quarter this year. Here you can see the significant decrease in fixed cost, 107 million euros and higher volumes. The main explanation for both is the high level of maintenance activity in the previous quarter, as we discussed in the call in summertime. In fact, deliveries actually decreased from second quarter to third quarter in some of our businesses. On group level, prices were broadly stable quarter on quarter, whereas variable costs increased. The cost increase came from two sources, wood cost in Finland and pulp costs to the two pulp consuming paper businesses. Changes in pulp market prices realized with one quarter lag as compared to the pulp costs in the pulp-consuming paper businesses. And therefore, specialty papers and communication papers were incurring increasing pulp costs while the pulp businesses experienced a 3% decrease in average pulp sales price. And here you can see the comparable EBIT development by the six business areas. Fibers first improved its comparable EBIT both year on year and sequentially from the second quarter. This was the first quarter of full production at both mills in Uruguay, and there were no maintenance shutdowns in the third quarter. In Finland, wood costs were on a high level, and we took three weeks of downtime at the Kaukas and Kymi pulp mills to optimize our result. During the summer slowdown of the pulp market in China, our deliveries realized lower and our average pulp price decreased by 3% from the previous quarter. Communication papers increased its EBIT from the previous quarter. The average paper sales price was stable while there was a modest recovery in deliveries from Q2. Deliveries decreased sequentially from the second quarter in Rafatak and in the Asian fine paper business of specialty papers. Specialty papers was also impacted by peak pub costs in the third quarter. As a result, comparable EBIT in the two businesses decreased. Plywood performed well considering the slow construction markets. Energy business areas saw very low electricity prices during the summer months, given the seasonally low demand and high supply of renewable power on the market. The Estlink 2 transmission connection to Estonia was out of operation during the summer, further contributing to the low spot prices in July-August. In other operations not shown here, weak markets for renewable fuels continued. On the positive side, the biofuels business started to gradually benefit from decreasing input costs. Operating cash flow for the quarter totaled 242 million euros. impacted by an increase in working capital equaling 73 million euros. Net debt was 2.8 billion euros in total, and net debt to EBITDA ratio was 1.59. The second installment of the dividend for 2023 will be paid on the 7th of November. And here on this slide, you see our outlook for 2024. We expect the fourth quarter comparable EBIT to be on similar level or increase from the fourth quarter of last year. Volumes have recovered from the summer lows, but the demand recovery for our products is lower than we earlier expected. In biofuels, no meaningful volume increases expected in the short term. Average pulp selling price is still decreasing from the fourth quarter, in the fourth quarter from the third quarter. And energy-related refunds are expected to materialize in the fourth quarter in communication papers, similar to previous year. Finally, there's no significant maintenance shutdowns in the fourth quarter. And now I'll hand it back over to Massimo.

Thank you, Tapio. At our Capital Markets Day in September, we provided an update on the next phase of the UPM strategy. We presented a business portfolio, which is based on sustainable and renewable feedstocks and fossil-free energy. With it, we have also indicated where we will be focusing to pursue sustainable and profitable growth. Our portfolio is well positioned for robust growth in renewable fibers, advanced materials, and in decarbonization solutions businesses. Graphic papers will continue to generate strong cash flows. Let's now look at where we are and what we are doing in each of these categories. So let's start with the decarbonization solutions. First of all, the vision. Over the coming years, there will be a strong need for decarbonization solutions in transport and chemical industries. The expansion of the digitalization and the development of AI, as well as the electrification of transportation, the green transition in several industrial segments, will drive a significant growth of demand of reliable CO2-free energy. With our 12 gigawatt hours of generation of CO2-free energy, we are well positioned to capture the opportunities coming from this increased demand. In the short term, Stapio mentioned, electricity prices in the Nordic areas have been low and volatile. We are however entering the winter period where the energy consumption is seasonally higher. In this environment and in the short term, we continue to optimize our production and maximize the value creation on the electricity market through the energy mix we have. In parallel, we are working to capture the opportunities that the expansion of data centers and the industrial green transitions are offering in Finland. In biofuels, the current markets are weak. However, there are some positive signs if we look ahead. On one hand, there have been political decisions recently and proposals that should gradually start improving the demand on the market going forward. I'm referring here to anti-dumping duties and potentially limitations to the transfer of greenhouse gas emissions to future years in Germany. On the other hand, input costs have finally started to decrease, which is going to be having a positive impact on our biofuel business performance. The market price of advanced renewable fuels and the current spot prices of the main raw materials will allow a return to profitable business going forward. In biochemicals, we are looking forward to starting the LOINA biorefinery over the coming months. On site, the refinery is approaching technical completion and commissioning is proceeding. The sequential startup is expected to begin by the end of the year and the wrap-up of production to proceed during the rest of 2025. As discussed at the Capital Market Day, we expect to reach full production and positive EBIT in the biochemical business in 2027. When it comes to advanced materials, the demand has been impacted the most by the unusual cycle last year and inconsistent recovery of this year. with a strong start of quarter one and the softening of the demand during quarter two and quarter three, as mentioned before. These businesses, however, have long value chains, and this makes the inventory play a bigger role here, amplifying any variation in the demand. In other terms, when demand is stronger, There is more openness to raise inventory levels and vice versa when the demand softens. Because this happens at every level of the value chain, this leads to the ample variations in volumes of the past quarters, variations that are higher than the real variation of the underlying consumer demand. We remain confident in the medium to long-run demand outlook for these businesses as the drivers behind them stay unchanged and beyond the demand cycles or the inventory cycles. For this aspect, we see that their growth will exceed GDP growth on average over time and cycles. In addition, these businesses offer good opportunities in faster growing geographies and for targeted M&A operations. However, while we wait to get the boost from the market improvement, we are taking decisive actions to further improve our competitiveness here. This includes simplifications of our organizations and actions on fixed and variable costs. This will improve the performance as well as the ability to fully capture the market recovery and realize our long-term growth ambitions here. In parallel, as indicated earlier, we will continue to explore value-accurative opportunities for inorganic growth to reinforce our presence here after the acquisition and the integration of the graffiti business in the summer. When it comes then to renewable fibers, we have here a world-class low-cost platform in Uruguay. Quarter three was the first quarter of full production at both our pulp mills in Uruguay. This now enables the next phase of cost optimization to begin. In quarter four, we will reach the full utilization of the railway connection between Paso de los Toros mill and the port terminal in Montevideo, which will allow a reduction of logistic costs. In the medium term, in addition to get into the targeted cost levels, we will look for opportunity to expand further production beyond the current reached nominal capacity. But when it comes to Finland, our other renewable fibers platform, the situation is quite different. The current wood costs are at an unsustainable level. As commented in other occasions, this is a structural change for the whole industry in the region, and it will require structural solutions. We have large-scale, well-maintained mills in the region, but even for us, it makes sense to optimize production to reduce the highest cost wood sources, specifically when pulp prices end up being soft. Hanks, the temporary downtime that we have announced in quarter three. We also announced efficiency measures in our pulp forest and timber operations in Finland during the quarter. In graphic papers, the objective continues to be a strong free cash flow generation, and the business is delivering on that. Over the past 12 months, the communication paper business has generated nearly 400 million euros of free cash flow, or 33% free cash flow return on capital employed. This year, market demand has been stable after the strong dip last year, but the market decline is expected to continue over the medium to long term. To make sure that our cost competitiveness is maintained, we closed down the Hurt and New Spring meal in Germany during quarter three. and we decided to close down the fine paper machine number 3 in the Nordland Mill in Germany that will take place by the end of the year. The annual fixed cost savings of these measures will be about 45 million euros. and here what you can see are the two slides from our capital market days presentation that visualize our growth ambitions both in terms of portfolio and geographical evolution we have taken recently a major step in the renewable fibers growth and we will drive cost optimization and further production expansion In the short term, this has increased our exposure to the cyclical pulp prices. However, our aim is not to become a pulp company. In the coming years, we will grow in the advanced materials and in the decarbonization solutions businesses, balancing the portfolio. We will also look for opportunities to expand in higher growth geographies. In the short-term weather, in soft markets, our top priority is to improve our competitiveness and performance. In this area, we have taken a number of actions and steps already, and as an example of the impact of what we did, our fixed costs in the first nine months of this year were 71 million euros lower compared to the same period last year. This is a remarkable achievement if we consider that last year we used a lot of temporary layoffs and this year we have the full added fixed cost on top from both Paso de los Toros and the biochemical business in our P&L. Nevertheless, we will not stop there. As said, we will aim to improve our performance while setting ourselves up to capture the recovery and the future growth of these markets. To finish and to summarize, slow markets have impacted our performance in Q3. But despite that, we have increased our profitability both year on year and sequentially. In different businesses, we are working to improve the organizational, operational, and commercial effectiveness. Equally, we are at an advanced stage of developing an AI roadmap that will further enable productivity. Whilst we do not speculate on the evolution of the demand in the next quarters, given the high level of uncertainty in the global economy, we expect our performance in quarter four to be sequentially better than quarter three, and at the level or above quarter four last year, as Tapio indicated. And this is supported by positive seasonality affecting a number of our businesses, like Raflatak, energy or communication paper where we will have the booking of the energy-related refunds mature during the whole year. The recent transformative investment of Passo de los Toros has reached a key milestone last quarter with reaching the normal capacity, but has a still relevant untapped potential coming from both cost improvement and capacity expansion. Loine, we commented it before, will soon start production. Our plans for the next year are being prepared along the strategic priorities shared at the Capital Market Day, having as an objective to create a balanced portfolio that will deliver a profitable growth and attractive return to our investors. This ends the prepared part of our presentation, and we are happy to take your questions now.